The Secret of the Israeli Labor Market’s Flexibility

Defining Israel's labor market as flexible conceals a little statistical lie. It is defined as flexible because most of it is – but it has big areas which are about as flexible as reinforced concrete.

Workers protesting labor conditions on a crane at a Ra'anana construction site on March 2, 2015.
Tomer Appelbaum

The Israeli labor market is extremely flexible. Any novice economist will tell you so. But why ask novices? The governor of the Bank of Israel herself, Karnit Flug, a labor market expert, says so too.

But what is a flexible labor market, anyway? It refers to the ease of hiring and firing; mobility – the ability of a worker to move from one job to another, and to take advantage of opportunities for advancement and professional development.

Research has shown that mobility between jobs is beneficial to productivity. It’s clear why. Think what happens when you start a new job: The burden of proof, of our adequacy, brings out the best in people, usually.

Flexibility has its downsides, too: instability, job insecurity and the loss of knowledge when a professional moves on.

Defining the Israeli labor market as flexible conceals a little statistical lie. It is defined as flexible because most of it is – but it has big areas which are about as flexible as reinforced concrete. These areas employ about a quarter of all employees in Israel, who are almost impossible to move from job to job; the churn rate is low; and it’s just as had to get a job in them because everybody has tenure.

Problem: the public sector

Histadrut members raise their hands to show support for a general strike.
Oren Cohen / Histadrut

The rigid areas of the labor market are mostly in the public sector, at the government companies and at some companies that used to be government companies, like the banks. The Bank of Israel itself suffers from labor inflexibility.

The process of the rest of Israel’s labor market becoming flexible took three decades, from the great economic stabilization plan of 1985. All of the sectors that have blossomed since then – high-tech, mobile communications, the media, professions like law and accounting and investing – are characterized by high labor flexibility, which can often favor the workers.

The bottom echelon of the market, such as cleaning and guarding jobs, are also highly flexible, though there the flexibility isn’t necessarily good for the workers, who usually earn minimum wage, and moving jobs doesn’t necessarily involve promotion or better terms.

So if one wants to check flexibility or mobility in the Israeli labor market, one can only look at the business sector, because the public sector is rigid, which has implications for its service, productivity and efficiency.

Recently two researchers at the Bank of Israel, Dr. Tania Sokhoi and Ramot Nesika, did a study on mobility in the business sector. The trigger for their study was the government’s decision to raise the retirement age of men from 65 to 67, and women from 60 to 62, which was done gradually from 2004 to 2009.

The main reason to raise the retirement age was the need to contend with the gargantuan actuarial deficits built up by the Histadrut labor federation, which had reached 140 billion shekels (about $35 billion) by the year 2010.

One reason for that deficit was corrupt management of the pension funds by the Histadrut. Another was the accelerated rise in life expectancy in Israel. Anyway, the Histadrut was left with liabilities it couldn’t cover. Benjamin Netanyahu, then finance minister, put together a plan to help the pension funds, which included raising the retirement age and cutting pension benefits. (Which serves as a reminder that when our pension managers can’t cover their liabilities to us, they simply don’t pay, while non-contributory state-funded pensions continue to get paid.)

Anyway, back to the study: Raising the retirement age did the trick. It led workers aged 55 and up to cling to their jobs. Mobility decreased. We know because the researchers studied two periods: 2004-2006, and 2010-2013, and found a drop in mobility in the second period. Other reasons, beyond raising the retirement age, was that economic growth was slower in that time (the faster economic growth, the more opportunities there are for workers). Another reason was a decrease in part-time workers (a population characterized by high mobility). Another was improved efficiency in finding workers to man jobs.

From 2010 to 2013, 9% of workers aged 55 and up voluntarily changed jobs (oddly, the study only encompassed Jews), compared with 11% in 2004-2006. Workers whose retirement is put off are less likely to take the risk of changing jobs.

But the really interesting part of the research appears in a few lines towards the end of their paper: “As noted, mobility improves the allocation of workers between employers and thus is associated with the development of productivity. Furthermore, there is a link between mobility in various age groups. Therefore, it is worthwhile strengthening the policy that encourages employment of older workers through creation of conditions that will contribute to mobility as well and will make it easier for workers to take risks. It is possible, for example, to increase the availability of professional training for older people, to make the conditions for receiving unemployment benefits at older ages more flexible, and to prepare programs encouraging employment of older people.”

And that touches on a number of problems in the Israeli labor market, one being the low productivity, which is due, among other things, to the rigidity in certain segments of the economy; the absence of good, efficient training programs; the absence of a safety net for older people seeking jobs; and age-based discrimination.

By the way, one of Netanyahu’s achievements as prime minister is definitely that he managed to keep unemployment steady at its low level. Give credit where it’s due: It happened on his watch. That said, there’s one worrying thing about this achievement – it made Netanyahu and his government fall asleep on their watch. They are not doing enough to develop the labor market and make sure that unemployment stays low. Economic growth isn’t enough to pull that engine; Israel needs more job-training programs, better social security networks for the jobless, not only tenure for insiders; and a nationwide drive to improve productivity. The increase in lifespan and technological development demand that we develop these, and fast. Thing is, that low unemployment rate ruins any feeling of urgency we might have. Urgency is usually created by economic crisis, and we aren’t in one, for better or worse.