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After several warnings from industry and commerce, the Bank of Israel cautioned that a sharp increase of the minimum wage to $1,000 would throw another 40,000 citizens into the unemployment cycle while worsening opportunities for jobseekers to find work.
Amid disagreements over the question of raising the minimum wage in coalition negotiations between the Kadima and Labor parties, the Bank of Israel said in a statement this week that the ramifications of the proposal were likely to negatively affect a big portion of the low wage earners - the part of the population that was supposed to benefit from the proposal.
Adoption of the proposal, the central bank said, would hurt manufacturers mainly in those sectors with a high concentration of low wage jobs and, in particular, in those sectors that are subject to international competition.
According to a calculation carried out by the economic team of the Manufacturers' Association of Israel, raising the minimum wage to NIS 4,500 a month would cost the economy NIS 26 billion annually of which NIS 18b. would weigh on the business sector. In comparison, instituting a negative income tax would cost the economy no more than NIS 12b. annually.
The Bank of Israel said that instituting a negative income tax would work towards increasing the income of low wage earners without hurting unemployment.
The Kadima and Labor Party are in agreement in principle over raising the minimum wage, but there is still disagreement over the timeframe and the amount of the increase. Kadima has said that the Labor Party's demand for the minimum wage to be raised to $1,000 (NIS 4,700), would cause unemployment to go up by 4-5 percent within a few years.
The Bank of Israel stated that, in principle, there was room to raise the minimum wage gradually but only if done in accordance with the economic growth rate, the unemployment rate and the situation of those sectors in which low wage jobs are concentrated.
In addition, the Bank of Israel called on the government to implement substantial steps to ensure the proper enforcement of the minimum wage law. Similar to commerce and industry, the Bank of Israel agreed that any decision on the minimum wage question needs to be negotiated together with employers and employees' unions.
Furthermore, it said, the minimum wage law ought to be modified by clearly defining and including certain additional employees' benefits or salary components such as seniority, premiums and the extra month's pay, in the calculation of the minimum wage.
The Bank of Israel pointed out that the salary of part of the minimum wage earners was much higher than the minimum wage if additional salary components were included, which until now were not counted in the calculation of the minimum wage. This phenomenon is present particularly in the public sector, where the average gross salary of minimum wage earners is 50% higher than the minimum wage itself.