The year that wages went down and then some (Israel)

Ha`aretz ^ | Tuesday, December 03, 2002 | Haim Bior

[Willie Green]

For education and discussion only. Not for commercial use.

The few dozen additional shekels salaried employees will receive starting with January 2003's salary and ending with that of April 2004, in accordance with the recent cost-of-living supplements agreement, will not change the general picture: 2002 will end as a year of wage cuts.

The recovery plan for Israel Military Industries, for example, calls for 900 layoffs and an 11-percent cut in the wages of the remaining employees. Workers at the Industrial Development Bank had to accept a 3-percent wage cut. New workers in the high-tech industry are receiving salaries 10-15 percent lower than their colleagues who started jobs in 2001. The Ashtrom construction company decided to cut its employees' wages by 4 percent, but due to threats by the Histadrut labor federation to file a lawsuit against the wage cuts, only the executives and those employed under individual contracts will earn less each month. The Histadrut itself announced plans to cut its own employees' wages by 10 percent and to dismiss dozens of employees.

After several consecutive years of salary growth during the 1990s and through 2001, 2002 is witnessing a downward trend due to the recession that by all accounts will continue for the next several months. Unemployment, the closure of companies and production lines at plants, reductions in positions and the layoffs that characterize a recession, as well as inflation, have caused wages to drop.

Many factories, both in high-tech and in traditional industries, are cutting costs by lowering salaries rather than laying off workers because the management believes that layoffs create internal shock waves. The remaining employees may feel alienation and fear, and the relationship between management and the workers deteriorates. Wage cuts, on the other hand, have been accepted by workers as a less severe step.

Nati Zakai, CEO of Benefit, a wages and retirement consulting firm, says that it is understandable for managements to fire workers in sectors in which the cost of labor represents a large component of a company's expenses, such as high-tech. In other sectors, however, management is aware the other steps must be taken, such as freezing or cutting wages, reducing overtime hours or deducting a temporary loan to the company from employees' wages, which will be repaid in a year.

"Wages are no longer inflexible in an era of continued losses," says David Shay, head of application development at Hilan Tech. Often the senior executives and board members will take a salary cut first, and only at a later stage will wages and fringe benefits to workers be reduced.

In 1999 wages grew by 2.4 percent in real terms; in 2000, on the eve of the recession, wages rose by 6.2 percent, and in 2001, by 1.4 percent. Ptahiya Bar-Shavit, the chief economist for the Bank of Israel, says that annual inflation from January to September 2002 was 5.3 percent. During that period wages rose nominally by just 0.3 percent, which means that in real terms they fell by 5 percent due to inflation.

In 2001 there were already indications of cutbacks in expenditures due to the recession. Although wages continued to rise, they did so at a much slower rate and in 2002 they began to fall. Data collected by the Central Bureau of Statistics show that in August 2002 the average wage was NIS 6,965.40, compared to NIS 7,073.40 in August 2001.

Bar Shavit notes that wages have eroded in 2002 not only due to the recession but also due to inflation. In 2002 inflation will probably reach 8 percent, more than anyone in the central bank anticipated. "Had inflation been maintained at the level set by the Finance Ministry - 2 to 3 percent - wages would not have been eroded and would even have risen slightly," says Bar Shavit.

Most high-tech companies have stopped giving workers vouchers for fancy restaurants, have cut back on the use of leased cars, events for employees and the scope of employee participation in overseas exhibitions and conferences.

Job placement companies that operate in the high-tech field estimate that wages have dropped 25-30 percent since mid-2000, when the high-tech crisis erupted, and are down by 15-20 percent compared to mid-2001. Hardest hit are executives without years of seniority, human resources coordinators and employees in positions that are not part of the business core of the company. The thousands of layoffs in the high-tech sector and the transfer of many workers to traditional industries also contributed to the drop in average wages.

"After low inflation from 1999-2001, the governor of the central bank made a totally unjustified move when he lowered interest rates sharply," says Bar Shavit. "This resulted in the accelerated depreciation of the shekel, which led to a rise in inflation, and the subsequent erosion of wages." Bar Shavit feels that the postponement of the payment of C-o-L supplements during the three years prior to 2002 was justified, in order to prevent a vicious cycle of wage and price increases.

"Because it has been three years since a C-o-L supplement was paid, inflation is 8 percent and wages have eroded by 5 percent, the Histadrut is right in demanding the payment of such a supplement," says Bar Shavit, "especially for the workers at the bottom of the pay scale who have no negotiating power."

Bar Shavit believes that as soon as inflation is curbed, wages will recover and will resume creeping slowly upward.

Attorney Efraim Ziloni, who heads the economics and social division of the Histadrut, figures that wages will be eroded by 9 percent in 2002. In terms of disposable income, erosion will reach 11 or 12 percent. Ziloni says that even the central bank now admits wages will be eroded by 8.4 percent in real terms in 2002. The C-o-L supplement will cover only 40 percent of the price increases. "It is therefore important that the Histadrut complete its discussions with the treasury regarding the collective wage agreements in the public sector and the other wage agreements in the private sector," says Ziloni.