Prime Minister Benjamin Netanyahu, together with Minister of Finance Israel Katz, announced this week another month long extension of emergency support for furloughed workers. This is the third extension made to the support, which has so far been distributed in small, short term measures, usually for a month at a time.
This begs the question: why has the government preferred to extend support for such short periods instead of committing to longer term support for what will most likely be a long drawn out unemployment crisis?
This policy has been entirely unique to Israel. All other OECD member countries announced in March support schemes lasting at least until September, whereas the Israeli government has preferred to leave a certain amount of vagueness surrounding the duration of support, often announcing extensions days before earlier schemes are set to expire. So why has the government been so keen not commit to long term support?
The unemployment trap
Some in the MoF have cited concerns over Israel’s Social Security Institute (Bituach Leumi) financial stability as the reason for a certain fiscal prudence which favors a more cautious approach. However, Meir Shpigler, head of Bituach Leumi has repeatedly called on the government to extend support, claiming that the institute has more than enough funds at its disposal to back longer term commitments.
Another claim made by officials in the MoF is that committing to long term support would harm the labor market by reducing worker’s incentive to search for jobs. In certain cases, known by economists as “Unemployment Traps”, workers will prefer to rely on the generous safety net offered by the government rather than have to find a job on the market.
There are several problems with this explanation, which has been widely criticized by economists. Firstly, Israeli unemployment benefits are among the lowest in the west, and offer compensation that is far from the wages workers could earn on the market. This means that unemployed Israelis suffer a considerable drop in quality of life.
As some Israeli economists have pointed out, what the government should be worried about most is not an unemployment trap, but rather the opposite. With low levels of government support, workers who have lost their jobs may be forced to take the first job offer they can get. Since unemployment is at an all-time high, competition over jobs will drag wages down, with employers offering the position to those who are prepared to work for the lowest salary. This often leads to a lower level of productivity, with workers accepting jobs for which they are overqualified in an attempt to compensate for the loss of wages.
More generous unemployment benefits allow for workers more leeway, avoiding the temptation to take any job offered to them, and allow them to negotiate for higher wages and, crucially, a larger portion of the company’s overall revenue.
Engineers working on garbage trucks
A prime example of this occurred in Israel in the early 90’s, when over a million Jews from the recently collapsed Soviet Union made Alliah to Israel. Many of these new immigrants were highly skilled and educated, but suffered from high levels of unemployment and low government support.
Many of these new Israelis had been trained as engineers, doctors or musicians, but were forced into low income and low skill jobs. This is often recalled with a certain degree of romanticism in the Israeli collective memory, but from the standpoint of the economy as a whole it may be rightly regarded as an institutional failure. By not offering support to the newly arrived immigrants the Israeli economy lost the benefits it could have gained from large numbers of highly skilled workers coming in from the collapsed Soviet Union.
A slightly longer period of government unemployment support allows for workers the freedom to navigate the labor market and find the job most suitable for their skills and training. That way, the loss of productivity due to misplacement of skilled workers is mitigated. In many cases a more generous unemployment support program allows for a more efficient allocation of labor, which allows highly skilled workers to negotiate better wages in more suitable position for their skills, driving productivity up.
So the question remains – why do the Prime Minister and the Minister of Finance prefer to provide support in short term pulses, leaving so many Israelis with a sense of insecurity about their immediate financial future?
The answer is simple. Katz and Netanyahu prefer to weaken Israeli workers’ bargaining position when it comes to returning to work after furlough. Workers in a more precarious financial situation will have no choice but to agree to lower wages in an attempt to compete with thousands of other workers.
Israeli workers have in recent years made significant achievements when it comes to working conditions. The minimum wage has increased several times, pushing average wages up with it. Historically low levels of unemployment have meant that workers’ bargaining position has been strong, with employers having to compete with each other over skilled labor, offering steadily rising wages.
For Netanyahu and Katz, both ardent supporters of what is known as supply side economics, which favors profits over wages, this may be a historic chance to correct matters. As long as workers are kept under precarious, unstable financial conditions, they will be forced to agree to lower wages, pushing profits back up again.