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The Central Bureau of Statistics has stunned Israel's political and business community by indirectly admitting that its method for measuring unemployment is not the accepted methodology used by the OECD. Starting this year, it must calculate the unemployment rate on the same basis as used by the rest of the OECD's members. As a consequence, Israel's unemployment rate - one of the most important macroeconomic figures, along with GDP growth - has jumped 20 percent.
Israel joined the OECD in late 2010, and must update and amend its method for measuring unemployment. According to the Central Bureau of Statistics, the unemployment rate was not 5.4% at the end of 2011, but 6.5%.
The Central Bureau of Statistics announced on February 28 that the average unemployment rate in 2011 was 5.6% of the civilian labor force, or 174,000 unemployed persons. That figure has now been revised to 227,000. An unemployed person is defined as a person aged 15-64 who is seeking work, but is not working (cannot find a job).
A top economic official in Jerusalem told "Globes" about the shock among Israel's economic leaders who received the news a few days ago. "We're also in shock, and cannot understand the change. Governor of the Bank of Israel Professor Stanley Fischer saw the numbers and is demanding explanations. He hasn’t yet received them, and he does not find what he was told convincing." A top Bank of Israel source admitted that he did not understand the change either.
Beyond the fact that the Central Bureau of Statistics' blow came without warning, the main problem is that the explanations it offers are unpersuasive, and fail to shed light on the real reasons for the jump in unemployment. Firstly, the Central Bureau of Statistics says that, as part of the change in methodology, it was decided to include regular soldiers and career officers and NCOs serving in the IDF as employed. Until now, the unemployment rate only considered the civilian labor force, not the military, which is not the accepted methodology in OECD member states.
"This change should lower the unemployment rate, because the employment rate of IDF servicemen is 100%. This means that the increase in the unemployment rate between the two surveys is not because of this change, and is therefore doubly surprising," says Psagot Investment House Ltd. research department head Uri Greenfeld. He adds, "The unemployment rate of the civilian workforce (without the IDF) is much higher, because the unemployment rate in the Army is zero."
Another change relates to the number of communities sampled, which was increased by 100 communities to 470 communities from 370 communities. "This means that more of the smaller and peripheral communities are included in the Central Bureau of Statistics surveys, and these communities tend to have lower employment rates than the big cities."
This exposes another problem: the Central Bureau of Statistics seems, until now, to have neglected communities with high unemployment rate, which apparently explains part of the low unemployment rates previously announced. This means that one of the great contributions of Israel's joining the OECD is that the Central Bureau of Statistics must now measure unemployment according to the OECD's methodology, bringing the statistics closer to reality - and that reality is shown to be much bleaker than was thought a few weeks ago.
Israel's low unemployment rate has been a point of great pride for Prime Minister Binyamin Netanyahu, and even more so for Minister of Finance Yuval Steinitz, since the establishment of the government in early 2009. They based their claims for the government's economic success on the low unemployment rate. The Central Bureau of Statistics' bombshell has severely damaged its credibility.