A marketing and hi-tech job fair run by Gvahim at the Google TLV Campus in December..
(photo credit: MICHAEL ALVAREZ-PEREYRE/GVAHIM)
Many claim – and rightly so – that Prime Minister Benjamin Netanyahu’s decision to expand an existing minimum wage agreement smacks of electoral season populism. What better way to garner support than to pass out an acrossthe- board wage hike? It is still unclear whether Attorney-General Yehuda Weinstein will provide the legal backing to Netanyahu and Economy Minister Naftali Bennett – who also support expanding the minimum wage agreement reached at the beginning of the month between the Histadrut labor federation and the Manufacturers Association to include state employees. There is good reason to believe that Weinstein will tell Netanyahu and Bennett that this sort of decision has to await the next government.
Economists hotly debate the pros and cons of raising the minimum wage. Deciding in the heat of an electoral campaign to raise it – even if doing so makes good economic sense – gives the impression that the prime minister and others are being driven by opportunism, not professional considerations.
We believe that raising the minimum wage might be a good move, if combined with expansion of a negative income tax. But it must wait until after the election.
Neoclassical economists insist any rise in the minimum wage leads to increased unemployment (if the price of something goes up, the amount demanded must fall), the quickly expanding research on the issue has reached no definitive conclusion.
Correlation between minimum wage and unemployment is not strong. In the US in the 1960s, when the real minimum wage was at an all-time high, unemployment was low, and in the 1980s, when the minimum wage was low, unemployment was high. Here, a study conducted by the Bank of Israel in 2000 (the present governor Karnit Flug was one of the researchers) 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 rise in layoffs.
The Israeli textile industry’s troubles have more to do with globalization processes. Obviously, a country that pays a minimum wage of around $7 an hour will never compete with countries such as Bangladesh, Vietnam, China or Thailand. But lowering the minimum wage is not the solution. Western countries such as Israel need to concentrate on less labor intensive industries.
Not everyone can work in hi-tech, but there are other highly productive fields. Construction, health services, business services, legal services and insurance can offer high salaries while remaining competitive.
When the minimum wage is raised, employers do not rush to fire workers. They are more likely to pass on the increased production costs to consumers in the form of higher prices for goods or services.
Also, employers that pay their workers more demand more, even if it means investing in training or more efficient technologies.
Compared to many other countries, Israel’s minimum wage is low. Based on OECD data from 2012, Israel’s minimum wage in dollar terms is ranked with Spain, Greece, South Korea and Slovenia, even though GDP per capita here ($37,000) is significantly higher than in these countries (between $20,000 $30,000) and the cost of living is comparable or higher. Raising the minimum wage to NIS 5,000 a month by 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.
A negative income tax is a much effective way to fight poverty than raising the minimum wage.
That does not justify, however, keeping the minimum wage where it is. Raising it does not necessarily increase unemployment, but it could very well lead to higher productivity.
The power of labor unions has declined. Aggressive management techniques and personal contracts have spread. Workers have fewer legal protections and less power. Under the circumstances, the state has an important role to play in ensuring they receive a living wage. But raising the minimum wage now, in the middle of an electoral campaign, raises questions regarding the prime minister’s motives. The next government should decide.