The Bank of Israel: A steep increase in the minimum wage, especially in industries with problems of profitability and competition, would lead to large-scale dismissals and an increase in unemployment. Earned income tax credits (EITC, negative income tax)

26.05.2010

The Bank of Israel: A steep increase in the minimum wage, especially in industries with problems of profitability and competition, would lead to large-scale dismissals and an increase in unemployment. Earned income tax credits (EITC, negative income tax) should be increased, and the minimum wage enforced more rigorously.

	According to Israeli law, the minimum wage is 47.5 percent of the average wage in the economy, and as a proportion of the average and median wage, the minimum wage in Israel is relatively high compared with the levels in the OECD.
	The Ministerial Committee on Legislation authorized an increase in the minimum wage to NIS 4,600 a month, which is about 57 percent of the average wage and 68 percent of the median wage in Israel, higher than the equivalent levels in the OECD.
	The Bank of Israel opposes the increase in the minimum wage to NIS 4,600, because such a sharp increase, in particular in industries facing problems of profitability and competition and against the background of higher unemployment than in 2008, is expected to lead to dismissals on a large scale and to a further increase in unemployment.
	There is a relatively low level of compliance with the law in Israel––about 14 percent of all full-time employees earn less than the minimum wage.
	The Minimum Wage Law, currently only partially enforced, should be enforced more rigorously, and enforcement should be extended to incorporate foreign workers.
	The income of low-wage-earners should be augmented by means of extending EITC countrywide and increasing the amount of the credit.
The Ministerial Committee on Legislation recently approved a proposal to increase the minimum wage to NIS 4,600 a month from its current level of NIS 3,850. According to the proposal the minimum wage would be increased gradually by 20 percent. It should be noted that the total wage of some minimum-wage earners, especially in industries in which most workers are unionized, is significantly higher than the minimum wage itself, as it includes wage components not included in the calculation of the minimum wage. This is particularly widespread in the public sector, where the average gross wage of workers earning the minimum wage is markedly higher than the minimum wage itself. In other workplaces too, such as in the manufacturing industry, the total wage of most of those on the minimum wage is significantly higher than the minimum wage specified in the Law.
Compliance with the Law is relatively low, with about 14 percent of all full-time employees being paid less than the minimum wage. In the accommodation services and restaurants industry, for example, about a quarter of all full-time employees are paid less than the minimum wage, and in manufacturing, about 10 percent.
Basically there is a consensus that the minimum wage is a tool for increasing the wage level of the low-paid. The current level of the minimum wage, however, is already high in relation to the wage distribution in Israel, relative to the norm in the advanced economies. The proposed change would increase the minimum wage to 57 percent of the average wage and 68 percent of the median wage, which would be higher than in all the other OECD countries.
The proposed increase would have a direct effect on about a quarter of all workers whose current wage is between the present minimum and the proposed level––in manufacturing about a fifth of all employees, and in accommodation services and restaurants, abut 43 percent. Some of those affected would indeed benefit from an increase in their wages, and their economic situation would improve; in some instances, however, it is reasonable to assume that employers would not comply, since there will be a greater incentive to non-compliance as the difference between the minimum wage and the competitive wage widens, and the economic situation of those workers will not change. In contrast, it is also reasonable to assume that some employees, particularly in tradable goods industries, will be fired, so that their situation will deteriorate.
In considering the proposed change in the Law, it is important to relate to the current macroeconomic situation, with tradable goods industries facing problems of profitability and competition, and with unemployment still higher than its pre-crisis level. In addition, given the large number of foreign workers still employed in Israel, regarding whom the level of compliance with the Minimum Wage Law is even lower, the proposed change would make it even more worthwhile to employ them rather than Israelis with low educational levels. It is expected that a steep increase in the minimum wage, especially at this time, would lead to widespread dismissals and to an increase in unemployment.
Thus an examination of the range of implications of the proposed change gives cause for concern that it would have a negative effect on a considerable share of low-wage earners, those it is aimed at helping. It would also have an adverse impact on producers, mainly in those industries with a high concentration of low-paid workers, and in particular those facing international competition.
In light of the above, a sharp increase in the minimum wage is to be avoided, especially in the current economic situation. Decisions on changes in the minimum wage should be made after negotiations between workers' and employers' organizations, and should incorporate an amendment to the wage components included in calculating the minimum wage. Components of the wage that should be included are those that are to all intents and purposes parts of the wage (the thirteenth monthly wage, seniority, etc.) and which are not reimbursement of expenditure or incentives for extra work. Serious steps should be taken to strengthen the enforcement of the Minimum Wage Law in order to increase the currently low rate of compliance. In the context of the discussion on the minimum wage, it should be noted that Earned Income Tax Credits (EITC), or negative income tax, that has been operating recently in certain regions, acts to increase the income of low-wage earners in families with low income without adversely affecting their employment. Thus increasing the income of the low paid should be achieved by giving national coverage to EITC and increasing the level of the credits, and not by means of an increase in the minimum wage.