Bank of Israel's Flug: Employment issues, inequality as central economic problems

Bank of Israel chief says Israel only spends a third of what other OECD countries spend on active labor policy; PM Netanyahu promises deregulation.

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November 3, 2014 20:23
2 minute read.
settlement construction

A laborer works on an apartment building under construction in Jerusalem. (photo credit: REUTERS)

Bank of Israel Gov. Karnit Flug on Monday singled out Israel’s labor market as the central arena for the country’s long-term economic health.

Speaking at the Israel Democracy Institute’s Eli Hurvitz Conference on Economy and Society, Flug said that policymakers had to focus on “inclusive” growth.

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“We face three central challenges: absorbing populations with low employment rates and low wages into the core of the labor market; raising the productivity levels in a portion of the economy reflected by high levels of low wage workers; and matching skills and education to the changing labor market,” she said.

“In order to bring the economy to extended, inclusive growth, whose fruits will be shared among the general population, we must devote the necessary resources to the labor market and work on productivity, which will lead to an improvement in the wage level,” she continued.

In terms of GDP, Israel spends only a third the levels of its OECD counterparts on active labor policies, Flug noted in a comment directed at Finance Minister Yair Lapid. BoI has pushed for greater civilian spending and, if necessary, tax increases to fund them in the latest budget.

Though unemployment jumped to 6.4 percent in the third quarter from 6.1%, the general trend in recent years has been relatively low unemployment.

Reasons included the welfare benefit cuts in 2002-2003 that pushed some people into the labor markets; the rise in educated workers, improved methods of matching companies to the workers they need, higher wage flexibility that let employers hold onto workers during tough times, and negative income taxes.

Yet four reasons persist that hold real wages down: low skill levels among the new entrants to the labor market; an increase in part-time employment; income tax cuts that increased net earning (but kept gross earnings from rising more); and the global trend of technological change affecting the labor market.

As a result, the state should spend more on educating and training people; further subsidize employment services for poorer communities; increase hi-tech education (and not vocational training) in high schools; and increase negative income tax. The government should also reconsider guest worker programs and better enforcing existing labor laws.

At the same conference, Prime Minister Benjamin Netanyahu talked up a public sector reform plan that the cabinet recently approved, as a means of moving the economy forward.

“The government must serve the public, not the other way around,” he said.

Israel suffers from overregulation, he added, and needed to both cut down excessive red tape and introduce a mechanism for evaluating the cost of new regulation in the future.

The cabinet approved plan would cut 25% of regulation over five years and set up such a mechanism. A poll unveiled at the conference showed that both leaders hit on important points. 86% of respondents said they were dissatisfied with government plans to reduce poverty.

It also showed Israel’s relative standing in the world falling in terms of regulation, from 23rd place in 2007 to 109th in 2013.

In related economic news, Flug reiterated hints that BoI was considering further lowering interest rates and using unconventional tools such as quantitative easing – the buying of private bonds to inject more money into the economy. The bank’s interest rate is already at a record low 0.25%.

Last week, the US ended its own QE program that it installed to battle the fallout from the global financial crisis in 2008. The program is generally considered to have been successful.


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