18.4.2006
 
Bank of Israel: Minimum wage should be raised gradually in line with growth
A sharp increase in the minimum wage could create more unemployment and make it more difficult for the jobless to find work
 
In recent weeks there has been much public discussion on the question of increasing the monthly minimum wage to NIS 4,600 (or $1,000) from its current level of NIS 3,456 (approximately 47 percent of the average wage). According to this proposal, the minimum wage would be raised by 33 percent in several stages. It is important to point out that total pay for some of the workers earning minimum wage––particularly in fields where most employees are unionized––is significantly higher than the actual minimum wage, as pay includes components that are not included in the minimum wage. In the public sector, this is particularly widespread and average gross wages for those on minimum wage in the sector is some 50 percent above the level of the minimum wage. In other sectors too, such as manufacturing, total pay for most employees on minimum wage is considerably higher than the legal minimum wage.
The level of compliance with the law is relatively low; some 13 percent of all full-time employees earn less than the minimum wage. In sectors such as hotel and catering, the level of workers earning less than the minimum wage reaches a quarter of all full-time employees. Therefore enforcing the Minimum Wage Law is of the utmost importance and we call upon the government to increase enforcement in this area.
The proposed increase will directly affect around 18 percent of all workers, whose pay falls between the current minimum wage and the new level proposed. Among those affected, some will see their wages rise and their economic situation improve; for some, it is reasonable to assume that their employers will not obey the law as the incentive not to comply increases as the gap between the minimum wage and the competitive wage becomes wider, and for these workers, their situation will not change; while for others, it is reasonable to assume that they will be dismissed from their place of work, and their economic situation will worsen.
With regard to the proposed bill, it is important to take into account our current macroeconomic situation, where the rate of unemployment for those with up to 12 years of schooling, is some 13 percent. Given too the high rate of foreign workers still employed in Israel––for whom the rate of compliance with the law is relatively low––passing this bill would further increase the attractiveness of employing foreign workers above Israelis with low levels of education. Therefore, in the current circumstances, it is reasonable to assume that the numbers of those joining the ranks of the unemployed will be relatively high. From research on the influence of the minimum wage on the Israeli economy carried out in the past by the Research Department of the Bank of Israel, one concludes that raising the minimum wage as proposed, if carried out in a single immediate step, would reduce the number of employees by 40,000, i.e. could increase the rate of unemployment by 1.5 percentage points. Graduating the increase in minimum wage over several years, on condition that the economy grows and, with it, labor productivity and therefore wages, will moderate the negative affect on employment.
In examining the wider implications of the proposal, there is a fear that it will impact on a not inconsiderable number of employees on low wages––the very workers whose situation the proposal was designed to improve. In addition, adopting this law would harm manufacturers, mostly in those fields which have high concentrations of low-paid employees, and in particular for those who compete internationally.
Summary of the Bank of Israel's position on raising the minimum wage
In summary, the Bank of Israel believes that a sharp increase in the minimum wage would harm employment, raise the number of unemployed and make it more difficult for the jobless to find work. The minimum wage could be raised however gradually, and while taking into consideration the growth in the economy, the increase in labor productivity, the level of unemployment and the situation of sectors that rely on many workers earning low wages. The decision to raise the minimum wage should be taken through negotiations between workers' and employers' organizations, and should also include the correction of wage component definitions for the purposes of calculating the minimum wage. Components that should be included in such calculations are those that are true wage components (13th month's salary, seniority increment etc.) and not reimbursements for expenses or incentives for intensive work. It is also important to take practical steps to enforce the Minimum Wage Law, which, as noted, is widely flouted. In the context of the minimum wage debate, it should also be pointed out that "Earned Income Tax Credit" would raise incomes for workers on low wages in families of low incomes, without impacting employment.