Trying to Bridge the Wage Gap

Extract from an article in Issue 17, December 10, 2007 of The Jerusalem Report. For full story please subscribe to The Jerusalem Report click here to subscribe. A new Knesset initiative aims at limiting the salary of the highest-paid employee in publicly-held corporations to no more than 50 times the lowest salary at the same place of work. Miriam Mizrahi, 53, is a caregiver at a publicly-sponsored home for the infirm elderly in Jerusalem. Tired, just coming home from a nine-hour shift, she drops into a chair in her sparsely furnished apartment in a working-class neighborhood in Jerusalem. Her back hurts, she says, from pushing wheelchairs and bending to retrieve things that the elderly drop unintentionally. Her uniform is stained, because some of the people she cares for are incontinent. Mizrahi's husband died five years ago. Her husband was a day laborer, and left her with no pension. She has heard, vaguely, of a new Knesset initiative to limit the salary of the highest-paid employee at publicly-held corporations to no more than 50 times the lowest salary at the same place of work. Informed that the bill has recently passed its preliminary reading at the Knesset, she sighs and seems to sink, even more dejectedly, into her chair. "I've worked all my life. I never even finished high school. My husband, may his memory be a blessing, worked all his life, too. And I bring home about 3,200 shekels a month. I'm supposed to make minimum wage [approximately 4,000 shekels ($1,000)], but they always find reasons to dock my pay or charge me for something, like my uniform, even though they're not supposed to. "Fifty times that - wow, that would be so much money, I can't even imagine how I would live - what would I do with all that money?" She smiles. "What do rich people do with all that money? I know what I can't do with what I make - I can't really live. I can't give my children what they need. I can't always buy good food - we eat a lot of bread and pasta around here, and now the price of bread is going up, too. My two boys are good boys. My oldest just finished school last year, and he's going into the army soon. My youngest is supposed to be in 10th grade - but there's a teachers' strike, so he's working here and there. And I do important things, I think - I take care of old people whom no one else wants to take care of. "Wow, 50 times what I earn? That's so much money!" But while Mizrahi can barely fantasize about what she would do with "so much money," the proposed legislation, brought to the Knesset by Shelly Yacimovich (Labor-Meimad) and supported by the government, has drawn criticism from economists and columnists, who regard it as a dangerous, populist political intervention in the economy. Writing in the general and the economic press, they threatened that the bill heralds "the return of communism," the end to hard-won privatization of the once highly regulated Israeli marketplace and, ultimately, the downfall of the Israeli economy. Yacimovich says she is "delighted" at the controversy that the bill is generating. Salaries paid to top managers, especially in public corporations, have skyrocketed in recent years to unprecedented levels, she contends, creating a new class of wealthy individuals "completely separate, out of touch" with most employees, even in their own companies. In fact, Adva, a social policy organization, has published statistics showing that average annual top-level executive salaries in public firms rose from 1.55 million shekels ($387,000) in 2003 to 2.09 million shekels ($522,000) in 2006 - a 34.8 percent rise in three years. At the same time, social security and welfare benefits have been severely curtailed, and the prices that citizens must pay for once-free services, including some medical procedures and medications, as well as compulsory education, have gone up. And symbolically, regulation of the price of bread and bread-products - which constitute a relatively high percentage of the expenses of poor families and a decreasing percentage of the expenses of richer families - was rescinded in early November. The international Gini index (a measure of income inequality within a country) ranks Israel among the developed countries with the highest levels of income inequality. Anticipating the criticism, Yacimovich claims that the bill does not violate the "rules of the free market." Furthermore, she notes, the bill does not actually set a maximal salary ceiling; rather it establishes relative salary levels. "If a corporation's board sees fit to raise the salary of the CEO due to the company's success, it can do so without any restrictions, other than that it would also need to raise the lowest salary it pays in proportion," she explains in her introduction to the proposed legislation. Furthermore, Yacimovich insists on referring to the bill by its official name, The Wage Gap Reduction Bill. She therefore regards the bill primarily as promoting a more equitable distribution of the profits of corporations. She defends the proposed 50-times maximal gap as extremely generous to high-salaried managers, noting that with the minimum wage now about 4,000 shekels per month, a 50-fold multiplication would result in a maximal salary of 200,000 shekels ($50,000) a month - which would, in her estimation, mean that only about 200 individuals in public companies in the country would be subject to a salary cap under the bill. "We know this is a high figure," says Amit Ben-Zur, spokesman for Yacimovich. "It isn't the optimal proportion, but we felt that was what would be likeliest to be passed by the Knesset. And it makes our point - that income and wage gaps must be taken into consideration. Until now, companies could award their managers any sums that they wanted. The fact that there will be a cap is a beginning towards a more equitable distribution of income in this country. Once that principle has been accepted, it will be easier to correct the distortions and inequities." Although initially proposed by Yacimovich, the bill has been sponsored by the government - albeit in a more limited format than Yacimovich had originally intended. According to Ben-Zur, she had originally intended for the legislation to apply to all companies traded in the stock exchange - but the government opposed this broad-based intervention and demanded that it apply only to public companies. "We agreed to this because it makes the point that we want to make and because it is a change in the right direction," Ben-Zur tells The Report. "In the future, we hope that we will be able to expand the bill's implementation." To observers, the government's support for the bill was initially surprising, especially in light of the recently passed 2008 budget that the government submitted to the Knesset, which included further cutbacks in social services, additional privatizations, and elimination of regulatory mechanisms. But a senior member of the ruling Kadima party, who refused to be identified for this report, explained that "the government is worried about the way the winds are blowing." He cites the demonstration held in mid-November in support of the teachers' strike, which was also billed as a demonstration for greater social and economic equity. "When the government first discussed the bill, in the early summer, of course we didn't know that 100,000 people would turn out for a demonstration in support of the teachers, but we could already sense that the public is getting tired of the wage gaps, of fantastic wages contrasted with abject poverty. Even people like [Likud leader] Benjamin (Bibi) Netanyahu, who lead the privatization and free-market campaign, have realized that the public just won't tolerate this and have started to proclaim that the government needs to provide for the weakest people. So since Yacimovich agreed to limiting this to 50 times and to public companies - the government sort of felt that it had no choice, in terms of public opinion." The bill now faces a long road full of hurdles, as it moves to committee deliberations, after which it would need to pass three more readings before it could become law. Despite Yacimovich's and members of the coalition's explanations, professional economists remain unconvinced. "The wage cap bill is not a brilliant idea, to put it mildly," Ruth Lowenthal, senior partner in Sadan Lowenthal Ltd., a Tel Aviv economics consultancy, tells The Report. "The socialistic instinct towards equality may be understandable, but we've seen attempts to dictate economic policy by political figures, against the law of economics, in various socialist countries and also in Israel in the past. The results have always been dismal. And in this case it is not even clear that those who are being targeted are the wealthiest [in the country]. For full story please subscribe to The Jerusalem Report click here to subscribe.