New report: Public-sector pay is eroding, and the share of top performers is falling
Although average pay in the public sector is still higher than in the private sector, the gaps are closing quickly. A new report by the Finance Ministry’s Salary Commissioner paints a different picture: while the private market is “stealing” the best talent, public-sector workers are being forced to erode their earning power. The evidence is clear on the ground, one in five government employees has to take on additional work in the private sector to make ends meet.
The public sector in Israel includes about 750,000 workers and covers the health system, education, local government, government ministries, higher education, statutory corporations, state-owned companies and other bodies. Employment in this sector is marked by high stability compared with the private sector, and by a structured wage system based in most cases on professional affiliation, organizational hierarchy and seniority.
The study shows that this wage system does create certainty and equality, but at the same time it reduces employers’ flexibility and limits the ability to reward performance or quality. In extreme cases, it may even create a situation in which workers content with the fixed wage are דווקא weaker employees who cannot earn at a high level in the private sector, a phenomenon that could harm the functioning of the public sector and the quality of service provided to the public.
The newly published research sheds light on certain trends: pay in the private sector has risen rapidly, and a significant gap has opened up especially among those with academic degrees. Particularly notable is the decline in the share of workers with high psychometric scores who joined the public sector in the decade between 2013 and 2023. These findings suggest that most of those entering public service do so immediately after completing their degree, while only a few choose it after gaining prior professional experience in the market.
During that decade, the share of public-sector employees rose by only 1 percentage point, reaching 17% of all salaried employees in 2023. At the same time, wage gaps between the sectors narrowed significantly. Although on paper average public-sector pay remained higher, about NIS 14,000 compared with about NIS 12,000 in the private sector, the private-sector data are skewed downward because of the high number of part-time jobs. Despite this bias, the analysis shows that the gap narrowed sharply due to rapid wage growth in the private sector since 2019.
To make a more accurate comparison between workers with similar characteristics, the report’s authors, Uri Shimon and Tal Ben Shalom from the Finance Ministry’s Salary Department, examined the pay of people with academic degrees. Here the picture is reversed: while average pay for academics in the private sector is a little more than NIS 20,000, in the public sector it is a little more than NIS 15,000. This gap widened significantly starting in 2019, in part because of the influence of the high-tech industry.
A wage analysis by occupational classification shows a varied picture. At the bottom of the scale in the public sector are education workers and local government employees, while above them are employees of government ministries, the health system, the defense establishment and non-supervised institutions, such as the State Comptroller’s Office. The pace of wage growth in these fields differs substantially from that recorded in the free market. While pay in the private sector grew by 42% over the past decade, the most notable increases in the public sector were recorded in non-supervised bodies (36%), education (33%), defense (29%) and higher education (28%).
These differences are also evident by field of study: law and humanities graduates enjoy higher pay in the public sector, though the gap is modest, compared with mathematics, statistics, computer science and economics graduates, who earn significantly more in the private sector, a gap that continues to widen steadily.
Another figure that has changed over the years is the share of public-sector employees who also work in the private sector. Some do so because in the health system and higher education, for example, there are employees in part-time positions. In other cases, it is apparently to supplement income. Over the past decade, the share of employees in government ministries themselves who also work in the private sector rose from 15% to 20%.
The hidden erosion of human capital
A Bank of Israel study published last year pointed to a decline in the quality of public-sector workers compared with the private sector, based on international skills tests (PIAAC). The current study’s data reinforce this trend: while psychometric scores remained stable, the share of top performers in the public sector fell from 5.7% to 4.2%, a drop of more than 25%.
“This situation may have a major effect on public service in the long term and requires attention,” the authors warned. A similar picture emerges from an examination of matriculation scores: while the overall eligibility rate is stable, the share of top performers in government ministries fell by about 20%, while in the private sector it rose by 12%.
At the same time, clear demographic trends are evident. Public-sector workers tend to marry spouses who are also employed in the sector, sometimes in the same organizations, especially in education and local government. The highest rate of workers whose spouses are also employed in the public sector was recorded in the security agencies, where 39% of workers are married to public-sector employees, a fact that makes sectoral pay a critical component in the financial stability of these households.
Another notable trend is the dominance of young, inexperienced workers in public service. The authors also point to two central barriers that deter experienced private-sector workers from joining the government: first, wage gaps, since the return to high skill is much greater in the free market; second, geography, as most government ministries are concentrated in Jerusalem, apart from units that do not operate nationwide.
It is interesting to note that while in 2013 about half of new government employees had to accept a pay cut, in 2023 this phenomenon became rarer. According to the authors, this gap may indicate improved pay in the public sector, but it may also reflect a decline in the sector’s prestige, workers are not willing to join it even for higher pay, or they turn to it only after losing their previous jobs.
The bottom line, and the implications
Either way, the issue of worker quality in public service concerns all economic bodies in Israel, not just the Salary Department at the Finance Ministry. In the Bank of Israel’s March report, it was explained that Israel’s civilian public spending is low compared with OECD countries, partly because of low wage levels. “The ongoing erosion in public-sector pay continued this year as well,” the report said. “It is reflected in a marked decline in worker skills, particularly among young men, both in international comparison and relative to workers in the business sector, with negative implications for the quality of public service and economic growth.”
The Bank of Israel says that while pay erosion is similar to the trend worldwide, the erosion of skills in Israel is sharper. It may be that, beyond pay, other factors also had an effect, such as damage to the status of the public bureaucracy, a hypothesis that requires further research.
