Analysis

Panicky Response to Israel's Unemployment Surge Leaves Existing Problems to Fester

The pressure of the coronavirus crisis has prevented meaningful discussion about managing the workforce in the long run

Sami Peretz
Sami Peretz
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Shuttered stores in Jerusalem during the coronavirus pandemic, March 2020.
Shuttered stores in Jerusalem during the coronavirus pandemic, March 2020.Credit: Ohad Zwigenberg
Sami Peretz
Sami Peretz

Since the coronavirus crisis broke out, Israel’s Employment Service has reported every evening on the number of the newly unemployed, and is publishing outrageous numbers the likes of which Israel has never seen before. Up until April 19 the numbers were moving in one direction only – more and more people being laid off or put on unpaid leave every day. That day Israel began relaxing the lockdown it imposed in a bid to stop the spread of the coronavirus, and since then there has been a slow movement of workers returning to the workforce, which picked up in May, and then more so over the past few days.

Employment Service data show that since April 19 some 245,830 Israelis have returned to work, while another 106,530 were laid off. It’s likely that even more people have returned to work, as many people presumably have simply not reported it. This creates an unclear picture regarding Israel’s unemployment rate, which peaked at an astounding 27.8%, or some 1.15 million people. This figure has been changing significantly every day. During usual times, the unemployment rate changes only slightly – with gains or losses in the range of 0.1% per month. Since the crisis began, it has been changing by entire percentage points each day.

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The state has managed the financial aspect of the crisis with one clear goal: Getting as many people as possible back to work, no matter how and no matter at what percentage of a full-time job. The main goal is to get people working, and quickly, to prevent temporary unemployment from becoming chronic and to keep jobs from being destroyed, and to push unemployment figures back down to the single digits. The government allocated some six billion shekels to be paid as grants to employers who take workers back from unpaid leave, and is offering backing for loans to businesses, reducing their arnona (municipal tax) payments and allowing them to delay paying taxes.

The overarching plan of getting people back to work was carried out while rejecting ideas that in usual times would have seemed necessary for Israel’s workforce: high-quality jobs, positions with high output, and workers receiving career training through the course of their careers. All this will wait for other times, because at the moment the task is dramatically, immediately reducing the scope of unemployment by shooting in all directions. Is this the right approach, or would it be better if the state were to take advantage of this major shock in order to mark up some more long-term achievements for Israel’s labor market?

The government’s policy over the past decade and a half had been focused on limiting unemployment and increasing employment, and it achieved major results as Israel’s unemployment rate shrunk to a particularly low 3.5% on the eve of the coronavirus crisis. This focus came at the expense of two major issues – Israel’s high cost of living, and labor output, two interconnected issues.

In many local workplaces, the labor output is too low and the price of the products is too high. For instance, in the food sector, improving output generally depends on investing in machination and employing skilled, professional workers with high output. But many factories have a lot of workers doing work that could be automated, and the result is low output and high production costs – which leads to high prices. When the 2011 cost-of-living protests broke out, the government came under major pressure to advance reforms to lower the cost of living, and it did indeed take several measures that did not lower prices, but apparently halted the trend of price increases. That still leaves Israel with a cost of living some 20% higher than the OECD average, as well as labor output dozens of percentage points lower than that in most developed nations.

Israel’s choice of low unemployment and a high cost of living is apparently a better recipe for social stability than low prices and high unemployment. In theory, a balanced economy knows how to offer new jobs to people pushed out of their workplaces by efficiency measures, but Israel’s economy isn’t balanced in terms of the safety nets it offers workers. We don’t have good employee training systems,and unemployment pay doesn’t last long enough for people who don’t manage to find new jobs. Some people consider this an advantage since it forces people to take any job they can find, and that’s one of the explanations for Israel’s previously low unemployment rate.

This is also one of the explanations for the low worker output - many of the people who entered the workforce over the past decade are people without education or skills, and their output reflects this. Take for example members of the ultra-Orthodox community, many of whom are relatively unskilled. This has raised the question of whether the time has come to kick up a notch Israel’s employment policies – investing more in worker training in order to improve output. Output isn’t just a technical economic concept, but rather the key to improving salaries. The Finance Ministry reported on Tuesday that a higher percentage of ultra-Orthodox workers than Israelis as a whole have been put on unpaid leave or laid off.

The coronavirus crisis create a new situation, but the speed at which it hit Israel and the massive financial pressure it put on the country and the unemployed workers has prevented any in-depth, meaningful conversations about how to manage the workforce in the long run. State unemployment payments shot up from 300 million shekels as of February to 1.5 billion shekels in March and an estimated 5 to 6 billion shekels as of April. Pressure from employers and the self-employed pushed the government to repeatedly expand its aid offerings, and to date the only focus of attention has been returning as many people as possible to work. This has happened amid a pretty chaotic decision making process due to the nature of the crisis, the political reality of forming a new government while a crisis is playing out and also simply due to Israel’s complicated bureaucratic culture.

According to statistics published by the Finance Ministry’s chief economist in May, the average salary of April’s newly unemployed was relatively low – only 6,342 shekels a month, versus the country’s average monthly salary of 10,481 shekels as of 2019.

New data published on Tuesday indicated that people laid off during the coronavirus crisis had earned an average of 7,577 shekels a month as of 2017, versus the 12,136 shekels a month earned by those who weren’t laid off.

These figures point to a clear conclusion that the people who are being hurt are mainly the young, the uneducated, temporary workers, people without seniority, women, and the ultra-Orthodox.

This raises the question as to what would be the best way to help these groups. Should the government be paying their employers 7,500-shekel grants per worker in order to accept them back to work, or should this money be invested in improving their skills so that they have better career prospects? The effectiveness of the aforementioned grant has been disputed. After all, there’s no reason to encourage employers to take back workers they don’t need. If the grant drives them to do this, it’s likely that they’ll bid these workers farewell at the first opportunity.

If this happens over the span of four months, they won’t be paid the grant, but rather only a proportionate sum for however long the employee was employed. If this happens after they receive the full grant sum, this will leave the country with unemployed people whose former employers were already subsidized. This sum of six billion shekels is an investment in employers, not in employees’ skills, and this is a missed opportunity.

The pressure that the coronavirus crisis created prevented a thorough discussion of the most effective ways to use government incentives. But this won’t save the government from having to do something about the high percentage of unemployed that Israel will be stuck with after the current uncertainty dissipates.

There’s no dispute among the Finance Ministry, the Bank of Israel and workforce experts about the need to improve the skills of the newly unemployed. Every policy document, whether from the ministry, the Employment Service or National Insurance, addresses this. But this is perceived to be something that can be advanced seriously only after the current uncertainty passes and we know just how many people are still unemployed after Israel returns to routine. The problem is that at the moment, the government is blowing its resources on a range of programs, increasing the national debt and may be out of resources when it finally faces this issue.

It’s possible that improvements in other parameters – such as increased output (because the economic output will be split among fewer workers) or lower cost of living (because demand for products, services and workers will drop) – will create a new balance among these three parameters. This serves an economic purpose, but politically and socially high employment is a ticking time bomb - and therefore any bailouts or assistance needs to address worker skills.

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