Has Israel Reached the End of the ‘Jobs Miracle’ Era?

Avi Waksman
Avi Waksman
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People stand outside the Employment Office in Holon.
People stand outside the Unemployment Office in HolonCredit: Alon Ron
Avi Waksman
Avi Waksman

The “employment miracle” that contributed so much to the Israeli economy’s high rates of growth in recent years is starting to show signs of strain, and that threatens to put a cap on the economy’s ability to grow in the years ahead.

The latest evidence is that the growth in Israel’s population of employed grew at an average rate of 2% from a year earlier in the six months through November. That was the slowest pace since at least the middle of 2013 and marks a sharp drop from the peak rate of 3.4% in the six months to June 2014.

But even before that, Israel’s workforce participation rate — the percentage of working-age people who are employed or actively seeking employment — has been stuck for two years at slightly under the median for countries belonging to the Organization for Economic Cooperating and Development. Israel’s rate peaked at 78% in May and has edged down since then.

If expectations for an overall slowdown of the Israeli economy prove true, the employment slowdown could grow worse. Wage growth, which has been rising at a fast clip in recent years, could slow, especially as the increase in the minimum wage in 2017 no longer factors in.

On the other hand, with Israel’s unemployment at such historically low levels, a slowdown in job creation isn’t likely to cause a big increase in joblessness.

The Bank of Israel attributes the slowdown in employment to slower growth in the prime working age population of 25 to 64, a process that is forecast to continue in the years ahead. The central bank cites figures showing the prime working age population will grow at a rate of 1.3% to 1.5% annually, versus overall population growth for Israel of 1.85% to 1.9%.

Two other factors that are constraining growth is Israel’s inability to raise the workforce’s already high educational profile or to raise the retirement age.

The government has been pushing for segments of the population, including the disabled, ultra-Orthodox men and Arab women, who have traditionally been underrepresented in the workforce to find jobs.

In the case of Israeli-Arab women that record has been hugely successful, with the participation rate exceeding targets, but the effort to raise the rate for Haredi men has stalled. Last summer, the government’s Employment 2030 committee promised to have its recommendations on how to increase employment shortly but they have yet to be completed, according to a Labor, Social Affairs and Social Services Ministry spokesman.

In spite of Israel’s problems, the rate of job growth is still higher than in most of the OECD. The number of employed grew 5% in 2015-17, versus 3.1% for the OECD. But Israel is no longer the leader in growth, just seventh among 36 countries.

Besides trying to reserve slower growth, Israel has to adopt policies to improve the kind of jobs it is creating. Employment growth was focused occurred mainly in lower income groups, such as Israeli-Arab women, where levels of skills and education are lower and so is productivity.

The State Employment Service estimates that 88% of the newly employed in Israel in the past two years took jobs in the service sector. Indeed, Israel has an unusually high rate of service jobs — 81.9% of the total, versus 73.3% for the OECD as a whole.

Service jobs don’t have to be low-pay, low-skill, said Hagai Levine, deputy director for research and planning at the Employment Service.

“On the one hand there’s high-tech, which provides services that can be exported, in which a relatively small group of people work. On the other hand, there are lots of service sectors where pay and productivity are low, like education, home nursing care and sales,” he said.

Most of Israel’s job growth has been at the lower end of the labor market in recent years. In the three years through the third quarter of 2018, the number of jobs in Israel in Israel grew 3.2% while those in hotels and restaurants jumped 16.8%.

Israel spends relatively little compared to other developed economies on advancing the labor market, most notably in training.

“Professional training in Israel is in distress,” said Levine. To help address the problem the Employment Service has introduced two programs, one of which subsidizes new employees while they undergo on-the-job training and anther that matches people willing to learn a new trade and complete a short course with an employer needing them.