Average Wages Rise 7% in Israel Amid Workforce Decline and Economic Shifts

Israel's average wages increased by 7% over the past year, yet many workers do not feel this rise in their paychecks. Economists attribute this discrepancy to a shrinking workforce, particularly among lower-wage employees who have exited the labor market, rather than a broad-based wage increase across all sectors. Approximately 250,000 Israelis have effectively left the workforce since October 2023, a trend linked to the ongoing conflict and demographic changes.

Bank Hapoalim reported the wage surge in the business sector but noted it has not significantly driven inflation, attributing this to increased labor productivity and reduced hiring of junior employees, especially in the high-tech sector. Despite layoffs, employment numbers in high-tech have remained stable. Mitigating inflationary pressures, companies have maintained or reduced workforce size while increasing output.

Economist Alex Zebzinsky of Meitav Investment House highlighted that the wage growth partly reflects a change in workforce composition, with fewer low-wage workers and a slowdown in total wage growth to a decade low. He also pointed out that comparisons to last year's data, affected by the "With the Lion" military operation, may exaggerate the apparent wage increase.

Labor market data from the Ministry of Labor shows a historic low unemployment rate of 3.5% but a decline in labor participation to 60.3%, down from 61% pre-war. Employment among men in northern communities dropped sharply from 79% to 64%, while Arab women's employment improved. Research by Professor Momi Dahan from the Hebrew University revealed that most new working-age individuals since October 7, 2023, have not joined the labor force, with young men particularly affected. The annual growth rate of the working-age population has slowed from 2% to 1.7%, partly due to emigration.

The decline in young men's labor participation predates the war, with a notable drop in participation among those aged 18-24, coinciding with reduced academic enrollment. Meanwhile, participation among Haredi and Arab women has increased. These trends raise concerns about medium- and long-term economic growth and underscore the need for policies to boost labor force participation and improve relevant skills.

Zebzinsky warned that although wage growth alone is not currently fueling inflation, the low labor participation and subdued consumption in service sectors like hospitality and education could lead to wage pressures and inflation once normal economic activity resumes. He emphasized the difficulty of replacing workers with technology in these sectors, which may intensify wage and inflationary pressures in the future.