The Israeli business sector foresaw the beginning of the recession and started to rapidly cut salary levels and downsize the number of employees even before its outbreak, according to research published by the Bank of Israel on Monday.
"The economic background conditions preceding the latest recession, particularly the contraction of world trade and the large appreciation of the shekel throughout 2008, adversely affected Israel's export-oriented industries, headed by the high-tech industries," said Bank of Israel economists in a comparative report on the reaction of Israel's labor market to the last two recessions.
"The result was a decrease in the average wage and the number of employee posts in these industries. The reductions started in the third quarter of 2008, a quarter before the onset of the recession, and contributed to a decline in wages throughout the economy, due to the large proportion of highly paid employees in the high-tech field."
Central bank economists said that the Bank of Israel Companies Survey showed that the business sector anticipated the start of the current recession in the third quarter of 2008, when a large drop in growth had already occurred, and adjusted wages and labor input accordingly.
Since September last year, the rate of unemployment increased gradually from 6.1% to 7.2% in January and 7.7% in March this year.
The most recent figures published by the Central Bureau of Statistics show that the rate of unemployment was constant at a level of 7.9% in the months April to July.
Since the beginning of the present decade Israel has coped with two recessions. The first started in the last quarter of 2000, against the background of the global slowdown that developed in the wake of the crisis in the high-tech industries along with the outbreak of the Intifada in October 2000, and continued until the last quarter of 2003. The second recession began in Israel in the last quarter of 2008, a year after it had officially started in the USA.
"In both cases the labor market in the business sector reacted by reducing wages and labor input (measured via weekly labor hours), [although], the speed of the reaction differed," according to the central bank report. "In the first recession at the beginning of the decade, the nominal wage and labor input started to decline only three quarters after the start of the recession, while in the latest recession they declined a quarter before the start of the recession."
Bank of Israel economists explained that the main reason for the difference in the speed of the labor market's reaction to the two recessions was due to the different ways in which the recessions developed.
"The first started suddenly, with the outbreak of the Intifada, and became more severe with the onset of the global slowdown following the bursting of the high-tech bubble," said central bank economists. "In contrast, the latest recession became apparent gradually, after a year of downturn in the GDP growth rate resulting from the global slowdown and the recession in the USA that began back in December 2007."