Economists: Israelis Should Demand Higher Wages to Counteract Inflation

The Central Bureau of Statistics last week reported that inflation rates in Israel reached 2.8% in 2021, while the consumer price index rose by 0.3% during the month of December. In 2021, the CPI surged by 2.8%, marking a decade high that nevertheless still falls within the Bank of Israel’s target range of 1%-3%.

Demanding better wages is one way to fight back, according to Joseph Zeira, an emeritus professor of economics at the Hebrew University of Yerushalayim.

“Any rise in prices is regressive,” Zeira said. “It hurts the poor more than the rich. The solution to that is raising wages. First of all, we should raise the minimum wage, which especially helps people with lower incomes.”

“I think that the Histadrut should wake up and demand an increase in wages. … They’ve been sleeping,” he said, referring to Israel’s largest labor union. “When prices go up our real wages are eroded, so workers should demand an adjustment of their wages and that will protect them against the rising prices.”

The Israeli government recently said it would gradually increase the minimum wage to roughly 33 shekels ($10.60) by 2025. But Zeira argued that the minimum wage should be raised from its current NIS 29 ($9.30) to NIS 40 ($12.85).

As prices continue to increase, poverty rates in Israel have already begun to rise in tandem. Nearly 1 in 3, or 31.2%, of children in Israel, lived below the poverty line in 2021, marking a 2.5% increase over a year earlier, according to a report that was published by Bituach Leumi late last month. Poverty rates overall increased from 21% in 2020 to 22.7% a year later, representing some 2.1 million people. The poverty line in Israel for a family of four stands at NIS 9,000 per month, or about $2,900.

Meanwhile, in the United States, the CPI increased by 7% in December year-on-year, representing the largest jump since June 1982.

While some have said that the current inflation is linked to COVID-related supply chain issues, Zeira believes that it is due to decisions by central banks to increase the amount of money in circulation. He also foresees prices stabilizing over the next year or two.

“What we have in the U.S. and in Israel is that the central banks, for various reasons, expanded the quantity of money significantly,” he explained. “Now is the time for prices to adjust themselves.”

Other experts disagree and argue that the pandemic is largely to blame for price hikes because it has caused dramatic supply chain issues around the globe, especially in transportation and shipping.

Ori Greenfeld, a chief strategist at Psagot, Israel’s largest investment firm, said that he is nevertheless optimistic that the situation will stabilize over the coming year.

“The consumer has to pay for it in the end, but when we think about these disruptions we shouldn’t be worried because they will end someday,” Greenfeld said.

What is more concerning at the moment, he noted, is the inflationary pressure that appears to be coming from the consumer side of the market. Consumer demand for housing and nearly all other goods and services has risen significantly. Together with this, a number of industries are suffering from severe labor shortages and workers have begun to demand higher wages.

“In the U.S., wages are going up, the price of services is going up and so this is why the Federal Reserve is very concerned,” Greenfeld said. “In Israel, this is not the case yet, but we’re starting to see some hints that we might get this in the next few months and if that happens then we should worry because then the Bank of Israel will have to raise interest rates. Any kind of interest rate hike will hurt the economy because people took loans and mortgages.”

Unlike Zeira, Greenfeld believes that raising wages will inevitably lead to further price hikes.

“When you have to pay more for your workers, then you also have to raise prices because you don’t want to lose money,” he explained. “Then you start an inflationary spiral. You raise wages, then you raise prices and you have more inflation so people go to their employers and [ask for] another raise.”