Freeing the labor market to fight unemployment

As a direct consequence of the lockdowns, more than a million Israelis have lost their jobs, and the country faces a 25% unemployment rate. Getting those individuals back at work is a national priority, failing to do so will not only destroy the lives of many families but also bring social unrest. Unfortunately, the government policy of distributing grants to employers to take back workers will not solve the problem. The labor market doesn't need a one-time influx of cash; it needs structural reforms.

Israel operates under a very stringent set of labor laws. According to the Economic Freedom of the World Index, Israel ranks 121 out of 160 nations for having one of the worst labor market regulations in the world. Those regulations include hiring conditions, minimum wage, centralized collective bargaining, hours limitations, mandated cost of worker dismissal, and many others. An over-regulated labor market in a time of economic growth was a nuisance that hurt productivity and growth. In a recession with high unemployment, as we are facing today, it is our worst enemy.

As small businesses start re-opening, they face a new economic environment with a very high level of uncertainty. Will the restrictions come back? Will consumers' shopping habits change? Will the government place new regulations?

Not knowing what to expect in the future, businesses will probably adopt a cautious attitude towards hiring and investments to reduce their exposure to risks. It is, therefore, imperative to reduce labor costs and allow for more flexible work contracts.

Reducing the cost of labor

The labor market works as any market, with demand and supply. The companies need labor input, and employees sell their labor. When the demand for labor decreases, as right now, and the supply of labor is unchanged, the market sets a lower wage, until more companies enter the market, start demanding more workers, inducing an increase in the salary. Lowering the cost of labor when facing high unemployment is crucial.

One way to reduce the price of labor would be to cancel all the employer's payroll taxes and mandatory contributions. Today, employers pay 7.25% of the monthly wage in social security contributions, 8.33% for severance pay, 8.5% for pension, and disability fund, 7.5% for advance study fund, and other payments for transportation and recreation. Without those mandatory payments, the cost of labor will be at least 30% lower.

It is true that in the short term, the worker might receive lower benefits. A negative income tax or tax credit that will allow the worker to pay directly into his/her pension, disability, and study funds could serve as a temporary remedy. It will still cost much less to the taxpayers than paying for full unemployment benefits.

Flexible work contracts

During normal circumstances, companies can estimate consumer's demand and hire workers accordingly. In today's situation, the level of uncertainty makes it almost impossible for them to reasonably quantify future revenue.

How can companies commit to employing a worker when it cannot form rational expectations about the future, and the cost of dismissal is high?

It is very likely that in the future companies will prefer to contract self-employed workers for a specific project instead of hiring regular employees. It drastically reduces the risk of exposure to the company and could potentially benefit the workers. Israelis are quite open to this idea. In a recent poll conducted by the Jerusalem Institute for Market Studies, when asked "To what extent are you willing to be self-employed and not hired to get a job during this period?", 33% of the respondents strongly agree, 42% partially agree, and only 24% opposed it.

The government could encourage this type of flexibility by making it easy for individuals to become self-employed instead of burdening them with terrible bureaucracy and mandatory payments,

As the country faces a very high unemployment rate, it is imperative to keep the labor market flexible and free from cumbersome labor regulations. If our government is serious about reducing unemployment, it needs to reform the existing labor laws drastically. Failure to do so will make economic recovery extremely difficult.

138 views0 comments

Recent Posts

See All
JIMS Green M.png

Thanks for Joining us!