Productivity and poverty

The working poor are a symptom of much larger and more pervasive economic ills plaguing our country.

Karnit Flug 370 (photo credit: REUTERS)
Karnit Flug 370
(photo credit: REUTERS)
In Israel, you can work and still be poor. That was Bank of Israel Gov. Karnit Flug’s message to the Knesset Finance Committee this week.
While poverty rates are obviously high among families where no one works (71 percent), many one-income households live under the poverty line (25.9%) and even some two-income households (4.6%) do.
“Poverty among families with one wage-earner and even with two presents us with a large challenge to raise the training and skills of those joining the labor force,” she said in her first appearance before the committee as governor.
Flug focused on some of the factors that directly influence the number of working poor such as a negative income tax that is too low and the strong shekel that hurts exports.
But it is the Israeli worker’s sorrowfully low productivity that is the main reason many of us toil but remain poor.
When productivity rates – GDP per hour of work – are low, salaries are low. According to an analysis by Prof. Dan Ben-David of the Taub Center for Social Policy Studies in Israel based on OECD figures, productivity per hour in 2012 was $33.7, slightly lower than 2011. Israel was ranked 26th out of 34 OECD countries.
A number of quite varied components make up productivity.
Most obvious is the worker’s skills and motivation.
But additional factors come into play such as the technologies used to produce or provide services, the roads used to transport goods and service providers, and the level of red tape that impedes opening new businesses, conducting transactions, building offices, hiring and firing workers and importing and exporting.
Nearly every component that goes into productivity is in dire need of improvement. While Israelis are relatively well educated, we have too many attorneys, MBAs and accountants, and not enough people employed in hi-tech, where productivity is exceptional high.
Also, while Israeli schoolchildren score about average on international scholastic evaluation exams such as the PISA, there are tremendous gaps between the best and worst students.
Sectors such as construction and some industries tend to rely on cheap manpower instead of updating their technologies.
And in a few state-run sectors such as the Israel Electric Corporation and the ports, strong unions make it difficult to fire excess manpower, which translates into lower productivity per worker.
Mind-boggling bureaucracy is part of the problem.
Instead of focusing on production, businesses get bogged down with red tape. In the real estate sector, a plethora of regulatory bodies such as the Israel Lands Authority that controls 93% of the land, the Land Registration Office (“Tabu”) and local planning committees create enormous delays.
A Treasury official said recently on Army Radio that it takes on average of seven years to receive a construction permit. Opening a business is also a long process. An OECD report found that it takes 34 days to get a license for a business in Israel compared to an OECD average of 13 days. In New Zealand it takes just one day.
Improving productivity is not all of the solution, however.
Even when there is a rise in productivity, employers do not necessarily pass on the higher revenue to workers. It used to be that a rise in productivity led to an equivalent rise in wages. But about a decade ago this changed. Productivity has grown but wages have remained about the same. Greed and a problematic business ethic combined with the weakening of trade unions explain this gap between productivity and wages.
The working poor are a symptom of much larger and more pervasive economic ills plaguing our country. If the politicians Flug addressed this week are truly interested in fighting poverty – including among those who work – in and narrowing the gaps between the rich and the poor, they need to take a more holistic approach. Not just a bigger negative income tax and the manipulation of the shekel are in order but also eradicating unnecessary bureaucracy, introducing more efficient production technologies, investing more in transportation and improving education for all sectors of society. Only then will we be able to truly brag of a “Start-up nation.”