Unlike U.S., Europe, Chronic Unemployment in Israel at Historic Low

Unlike U.S. and Europe, Israel’s labor market is strong, but at a cost of gaping wage disparities and workforce inequality.

Tomer Appelbaum

One dismal statistic is souring the picture of accelerating growth in the American economy and the declining unemployment rate: The proportion of long-term jobless among the United States population has barely shrunk and is still at nearly its highest level since long-term unemployment rates began to be measured in 1948.

True, at the height of the economic crisis in 2009, the jobless rate among those who had been out of work for at least a year and three months was even higher. It has moderated somewhat since, but is still substantially higher than generally prevailing levels over the years in the U.S. In addition, recent studies in the U.S. show that for those who are unemployed even longer – for at least two and a half years – their prospects of ever returning to the workforce are slim. They are unemployed for life, so even the anemic recovery that the U.S. economy has experienced over the past two years won’t help them.

Chronic unemployment is probably the most pernicious and depressing aspect of the modern job market. In its annual report for 2013, the Bank of Israel explains why. “Prolonged unemployment reduces the degree to which there is compatibility between job seekers and job openings, because it causes an erosion in the human capital of the unemployed,” the report says.

In other words, those who are outside the labor market for an extended period ultimately lose the ability to reconnect and get a job. They become mired in a desperate situation and the longer the joblessness lasts the greater the chances are that they will continue to remain unemployed.

It’s a bleak situation that also has serious personal, economic and social consequences. And that’s the situation that every developed country is increasingly dealing with. Except Israel. According to a recent Bank of Israel study, chronic unemployment in Israel, in total contrast with the U.S. and Europe, is in retreat. “In the second half of the last decade,” the central bank says, “the proportion of individuals who remained unemployed for an extended period declined.” An accompanying chart actually shows that Israel’s chronic unemployment rate in 2011 was the lowest since 1998.

And that’s not the only statistic that sets the Israeli labor market apart from the rest of the world. The central bank also looked into what has been happening with the more newly unemployed and how long it takes them to find a new job.

On that score the number of jobless who find new work within three months in Israel is at an all-time high, the highest by a wide margin since the state began tracking the phenomenon in 1996.

There are technical explanations for the narrowing of the time it takes to rejoin the workforce, mainly attributable to refinements in the job search process thanks to the Internet. There are also other, more substantive reasons, including a rise in education levels in Israel, making job seekers more suited to the needs of a modern labor force.

Structural change

The bottom line, the central bank says, is that frictional unemployment, the jobless rate related to people transitioning from one job to another, has declined and unemployment is at historic lows. That’s no accident. It’s the product of structural change.

Israel also has the highest poverty rates in the Western world, with wide socioeconomic disparities that rank the country in fifth to last place in the West and workforce productivity substantially lower than other Western countries (with the exception of Israeli companies that export their products). The Israeli government may be among the least efficient in the Western world, but ironically, Israel also has a dynamic labor market that is perhaps the strongest in the West.

According to the Organization for Economic Cooperation and Development, the grouping of the world’s developed economies, Israel has boosted its employment picture since the outbreak of the 2008 global financial crisis to a greater extent than any other developed country. It is also No. 1 in the OECD as measured by the situation for its young people. While average joblessness in the developed world among younger workers rose by 7%, in Israel, it declined by 6%.

And contrary to the accepted wisdom, the incidence of workers in Israel who are working part time because they can’t find full-time work is also bright. Israel is one of only three countries that have managed to reduce this problem since 2007.

It’s undeniable. Unlike most developed countries at the moment, Israel has no unemployment problem. It also doesn’t have joblessness that is passed from generation to generation. Almost anyone who wants to find a job here can do so, meaning that the situation for average Israelis is immeasurably better than their counterparts elsewhere in the West. There is a price to be paid for the robust labor market, however. One explanation for the current situation is the flexibility of the labor market, which is a nice way of saying that employees have become a kind of tradable commodity that can easily be bought and sold. The relative ease with which people can be laid off, as well as the expanded use of outsourced labor provided by firms providing various services, explain the capacity of the labor market to adapt to changing economic conditions and thereby weather economic crises easily.

But if faced with the choice of being an outsourced worker or being jobless – on the assumption that that’s the price that the economy may need to pay if the job market begins to shun employing contract workers and in the process loses its elasticity – most contract workers would prefer their current situation. And the Bank of Israel has found that this labor market elasticity is expressed mostly not through the dismissal of workers but in salary levels.

The central banks says it isn’t resulting in more layoffs in part because of the increased importance of those economic sectors in which employee retention is important – either due to the difficulty in recruiting suitable staff or the complexity and expense of training new people. And the factor that makes it easier for employers to retain workers during downturns is the relatively high degree of wage flexibility.

Not expendable

In other words, employers don’t relate to their employees as expendable. They are inclined to retain them but if necessary cut their salaries. That may also not be music to the ears of the average worker but again, it beats unemployment.

The conclusion from the Bank of Israel’s findings is that the Israeli labor market is incomparably strong, succeeding in providing employment to nearly everyone who wants it, but the price for that is gaping wage disparities and workforce inequality. In Israel, 25% of workers earn less than two thirds of the median wage. In OECD countries as a whole, the figure is 15%. In addition, in Israel high salaries earned by a small portion of the population skew the average wage to a slightly greater extent than elsewhere in the OECD.

On the plus side, the dynamic capacity of the Israeli economy to provide jobs for everyone has also meant that ultra-Orthodox and Israeli Arabs, whose workforce participation rates are relatively low, are also being increasingly brought into the labor market, even as overall unemployment and structural jobless rates sink to all-time lows. Particularly when we compare this to what is happening abroad, the labor market here is a walking miracle.

But this miracle comes at a price in the form of growing inequality. That must also be dealt with, but without harming the elasticity and robustness of the job market.