Finance Minister Bezalel Smotrich signed an agreement with Histadrut Chairman Arnon Bar-David to raise public sector wages and shorten the work week, along with a promise to increase productivity and improve management capabilities in the public service, in return for a "period of quiet and exhaustion." As far as the finance minister is concerned, this is a very successful political move, since he has bought himself industrial quiet vis-à-vis the country's strongest labor organization until 2027 and the people of Israel a break from strikes. For Arnon Bar-David, too, this is a successful move, because who will come to the Histadrut chairman with complaints after arranging a salary increase of about 11%, and if you add the reduction in the work week, you get an increase of about 15% in the workers' salaries. Of course, their alliance has other political influences at this time. Is it also the right thing financially at this time?
There is no doubt that public sector workers deserve a salary increase and improved conditions, and should have done so long ago. Their salaries had eroded for several years, and they were about to sign an agreement with them two years ago, which was not finally signed for political reasons and instability in the parliamentary arena. Now both sides have taken advantage of the current political timing and Bar David deserves credit for playing his cards in order to close a coupon for the workers.
But and this is a big but, the economic effect of the agreement is fueling inflation both directly and indirectly, in a way that is very problematic for the economy during this period. From a purely economic point of view, it would have been better to try to pass a broad process of freezing wage increases throughout the economy, in order to curb inflation. Such a move of wage increases for such a large and significant public directly fuels purchasing power and affects inflation. Even worse, it will inspire committees and other power groups – from teachers, social workers, nurses, factions, to doctors, etc. – to ask for pay increases. Worst of all is the indirect impact such a move will have on the private-business sector, which is the locomotive of the economy. For he, too, will eventually be affected and forced to raise wages that will again increase inflation. And this goes beyond the erosion of employers, who are already overwhelmed by rising prices of electricity, municipal taxes and goods. In addition, setting a new threshold for working hours, a decrease from 42 hours a week to 40, which is identical to a salary increase of about 4.5% and a decrease in output, and mainly damage to the business sector, which will be less competitive with the world.
It will take a few more months before we see the economic impact on the economy. But the political influence can already be felt these days.
The writer is the Chairman of the consulting firmAurenIsrael
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