Peretz’s populist minimum wage bill

Israel educate and train its workforce.

May 25, 2010 23:17
3 minute read.
amir peretz 298.88

amir peretz 298.88. (photo credit: Ariel Jerozolimski)

Former Histadrut Chairman MK Amir Peretz (Labor), no friend of neoconservative, free-market economic theory, scored a major victory this week. He managed to convince the Ministerial Committee on Legislation to back his minimum-wage hike bill. Realizing its populist appeal, the ministers were quick to support the legislation, which would gradually raise the minimum wage over 15 months from its present level of NIS 3,850 a month to NIS 4,600.

On the face of it, Peretz’s proposal sounds reasonable: all those supermarket cashiers, cleaners, and low-tech factory workers will be rewarded with an additional NIS 750 a month. The addition to their salaries will be paid by their fat-cat employers who are making loads of cash anyway.

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When businessmen like Shraga Brosh, president of the Manufacturers’ Association, oppose the Peretz bill, they seem disingenuous. Does Brosh really want us to believe that factories will be forced to either close down, fire workers or weigh outsourcing if the minimum wage is raised? Let the over-wealthy owners buy one less sports car, one less yacht.

Upon closer examination, however, while Peretz might sound like a modern-day Robin Hood, the economic reality is a bit more complex. An OECD report on Israel’s economy, presented in January, discussed our nation’s minimum wage. Not only did OECD economists not recommend raising the minimum wage, they suggested cutting it. They pointed out that at about 50% of the average salary, Israel’s minimum wage was already significantly higher than in the vast majority of OECD countries.

Also, the fiscal woes of Greece, Spain, Portugal and Italy are causing the euro to depreciate in relation to the shekel. As a result, Israeli products have become expensive in comparison to European products. If labor costs rise, Israelis exporters will find it even harder to compete with the Europeans.

Therefore, while raising the minimum wage might make life easier for some, it really could lead to layoffs, reduced production, stalled growth and more outsourcing as businesses search for cheaper labor, precisely as Brosh has warned. Unsurprisingly, therefore, stiff Treasury opposition means the Peretz bill is unlikely to become law, at least not in its present form.

STILL, WHILE raising the minimum wage might not be the answer, measures must be taken to fight Israel’s high poverty rates and the huge gaps between rich and poor. One in five Israelis lives in poverty, including many who are employed, compared to just 10% in other OECD countries on average. And the disparity between the top income earners and the lowest paid in Israel is one of the highest in the western world.

An important step in the right direction is a negative income tax, which has already been implemented in certain geographic areas and should be expanded nationwide as planned. By augmenting low incomes, a negative income tax encourages more individuals to join the workforce. However, the maximum benefit offered, which equals 5.5% of the GDP per capita or about NIS 300 a month, should be raised to the US level of 10% of GDP per capita or NIS 500 a month.

In addition, the government, in cooperation with corporations and labor leaders, should reach an agreement to cap executive salaries.

And before Peretz calls to raise the minimum wage, he should push for better enforcement of the existing one. In 2007, one out of seven employees was receiving less than the minimum wage and 29% of those with eight years of education or less got paid illegally low wages. 

But perhaps the single most important step that can be taken in the long run is to invest in the education and occupational training that will prepare our workforce for more skilled labor. After all, the Jewish state’s most important resource is its human capital.

Israel will never compete with low-tech industries. There will always be undeveloped countries with lower labor costs. Instead, Israel should strive to improve productivity by educating and training its workforce to perform skilled work.

As that trend accelerates, productivity will rise and so will wages. As a result, fewer workers will need politicians like Amir Peretz to push for an unrealistically high minimum wage.

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