05.10.2009
 
The reaction of Israel's labor market to the recession: a comparison of the last two recessions
 
  Wages and labor input reacted swiftly to the current recession and declined, and even anticipated its onset to a slight extent. This contrasts with the delayed reaction of the nominal wage in the last recession, which started at the end of 2000.
  The difference in the speed of reaction is due mainly to the differences between the manner in which the two recessions developed: the current recession started gradually, following the financial crisis, while the onset of the previous recession immediately followed the outbreak of the intifada in October 2000 and the bursting of the high-tech bubble.
  According to the Bank of Israel Companies Survey, the business sector anticipated the start of the current recession in the preceding quarter, when a large drop in growth had already occurred, and adjusted wages and labor input accordingly.
  Developments in the global economy concurrent with the gradual start of the current recession adversely affected export-oriented industries, especially high-tech industries. As a result, wages and employment in those industries suffered even before the economy entered a really tangible recession.
Since the beginning of the present decade Israel has experienced two recessions. The first started in the last quarter of 2000, against the background of the global slowdown that developed in the wake of the crisis in the high-tech industries and the outbreak of the El Aqsa intifada in October 2000, and continued until the last quarter of 2003. The second recession began in Israel in the last quarter of 2008, a year after it had officially started in the USA1.
In both cases the labor market in the business sector reacted by reducing wages and labor input (measured via weekly labor hours). However, the speed of the reaction differed in the two cases, as can be seen from Figure 1: In the first recession at the beginning of the decade, the nominal wage and labor input started to decline only three quarters after the start of the recession, while in the latest recession they declined a quarter before the start of the recession, in the second quarter of 2008.
The main reason for the difference in the speed of the labor market’s reaction to the two recessions lies in the difference in their characteristics: the first started suddenly, with the outbreak of the El-Aqsa intifada, and became more severe with the onset of the global slowdown following the bursting of the high-tech bubble. In contrast, the latest recession became apparent gradually, after a year of downturn in the GDP growth rate resulting from the global slowdown and the recession in the USA that began back in December 2007. According to the Companies Survey, the business sector anticipated the beginning of the recession in Israel, and started making the necessary adjustments to wages and labor input in advance.
The economic background conditions preceding the latest recession, particularly the contraction of world trade and the large appreciation of the shekel throughout 2008, adversely affected Israel's export-oriented industries, headed by the high-tech industries. The result was a decrease in the average wage and the number of employee posts in these industries. The reductions started in the third quarter of 2008, a quarter before the onset of the recession, and contributed to a decline in wages throughout the economy, due to the large proportion of highly paid employees in the high-tech field.
 
 
[1] The timing of the start of the recession is defined here as the fourth quarter of 2008, when GDP first fell. Under an alternative definition however, based on decline in per-capita GDP, the third quarter of 2008 would have marked the beginning of the recession.