Between 600,000 and 700,000 Israelis will be getting a present for Passover. Starting today, those who earn minimum wage will receive a monthly salary hike of NIS 350, if they work full time. Instead of NIS 4,300, they will be paid NIS 4,650. By the beginning of 2018, according to an agreement the Histadrut labor federation and business leaders signed last year, the minimum wage is to rise to NIS 5,300.
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The pros and cons of raising the minimum wage are hotly debated by economists. Conservatives, basing themselves on neoclassical theories, tend to argue that raising the cost of labor leads to unemployment. As with any other good or service, if the price goes up, demand goes down.
In contrast, those who lean left on economic matters tend to support minimum wage hikes as a means of fighting poverty. If those who earn the lowest salaries receive are paid more, goes the reasoning, this will help the poor.
Both sides make legitimate arguments, but they are misguided.
The correlation between minimum wage levels and unemployment is not strong. In the US in the 1960s, for instance, when the real minimum wage was at an all-time high, unemployment was low, and in the 1980s, when the real minimum wage was low, unemployment was high.
In Israel, a study conducted by the Bank of Israel (the present governor Karnit Flug was one of the researchers) in 2000 found that a rise in the minimum wage resulted in layoffs in the textile industry between the years 1973 and 1994. In contrast, in the food industry, minimum wage hikes resulted in no significant increase in layoffs.
But what happened to the Israeli textile industry has more to do with globalization. Obviously, a country that pays a minimum wage of around $7 an hour cannot compete with countries such as Bangladesh, Vietnam, China or Thailand.
Also, demand for workers tends to be inelastic. When the minimum wage is raised, employers do not rush to fire workers. They are more likely to pass on the higher production costs to consumers in the form of higher prices for goods or services.
The minimum wage hike is expected to cost employees NIS 9 billion, according to Globes, citing an unnamed source.
Also, employers that pay their workers more demand more, even if it means investing in training or more efficient technologies. In fact, raising the minimum wage might increase productivity.
Judging from statements made by Histadrut chairman Avi Nissenkorn, this is precisely one of the goals of raising the minimum wage.
“This is a historic moment for Israel’s economy and society. It’s a move aimed at raising productivity in Israel – which is 23 percent lower than the OECD average – and there is a significant correlation between the level of productivity and the level of wages. Indeed, wages in Israel are also 25 percent lower than the OECD average,” Nissenkorn said on Monday, according to Globes.
Regarding the Left’s claim that raising the minimum wage is a good way to combat poverty, we would counter that it is an inefficient way of going about it. Not all people who earn the minimum wage are poor. So, raising the minimum will not necessarily help fight poverty.
A negative income tax, based on the breadwinner’s family situation (how many children he or she has, married or single) is much more effective.
Israel’s minimum wage is relatively low. Based on OECD data from 2012, our minimum wage in dollar terms ranks with that of Spain, Greece, South Korea and Slovenia, even though GDP per capita here ($37,000 per year) is significantly higher than in these countries (between $20,000 and $30,000) and the cost of living is comparable or higher.
Raising the minimum wage to NIS 5,000 a month by January 2017 as planned would put Israel on par with countries with similar levels of GDP per capita and purchasing power parity such as Japan and the UK.
It would also help alleviate Israel’s high income inequality.
Among OECD member countries, only Chile, Mexico, Turkey and the US have higher levels of income inequality.
There are good reasons to raise the minimum wage in Israel. It could boost productivity and reduce income inequality without necessarily causing a rise in unemployment.
And the hike comes just in time for Passover, which will be good news for many families having a hard time making ends meet.