Why they don’t work

What makes Israel’s unemployment situation unique is the fact that the number of foreign workers employed in Israel — between 200,000 to 300,000 — nearly equals the number of unemployed Israelis.

In addition, unemployment plagues mostly three sectors of the Israeli population: haredim, Arabs (especially women) and residents of so-called development towns.

It is widely believed Israel should get rid of foreign workers, either by forceful expulsion of those who are illegally here, or by more humanitarian economic steps. Since they are preferred because of their very low cost (as well as their dedication to hard work), some recommend imposing costs on their employment that would make them less attractive to Israeli employers.

Foreign workers are often paid less than the local minimum wage. In addition, Israeli employers also save the huge charges on employment that the government levies in the form of national insurance, health taxes and social benefits, charges that almost double the cost of employment, pricing low skilled Israeli workers out of the market.

The heavy costs imposed by government on Israeli labor explain why Israeli employers prefer the cheaper foreign worker. But why do foreign workers yearn to come and work in Israel despite the low pay? Why is it that despite the hue and cry that they are being terribly exploited, foreign workers from practically every third world country beat their path to Israel?

Why are they ready to pay large sums of money to Israelis who smuggle them in, and then suffer the many indignities and hard labor imposed on them without complaint to the authorities? And why, when Israeli workers are offered low-skilled jobs for nominally better pay, are there so few takers?

The answer is in the different purchasing power that low Israeli wages offer to foreign workers vs Israeli workers. Foreign workers are eager to earn Israel’s lowest wages because when they are translated into dollars they can amount to 10 times what they earn at home in parity. In purchasing power, however, they can amount to 20 times or more. So by working hard for several years and living a close to subsistence existence in Israel they manage to save a small bundle. In their low-cost countries such small sums are a treasure, affording the workers a unique opportunity to lift themselves out of perpetual poverty and misery (which our kindhearted liberals, caring so much about the “exploited,” would deny them). This is why they are so eager to come and work here.

Conversely, the Israeli worker who spends his shekels in Israel does not benefit from the high purchasing power those shekels would command in third world countries. Worse still, he is actually overcharged by a third to a half on everything he buys by the monopolies and cartels that dominate our economy.

Two recent Channel 1 programs compared food prices in Israel and the US. Prices in Israel were four to eight times higher than in America. Milk is five times the price in the US, though American cows do not seem starved and US farmers are at least as well off as Israeli ones.

Great disparities also exist regarding most other consumer items, as well as other necessities and services.

ISRAELI WAGE earners are simply robbed blind by our rapacious elites and by strong interest groups such as farmers. This is why even families where two adults work cannot often make ends meet.

With the alternative of getting pretty generous unemployment benefits, income supplements and various social benefits — that often amount to more than what the average worker earns — and with additional income from occasional employment in the underground economy, it is small wonder that, offered jobs, many of the unemployed refuse to take them.

It is therefore questionable whether the effort to create substantial employment for Israelis by simply having them replace evicted foreign workers can bring significant results without addressing the monopoly-inflated costs that devalue the purchasing power of wages.

But since the price of labor reflects not only the purchasing power of wages but also productivity, certain structural rigidities of the Israeli labor market that impede productivity and keep wages depressed must also be addressed if government wants to improve labor markets.

However, suggestions — such as those offered in a September 1 Post editorial — that the government subsidize wages are only an invitation to further distortions, for an aggravation of the problem rather than its solution.

It is surprising to find that people still believe government can hand out subsidies in a beneficially targeted way that serves “the common good” without getting enmeshed in political preferences and favoritism. Cutting the extraordinary costs government imposes on employment is a much more efficient and equitable way of encouraging employment than subsidizing it.

The three sectors that suffer most from unemployment — haredim, Arabs and residents of development towns, have different social factors influencing their low participation in the labor force. What they share in common is a long-term reliance on Israel’s welfare system. They also benefit from counterproductive handouts, especially generous aid to large families. This aid and other significant social benefits increase, of course, when the head of the family is unemployed.

Labor law and regulation also have a strong impact on productivity and employment. During over 70 years of Labor rule Israel instituted a plethora of “progressive,” namely socialist, labor rules that badly distorted incentives to increase productivity. They also made labor markets so rigid that they are unable to respond to economic change or growth. Labor courts are staffed by many old socialists and statists who have no respect for property rights. They can be always relied upon to support the most outrageous union claims, imposing additional high costs on employment.

It should not come as a great surprise, then, that government gets what it pays for, and that it gets less of what it taxes most. Employment is highly taxed, so there is much less of it — in fact only 53% of Israelis participate in the workforce (in addition every third one is employed in the nonproductive public sector) compared to 65% in the OECD and many more in the US.

Unemployment is handsomely rewarded, so it keeps growing. It is up to government to change all this. Binyamin Netanyahu promises to do so.