Summary:

The dominant influence on the labor market in 2004 was the economic recovery in the business sector which led to an increase in employment and real wages and to a decrease in the rate of unemployment. Government policy had a decisive impact in 2004 through its contribution to public confidence and economic stability which are essential elements for stable growth in output and employment. At the same time the government worked to reduce labor costs and employment in the public sector. Despite the reduction in the rate of unemployment, it remained high at 10.4 percent on average. In addition, the rate of growth in labor input was lower than that of employment due to, among other things, the increase in the proportion of part-time workers. These trends indicate that the labor market is still weak and that the level of economic activity is lower than its potential.

In the business sector, the labor market has been reacting to changes in the business cycle in Israel during the last three years. During 2001 and 2002, employers adjusted the number of workers and the level of wages to the fall in real output, resulting in a decrease in the real wage and a relatively moderate increase in unit labor costs. In this way, they moderated the negative impact on their profitability and could react quickly, through increased hiring, to the positive turnaround in economic activity in the second half of 2003 and during 2004. This was first manifested in the services and commerce sectors and in the hi-tech sectors and later on in the other sectors. The expansion in employment during this period was accompanied by a sharp increase in worker productivity and cumulative erosion of 10 percent in unit labor costs.

The government "from welfare to employment" policy formulated during the years 2002 and 2003 was aimed at transferring the focus of public assistance from welfare support to greater personal responsibility and an increased demand for labor. As part of this policy, and as a result of budget constraints, transfer payments were cut significantly in recent years and eligibility was tightened. In addition, measures were taken to significantly reduce the number of foreign workers in the economy. Despite these policies, unemployment intensified and the proportion of "chronically unemployed" increased. Furthermore, a large proportion of the additional workers absorbed into the labor market in 2004 were hired for part-time and low-paying jobs. These trends indicate that, despite the decline in unemployment, government policy has not yet succeeded in achieving a stable and sustainable increase in employment, particularly among weaker segments of the population. Thus, more should be done to encourage employment and to minimize the negative impact on weaker populations through programs targeted at defined groups, the institution of a negative income tax, incentives for employment in peripheral areas, etc.


Chapter 2: The Labor Market - PDF file