The Israeli unemployment miracle that was not


When I hear about dips in Israel’s unemployment rate, I am reminded of a Gary Larson “Far Side” cartoon, in which a group of dogs gather around a screen to study a cat in full defense mode: hair raised, back arched, fangs bared. A canine instructor explains, “In this slide, we can see how the cornered cat has seemed to suddenly grow bigger…Trickery! Trickery! Trickery!” Like that comic cat, Israel''s unemployment rate appears to be something it''s not.
No question, the country''s 5 percent unemployment, an all-time low and among the best in the industrialized world during a time of economic crisis, is enviable. But if Israel''s economy is so good for workers, what fostered the popular discontent that brought 400,000 people to the streets to protest economic conditions last summer? Yes, people could find jobs, but it didn’t seem to be doing them much good in terms of purchasing power. Something was lost in translation, it seems, between the the Bureau of Central Statistics and the tent cities of Rothschild Boulevard.
One problem is that unemployment rates, by definition, show a skewed picture. When the government calculates the rate, it takes the number of people who worked for at least one hour in the week—not a very high bar—and divides it by the number of people in the labor force—that is, how many people are actively looking for jobs. The unemployment rate, then, does not show the percentage of people who aren’t working in the economy, but rather the percentage of people who are actively seeking work who cannot find it. Full-time students? They don’t count. Someone who’s given up on looking? Left out. Housewives? Soldiers? Post-Army twenty-somethings taking a few months to relax? Nope.
Trickery! Trickery! Trickery!
While low unemployment tells us how easily those who want work can find it, it leaves out some really important information about how many people are actually being productive in the economy. So what’s the real story?
If we instead look at the employment rate—the proportion of the working age population that is working—we can figure out what percentage of working-age people (15-64) are actually winning the bread and driving the economy. In Israel, that number is less enviable than the unemployment rate. In the OECD—a group of 34 advanced economies—Israel’s 2010 employment rate of 59.2% puts it fifth from last (ahead of only Turkey, Hungary, Chile and Italy), and behind European economic disasters like Greece and Spain. The United States, with its unemployment stubbornly stuck above 8%, has 67.6% of its population working, well ahead of the OECD average of 64.7%. In Switzerland, the number is 79.
Source Data: OECDSource Data: OECD
From these numbers, we can infer two clear lessons about Israel’s economy. On the upside, those Israelis that work are very productive. That’s how less than 60 percent of the working age population pushed the country’s economy to grow at a healthy rate of 4.8% in 2010.
On the downside, we see that a relatively small part of the population are pulling the rest along; Only 64.1% of working age Israelis are part of the labor force. That''s why even people with jobs feel like they''re not getting a fair shake. Every two employed working-age people carry the weight of another working-age person on their shoulders, with the government helping to spread the “wealth” between them.
It’s not that everyone should be in the labor force. Students gaining skills to be better workers in the future, new parents raising children and young people conscripted to defend the country in the army are all staying out of the labor force for good reasons, reasons that can improve the economy in the future.
But one group that has no reason to stay out of the labor force is the haredi population. Many of Israel’s ultra-Orthodox receive state funds to study in Yeshiva—which unlike university study does not lead to increased economic productivity—instead of contributing to the real economy. Only 23% of those people whose last institution of study was a Yeshiva are in the labor force, about two-fifths of the total labor participation rate. While they still represent a relatively small portion of the population, it is understandable why the garner the resentment of those working—and paying—to keep Israel’s economy moving forward. That is also why Bank of Israel governor Stanley Fischer (and the IMF agreed) said at the Herzliya conference that, “continuing growth by a population segment that doesn''t work can''t go on forever. It has to stop."
Fischer, it seems, learned the same lesson as the dog in the “Far Side” cartoon, and will not succumb to “Trickery! Trickery! Trickery!”