Fortunately, over the last twenty years, the Israeli labor market has become progressively more flexible. This process, however, has been riddled with obstacles and characterized by instability, tension between employers and employees, recurring strikes in the public sector, and the widespread and inappropriate use of contract workers in various industries. Notwithstanding the noteworthy achievements of the Israeli economy, which has seen an average growth rate of 5 percent in the past few years, it continues to suffer from social afflictions that can no longer be ignored. Many Israeli workers live with a persistent and often debilitating sense of uncertainty about their future, while large segments of the population struggle to make ends meet or find themselves unemployed.

This situation requires critical attention. Israel must implement a large-scale reform of its labor market. Such a reform should not permit aggressive free-market competition to dictate the living conditions of workers. On the other hand, it must not shackle the economy and impose centralism and sclerosis. In order to avoid both of these undesirable outcomes, policymakers need to learn from the experience of other countries, most especially from the Danish success story. The concept of job security must be understood in a manner conducive to present economic and social conditions as well as the challenges presented by an era of global competition.

Every future reform in the labor market must take into account that protecting workers does not necessarily mean protecting their employment at a particular workplace. Lawmakers and labor unions must accept shared responsibility for the overall benefit of society and allow entrepreneurs and employers the freedom to replace and mobilize workers in order to invest their resources as efficiently as possible. This will both improve the public welfare and expand the job market. At the same time, the government must fulfill its responsibility for ensuring that its citizens are capable of earning a living. It should be obvious to all that a committed and generous investment in human capital is an economic, social, and moral necessity that no country can afford to ignore.⁴⁵ Should Israel choose to follow the path of reform and devote the necessary effort to obtaining it, it will not only enrich its economic potential, but also increase its moral stature as a society that embodies the highest ideals of solidarity and mutual support.

The authors wish to thank Hadas Gabay and Yulia Horn for their generous help in researching this essay.

1. For the Israeli Army Radio report on the strike, see http://news.msn.co.il/news/Internal/Internal/200611/20061103071959.htm [Hebrew].

2. The survey, based on the answers of roughly fifteen thousand respondents, has been conducted annually since 2005 and ranks the fifty best companies to work for in Israel. For the purposes of this survey, a representative sample of two thousand workers are asked to list the criteria that, in their opinion, constitute an attractive workplace. More detailed information can be found at BDI’s 2007 “Analysis of Best Companies in Israel to Work For,” www.bdicode.co.il/Articles/best%20companies_eng.pdf.

3. Legislation pertaining directly to this procedure includes the 1963 Severance-Pay Law, and the 2001 Pre-notice for Dismissal and Resignation Law. The latter determines the time period required for notification prior to ending a contract.

4. To date, this situation has not changed significantly, as noted by Haim Bior in an article published in The Marker over three years ago: “Even today, despite globalization, working for the public sector is attractive, mainly from the standpoint of job security. It is difficult to fire permanent workers in government offices, municipalities, or the Jewish National Fund because of the strong protection barriers placed on these workplaces: collective agreements imposing a myriad of conditions on management when dismissing an employee, and the existence of unions. In terms of salary conditions, the public sector is less attractive: Most workers earn between minimum wage (NIS 3,335 per month) and average wage (NIS 7,400 per month).” Haim Bior, “The Public Sector in Israel: Less Attractive But Still Alive and Kicking,” The Marker, November 10, 2005 [Hebrew].

5. On this matter see Yinon Cohen, Yitzhak Haberfeld, Guy Mundlak, and Ishak Saporta, “Unpacking Union Density: Membership and Coverage in the Transformation of the Israeli IR System,” Industrial Relations 42:4 (October 2003), pp. 692-711.

At the annual Tikva Conference, which took place in April 2007 in Tel Aviv, Histadrut Chairman Ofer Eini admitted that the number of Histadrut members has been in continuous decline over the previous two decades. According to Eini, the Histadrut had almost two million members at the beginning of the 1990s, a number which had dropped to only six or seven hundred thousand by 2006. According to data published last year by The Marker, 60 or 70 percent of Israeli workers in the early 1990s were union members. This has dropped to 27 percent today. See Haim Bior, “Fighting for the Continuation of Organized Labor,” The Marker, April 27, 2007 [Hebrew].

6. Data valid for September 2007. See the Bank of Israel Research Department report from November 2007, “Recent Economic Developments 119: April-September 2007,” p. 6, www.bankisrael.gov.il/develeng/develeng119/develeng.pdf.

7. Haim Bior, “When the Permanent Becomes Temporary,” The Marker, April 28, 2003 [Hebrew].

8. See, for example, “Organized Labor Relations and the Teachers’ Strike,” a blog post by Ishak Saporta from Haoketz (“The Sting”), a social-activist website he co-edits, November 7, 2007, www.haokets.org/article.asp?ArticleID=2429 [Hebrew]. See also Daniel Gutwein, “The Soup-Kitchen Trend,” Ynet, September 11, 2007, www.ynet.co.il/articles/0,7340,L-3448692,00.html [Hebrew]; and Guy Davidov, “Dismissal? Only with a Satisfactory Cause,” Haaretz, August 23, 2005 [Hebrew].

9. For more on this issue, see the website of MK Shelly Yachimovich, www.shelly.org.il/wp/?p=1391 [Hebrew].

10. Hugo Hopenhayn and Richard Rogerson, “Job Turnover and Policy Evaluation: A General Equilibrium Analysis,” Journal of Political Economy 101:5 (October 1993), pp. 915-938. See also Gilles Saint-Paul, “Is Labor Rigidity Harming Europe’s Competitiveness? The Effect of Job Protection on the Pattern of Trade and Welfare,” European Economic Review 41:3 (April 1997), pp. 499-506; and “Employment Protection, International Specialization, and Innovation,” European Economic Review 46:2 (February 2002), pp. 375-395.

11. Eric Bartelsman, Andrea Bassanini, John Haltiwanger, Ronald S. Jarmin, and Thorsten Schank, “The Spread of ICT and Productivity Growth: Is Europe Really Lagging Behind in the New Economy?” in Daniel Cohen, Pietro Garibaldi, and Stefano Scarpetta, eds., The ICT Revolution: Productivity, Differences and the Digital Divide (Oxford: Oxford, 2004), pp. 1-140.

12. See, for example, Inbal Bar-On’s response, “Tenure at the Workplace Serves Capitalism (the Real Type, Not the ‘Bibi for the Vulgar Masses’ Type),” Interpretation online, December 8, 2007, www.interpretation.co.il/10_1013.htm [Hebrew].

In this context, one needs to distinguish between the argument that holds that tenure in the workplace increases workers’ motivation, and the argument regarding the “workers’ sense of mission.” The latter argument is reasonable, since certain employees—social workers or teachers, for example—are indeed motivated by the desire to contribute to society. Arguments that link tenure and positive motivation, by contrast, are not particularly convincing.

13. Andrea Ichino and Regina T. Riphahn, The Effect of Employment Protection on Worker Effort: A Comparison of Absenteeism During and After Probation, IZA Discussion Paper no. 385 (Bonn: Institute for the Study of Labor, 2001), http://ftp.iza.org/dp385.pdf.

14. Bior, “When the Permanent Becomes Temporary.”

15. Yael Walzer, “Reform or [Hand In] a Billion Shekels,” The Marker, July 13, 2007 [Hebrew].

16. Sari Makover-Belikov, “The Garbage in the Barn Is Cleaner than the Public Domain’s Garbage,” Maariv, July 8, 2005 [Hebrew].

17. In order to determine the degree to which employment protections are binding, OECD economists use the EPL index. The index, which is a rather complicated tool, takes several different factors into account, including protection for permanent workers from dismissal, special requirements for collective dismissals, and temporary employment regulation. For a detailed explanation, see OECD Employment Outlook 1999: Giving Youth a Better Start (Paris: OECD, 1999), ch. 2, annex 2.B, pp. 115-118, www.oecd.org/dataoecd/9/46/2079974.pdf.

Total-factor productivity is the measure of an economy’s production capacity for a given supply of production factors. This measure is primarily affected by the efficiency of the production process and the level of technological development. An increase in total-factor productivity is therefore of paramount importance to the process of economic growth.

18. Andrea Bassanini and Danielle Venn, Assessing the Impact of Labor Market Policies on Productivity: A Difference-in-Differences Approach, OECD Social, Employment and Migration Working Paper no. 54 (Paris: OECD, 2007), www.iza.org/conference_files/MeLaMa_2007/bassanini_a1425.pdf.

19. Most empirical research has not been able to establish a definite correlation between stringent employment protections and unemployment levels. See, for example, OECD Employment Outlook 2004 (Paris: OECD, 2004) ch. 2, www.oecd.org/dataoecd/8/4/34846656.pdf. The main effect of labor-market stringency is on employment levels, where the data point to a strong negative effect. When the number of available jobs shrinks, a significant proportion of job-seekers simply give up and, as a result, are no longer defined as unemployed.

Unemployment rates are defined as the proportion of jobless persons among labor-force participants, which includes the unemployed plus those in civilian employment. The rate of employment is the number of active workers proportionate to the entire working-age population. As a result, the rates of employment and unemployment do not add up to 100 percent. That is to say, there are individuals of working age who are not part of the workforce and are therefore not included in the employment rate or the unemployment rate.

20. Claudio E. Montenegro and Carmen Pagés, Who Benefits from Labor Market Regulations? Chile 1960-1998, Working Paper no. 494 (Washington, D.C.: Inter-American Development Bank, 2003), http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=788314.

21. Adriana D. Kugler, “The Effects of Employment Protection in Europe and the USA,” Els Opuscles del CREI 18 (February 2007), p. 39.

22. See, for example, Olivier Blanchard and Pedro Portugal, “What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets,” American Economic Review 91:1 (March 2001), pp. 187-207. Also see Ramón Gómez-Salvador, Julián Messina, and Giovanna Vallanti, “Gross Job Flows and Institutions in Europe,” Labour Economics 11:4 (August 2004), pp. 469-485; and OECD Employment Outlook 2004.

23. Nurit Wurgaft, “Unstable Worker, Available for a Relationship,” Ynet, October 1, 2001, www.ynet.co.il/articles/1,7340,L-1160568,00.html [Hebrew].

24. According to the Ministry of Industry, Trade, and Labor, the number of people working for employment contracting agencies in Israel is at present around 115,000, which is about 4.5 percent of the total number of employees in Israel. See Niv Hachlili, “4.5 Percent of Employees Are Contract Workers,” NRG Maariv, December 11, 2007, www.nrg.co.il/online/16/ART1/669/963.html [Hebrew]. The 2006 report of the Association for Civil Rights in Israel quotes unofficial evaluations estimating the number of contract workers at 10 percent of the total—in contrast to 2 percent in Europe. See Michal Tadjer, Working Without Dignity: The Violation of Workers’ Rights in Israel (Jerusalem: The Association for Civil Rights in Israel, 2006).

25. This happened, for example, in France. As part of a reform aimed at increasing labor-market flexibility three decades ago, wider use of “temporary contracts” was permitted. These contracts allowed employers to hire workers for a fixed period of time and then to terminate the contract at low cost. A study conducted by Olivier Blanchard and Augustin Landier demonstrated that this reform failed to achieve its goals: Workers’ turnover increased, yet the average period of unemployment was not shortened significantly. Overall, Blanchard and Landier concluded that the temporary contracts only worsened the situation of French workers. See Olivier Blanchard and Augustin Landier, “The Perverse Effects of Partial Labor Market Reform: Fixed-Term Contracts in France,” Economic Journal 112:480 (June 2002), pp. F214-F244.

26. According to data from the Central Bureau of Statistics published on the Ministry of Industry, Trade, and Labor website, www.moit.gov.il/NR/exeres/FA45C129-00DE-4BB7-BD42-87B7A3A4C07E.htm; also found in Hachlili, “4.5 Percent of Employees Are Contract Workers.”

27. Ronit Nadiv, Employment Through Temporary Employment Agencies, Israel 2000 (Jerusalem: Ministry of Labor, Agency for Human Resource Planning, 2003), pp. 30-34. Also available at www.tamas.gov.il/cmstamat/Rsrc/koach/tichnun_koach_adam/tichnun_pirsumim/pir_skirot/xkablan.pdf [Hebrew].
Regarding the situation in other developed countries, see Lawrence M. Kahn, “The Impact of Employment Protection Mandates on Demographic Temporary Employment Patterns: International Microeconomic Evidence,” Economic Journal 117:521 (June 2007), pp. F333-F356.

28. An absorption clause in the Temporary Employment Agencies Law came into effect on January 1, 2008, after having been approved by the Knesset in 1996. According to this clause, workers at temporary employment agencies are to be put on the company payroll after nine months of work. Supposedly, this constitutes an improvement in the condition of temporary workers. In practical terms, however, employers can bypass the law in several ways: For example, temporary employment agencies can easily become service-providers, which are not covered by the legislation. Furthermore, implementation of the clause may increase turnover rates among temporary employees, as it gives managers a clear incentive to terminate their employment before the nine-month deadline, leading to a rise in collective dismissals. See Ruth Sinai, “New Law Set to Make Longtime Temps Permanent Staff,” Haaretz, January 1, 2008.

29. OECD Employment Outlook 1999.

30. Mark A. Rothstein, Andria S. Knapp, and Lance Liebman, Cases and Materials on Employment Law (New York: Foundation, 1987), p. 738. This doctrine, of course, has certain legal boundaries. Starting in 1941, several state and federal laws were implemented in the United States forbidding dismissal on the basis of discrimination as well as protecting the right of association and activities aimed at exposing corruption in the workplace. Legislators in several states have affixed additional restrictions: (1) An employer may not fire an employee for reasons that violate a state’s public policy; (2) employers may not violate the rights of workers which have been established in an implied contract agreement between them; (3) dismissals made in bad faith or involving unfair dealings are prohibited. See Charles J. Muhl, “The Employment-at-Will Doctrine: Three Major Exceptions,” Monthly Labor Review 124:1 (January 2001), pp. 3-11.

31. See the website of the United States Department of Labor, www.dol.gov/dol/topic/wages/severancepay.htm.

32. Peter Auer, Janine Berg, and Ibrahim Coulibaly, “Is a Stable Workforce Good for the Economy? Insights into the Tenure-Productivity-Employment Relationship,” International Labour Review 144:3 (2005), pp. 319-343.

33. See the website of the United States Department of Labor regulations, http://workforcesecurity.doleta.gov/unemploy/uifactsheet.asp.

34. Kugler, “The Effects of Employment Protection,” pp. 1-6.

35. The OECD Jobs Study: Facts, Analysis, Strategies (Paris: OECD, 1994).

36. Ofra Shalev, “International Insecurity,” The Marker, October 2006, p. 79 [Hebrew].

37. “France to Replace Youth Job Law,” BBC News, April 10, 2006, http://news.bbc.co.uk/2/hi/europe/4895164.stm.

38. Poul Nyrup Rasmussen, “The Danish Model of ‘Flexicurity,’” The Journal, Premier Edition (2007), p. 46.

39. There are, of course, exceptions to this rule, such as the large strike of Denmark’s private-sector workers during April-May 1998. The strike was declared following the failure of the negotiations between employers and the labor unions that demanded more vacation days, and ended on May 8, following government intervention. See “Parliament Intervenes to End Major Conflict,” European Industrial Relations Observatory online, www.eurofound.europa.eu/eiro/1998/05/feature/dk9805168f.htm.

40. Soren Kaj Andersen and Mikkel Mailand, The Danish Flexicurity Model: The Role of the Collective Bargaining System, Compiled for the Danish Ministry of Employment, University of Copenhagen, September 2005, http://faos.sociology.ku.dk/dokum/flexicurityska05.pdf.

41. Thomas Bredgaard, Flemming Larsen, and Per Kongshøj Madsen, The Flexible Danish Labour Market—A Review, CARMA Research Papers, no. 1 (Aalborg, Denmark: Center for Labour Market Research, 2005), pp. 9-10, www.socsci.aau.dk/carma/carma-1.pdf.

42. Per Kongshøj Madsen, “The Danish Road to Flexicurity: Where Are We? And How Did We Get There?” in Thomas Bredgaard and Flemming Larsen, eds., Employment Policy from Different Angles (Copenhagen: DJØF, 2005), pp. 269-290.

43. OECD Employment Outlook 1997 (Paris: OECD, 1997), p. 133.

44. “Danes Secure in Global Job Market,” The Copenhagen Post Online, October 25, 2007, www.cphpost.dk/get/104093.html.

45. Underinvestment in human capital seems to be an inevitable consequence of relatively inflexible labor markets. Government intervention is therefore often required to provide basic education and professional training. Such intervention can be assisted by private companies and would fulfill the basic needs of employers, the unemployed, and the public purse.