Israel’s economy has come a very long way since the ‘80s when it was on the verge of bankruptcy. It has managed to transition from a socialist economy, with all its ills, to a capitalist economy, with all its ills. But the process hasn’t been completed; a few major problems are still left from those days.
One is the system of linkages in which wages and benefits at one workplace are linked to those at another. This distortion can be found, for instance, at the banks. Salaries at First International Bank, Union Bank and Mercantile Bank are all linked to those at Bank Leumi. Thus employees at the small banks, which don’t always post good results, get raises based on what happens at Bank Leumi.
This is a terrible system, one that's inefficient and unsuited to the modern era. And it also exists in another area of dramatic importance to Israel’s economy – security.
Salaries at the Shin Bet security service, the Mossad, the police and the prison service are all linked to those of career soldiers in the Israel Defense Forces, thanks to past agreements or promises by the government. If career soldiers get a raise, employees at all those other organizations expect the same raise. But the reverse isn’t true. If the police get a raise, it doesn’t apply to career soldiers.
This linkage is now threatening to cost the state an enormous 7.2 billion shekels ($2 billion) retroactively and another 620 million shekels every year from now on. The reason is that the government granted a raise to both current and retired career soldiers after the 2006 Second Lebanon War to compensate for a “lack of job security.”
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The current and former soldiers had argued that the IDF’s periodic streamlining plans result in dismissals of career soldiers, depriving them of job security. The government agreed and granted them raises of 1.3 to 7.3 percent, depending on their rank.
What wasn’t taken into account, due to negligence by the government, was that police officers, jailers and Shin Bet and Mossad people would demand the same raise. When they discovered they weren’t entitled to it, they petitioned the labor court, and the court agreed.
Thanks to the government’s negligence, this ruling has become an event of macroeconomic significance, as it requires the government to spend billions of shekels. This money can be obtained either through deep across-the-board cuts in social services and the defense budget, or by raising taxes.
Prime Minister Benjamin Netanyahu decided this week that this had no economic or other logic, and he’s set to secure the cabinet’s approval for petitioning the High Court of Justice against the labor court ruling. It’s hard to imagine the High Court diving into the practice of linkages and abolishing it. But if such a legal proceeding has a positive outcome, it would greatly reduce this blow that would result in lamentable waste and economic and administrative distortions.
There’s no good reason to granting raises to employees of the police, the prison service, the Mossad and the Shin Bet to compensate them for a “lack of job security,” because at all these organizations, both the number of employees and their salaries have been rising steadily.
Over the past few years, the IDF has implemented streamlining plans that resulted in the dismissal of around 5,000 career soldiers. This was a response to the inflated staffing that began after the Second Lebanon War.
But the state made a serious error by granting the “lack of job security” raise to army pensioners as well – people who are no longer employed and therefore have no need for job security, and who already enjoy generous pension arrangements. The inflated defense budget proves time and again to be a bottomless pit that sucks in every available shekel.
The state’s petition to the High Court in an effort to overturn the labor court ruling is absolutely essential – both to pare back the linkage system and make it clear to the state that the time has come to manage its budget more wisely and responsibly.