Summary
Background
• Labor productivity in Israel is about 20% lower than the OECD average. The main factors that affect the level of productivity are: physical capital, education and skills of the workers, public investment in research and development and quality of the equipment and infrastructure.
• In Israel people work more and produce less: working hours are longer (8.9%) and labor productivity is lower (20%) than the OECD average.
• Long working hours have a negative effect on labor productivity: the longer the working hours, the lower the labor productivity and the lower the marginal productivity of the worker due to burnout and fatigue.
• Long working hours are detrimental to the employees’ health: long working hours makes it difficult to balance work, leisure and personal time.
• The duration of the work day and the minimum wage also have a significant effect on labor productivity.
Duration of the Work Day
• Reducing working hours and increasing rest and leisure time will contribute to improving productivity: they will constitute a positive incentive for employers to efficiently reorganize the work day and working methods.
• Determining a policy for reducing working hours: The increase in productivity does not necessarily lead to a decrease in working hours, and productivity alone is not the main factor influencing working hours. Public-government policy is necessary, along with action of workers’ and employers’ organizations, which will lead to a reduction in working hours and an increase in minimum wage.
• Examples from around the world: Iceland conducted the longest and most extensive experiment in the world to shorten the work week. The result: productivity and quality of services remained the same or improved, and employee well-being increased significantly; In 2019, Microsoft in Japan moved its business to four work days. The result: activity grew by 40% and the company’s expenses were reduced.
Raising the Minimum Wage
• Raising the minimum wage supports increasing employee efficiency: it encourages employees to stay at the workplace and gain experience, and encourages employers to organize work more efficiently and conduct professional training, which contributes to increased productivity in the long run.
• A moderate increase in minimum wage does not increase unemployment: in 2005-2020 there was an increase in minimum wage in Israel, there was significant economic growth, unemployment fell sharply and the consumer price index rose moderately.
Labor Productivity in Israel
Labor productivity represents the output per worker or working hour, and is the customary tool for measuring production efficiency of workers. In 2019, productivity per working hour in Israel was about 20% lower than the OECD average, at $ 46.9. In the early 2000s, the gap widened, and has remained stable ever since.[1]
Illustration 1:
Labour productivity, by OECD Country (GDP per hour worked, US dollars, current PPPs), 2019
The analysis of the Israeli economy shows high productivity gaps between industries: the information and communications industry is at the top, with productivity per employee at $ 67.4; At the bottom are the trade and services industries, with employee productivity of only $ 35.1[2]. The difference in the manner and pace of productivity development in the various industries stems from the differences in the skills of the workers in the various industries and their education[3].
Factors Affecting Labor Productivity
o Physical capital – machinery, equipment, computing and vehicles;
o Infrastructure capital – public investment in research, development, quality of equipment and infrastructure;
o Human capital – education and skills of employees;
o Industry structure – the relative size of the industry;
o Work intensity – the number of working hours;
o Regulatory background conditions – the regulatory burden on business activity.
The Bank of Israel has published a comprehensive report, which proposes a series of measures aimed at increasing labor productivity and, as a result, the standard of living in Israel[4]. The measures are focused on the areas of human capital, physical capital, infrastructure capital and regulation. The investment necessary to implement these measures is about 3.3% of the annual GDP (about NIS 46 billion in 2019 terms), and are expected to increase labor productivity by about 20%.
In addition to these important steps, there are two other ways to increase productivity: reducing working hours and raising the minimum wage.
Along with the productivity gaps between Israel and the other OECD countries, Israel also works more and earns less:
• The number of working hours in Israel (2019) is 8.9% higher than the OECD average; In Israel, the number of annual working hours is 1,898, compared with an average of 1,743 in OECD countries[5].
• The average wage in Israel is about 20.1% lower than in OECD countries, and the lower the wage, the more the wage gap increases; Wages in the lower decile in Israel are almost 50% lower than the average wage in the lower decile in OECD countries[6].
Illustration 2
Average wages, by OECD Country, US dollars, 2019
Illustration 3
Average annual hours worked, by OECD Country, 2019
Long Working Hours Harm the Physical and Mental Health of Employees
• About a quarter of the men in Israel are employed for more than 50 hours a week, a condition defined as “overtime” and proven to be a health hazard[7]. Long working hours are a major risk factor for work-related injuries and employee health[8]. Overtime also has long-term consequences for the employees’ nutrition, family life and sleep time. Beyond the physical and mental well-being of overworked workers, excessive work involves a decrease in productivity and even impair to the products and services produced[9].
• A significant proportion of overtime workers do so involuntarily, but out of personal financial constraints or employer constraints. Most of them are divided into two groups: senior white-collar workers in demanding jobs, with a demanding and competitive organizational climate, which is often also characterized by high salaries; Destitute laborers, with low skills in the labor market, who are forced to work long hours to increase their income[10].
Long Working Hours Impair the Work Quality
• Long working hours do not contribute to higher productivity. On the contrary, the marginal productivity of each additional working hour decreases, i.e., it is worth a little less than its preceding working hour.
• Studies unequivocally show that the longer the working hours, the lower the work efficiency due to burnout and fatigue[11]; Each additional working hour reduces at a higher rate the cumulative benefit from work. At the end of a long work day, employees have a tendency to work slower and accomplish less.
• Long working hours harm the health of employees and make it difficult to balance work, leisure and personal time[12].
Reducing the Number of Working Hours Can Improve Employee Productivity
Significantly shortening the working week (from 40 hours to 35-36 hours, i.e., to four workdays) has a positive effect on productivity[13]:
o Reducing the number of working hours improves the well-being of workers: it helps to reduce stress and tension, it reduces the levels of exhaustion at work and allows for a balance between work and home[14].
o Israel is ranked sixth from the bottom in the OECD “Work-Home Balance” Index. It suffers from a particularly high rate of overtime and a particularly low rate of leisure time.
Illustration 4
Better Life Index, OECD
o Reducing the number of working hours changes and streamlines the working method: Shortening the work week encourages the implementation of new work strategies, through cooperation between employees and management, by, inter alia, shortening meetings and eliminating unnecessary tasks. Thus, employee productivity is not harmed and improvement in productivity is reached[15].
Raising Productivity Alone Does Not Reduce the Number of Working Hours
Active intervention is needed: Contrary to claims that an increase in labor productivity will lead to a decrease in the number of working hours, the increase in productivity does not necessarily lead to more free time (i.e., a decrease in the number of working hours). Productivity alone is not the main factor influencing working hours. Public-government policy is required, along with the protection of workers by trade unions[16].
The asymmetrical power relations between employees and employers mean that when working hours are determined by employers alone, this may significantly harm the employees. The interest of employers causes them not to shorten working hours, and even to extend them, despite the benefits inherent in shortening the work week. Regulation on the organization of work by law or in agreements is necessary to correct these market failures.
Shortening Working Hours Will Not Harm Business
A comprehensive study in the UK [17]examined the profitability figures of 50,000 businesses, and examined whether they could afford to move to a four-day work week (32 hours). The study found that reducing work hours could be offset by rising productivity and rising prices.
In industries where labor costs are high, there will be companies that may experience a cash flow problem, however this will only happen if the transition occurs too quickly, in a way that will not allow for a gradual adjustment.
Test Cases From Around the World
Iceland[18]
In the years 2015-2019, Iceland conducted two large-scale trials to reduce the work week to 35-36 hours, without reducing wages. The trials included 2,500 workers, which constitutes more than 1% of all workers in the country, and a variety of workplaces: office work and jobs in hospitals and education, “regular” working hours and shift workers.
Results of the experiment: The productivity and quality of services provided remained the same or improved in most workplaces; Employee well-being has increased significantly: mental stress and burnout have decreased, health and work-life balance have improved.
Following the success of the experiment: the trade unions achieved for 86% of the labor force in the country a shortened work week or the possibility of negotiating shortening the hours.
Microsoft in Japan[19]
In August 2019, Microsoft changed its business in Japan to four work days. In addition to reducing working hours, the company encouraged employees to shorten the duration of meetings to no more than 30 minutes, as well as to reduce the time they spent answering emails.
Results of the process: 40% growth in activity compared to the same period last year; Reduction of company expenses: Electricity expenses decreased by 23.1%, the number of pages printed decreased by 58.7%.
Reducing the Number of Working Hours Will Contribute to an Increase in Productivity
In countries with high productivity, people work fewer hours
There is a negative correlation between the number of working hours and labor productivity. According to studies, the correlation between the number of working hours per employed person and the level of productivity per working hour in OECD countries is significantly negative (-0.85)[20].
Illustration 5
Average Annual Hours Worked, Labour Productivity, by OECD Country (GDP per hour worked, US dollars, current PPPs), 2019
As can be seen in Illustration 5, in Israel labor productivity is lower (by about 20%) and working hours are longer (by about 14.4%) than the OECD average[21].
Israel is also above the trend line, meaning that given the product per working hour, the number of annual working hours is relatively large for countries with the same product (and vice versa).
Israel Has the Highest Number of Working Hours
• Israel has the highest number of working hour among OECD countries, along with Colombia, Mexico, Korea, Chile and Greece[22].
• In 2019, the number of annual working hours in Israel was 1,898, compared with an average of 1,743 in OECD countries.
• A full-time employee in Israel works an average of 44.7 hours per week, compared to an average of 41.2 hours in OECD countries, and only 38-39 hours per week in countries such as Norway (with a productivity of $ 93.2), Denmark ($ 84.6), Sweden ($ 76.4) and the Netherlands ( $ 75).
Illustration 6
Average Usual Weekly Hours Worked on the Main Job, by OECD Country, 2019
Raising the Minimum Wage Will Contribute to an Increase in Labor Productivity
Setting a Minimum Wage and Raising It Moderately Contributes to an Increase in Labor Productivity
A higher minimum wage motivates employees to higher labor productivity, encourages them to stay at the workplace and gain experience, and results in many professional trainings in the workplace, serving as a means for the employer to increase the return he receives for wages.
Studies have found an effect of an increase in minimum wage on labor productivity:
• A 10% increase in minimum wage leads to a decrease in employee turnover[23] and an increase in their wish to keep their job over time[24].
• Raising the minimum wage encourages employees to increase their efficiency, and even leads to a decrease in the supervision required by employers[25].
• There is a positive correlation between the level of the minimum wage and productivity; Employees put more effort into work for improved pay[26].
Setting a minimum wage and raising the minimum wage encourages companies to raise productivity, not through a reduction in the workforce (layoffs), but rather through organizational changes and training of employees[27]. In order to increase the return of the wages, the increase in minimum wage leads employers to expand opportunities for professional training of their employees (in the course of their employment), in a way that increases employee productivity.
The increase in minimum wage also leads to an increase in the wages of workers who earn more than the minimum wage. Wages in U.S. states that have raised the minimum wage have increased at a faster rate for all low-wage workers.
Illustration 7
10th-precentile wage growth, USA, 2013-2017
States with minimum wage increased
States with no minimum wage increased
A Moderate Increase of the Minimum Wage Does Not Increase Unemployment
It is commonly assumed that an increase in minimum wage will harm businesses and workers, since employment costs will increase and will lead to layoffs. However, this assumption is controversial. The issue of the effect of the minimum wage on employment has been extensively researched in the last decade, and the results of most studies indicate that a moderate increase in minimum wage has little, if any, effect on the employment of low-wage workers[28]’[29]’[30]’[31].
Illustration 8
The effect of minimum wages on low-wages jobs, USA, 1979-2016
The estimated average employment changes in that bin during the five-year posttreatment relative to the total employment in the state one year before the treatment
The 95% confidence interval
The running sum of employment changes up to the wage bin it corresponds to
Difference between actual and counterfactual employment count relative to the pre-treatment total employment
Between the years 2005-2020, in which the real minimum wage for full-time employment in Israel was increased by about 32% (from NIS 3,335.18 per month full-time to NIS 5,300), GDP in Israel increased by about 65%, unemployment decreased by about 56% and the consumer price index rose by about 21%. These data do not indicate a causal relation, but they do indicate that the Israeli economy has strengthened in parallel with the increase in minimum wage.
Illustration 9
Minimum wage, Unemployment, GDP, CPI: Rate of Change, Israel, 2005-2020
Notes and Sources
[1] Flug, K., Aviram-Nitzan, D. and Samuel, J. (2020). The challenge of raising labor productivity in the economy as a key to inclusive and sustainable growth. The Israel Democracy Institute.
[2] Gilat-Niftali indices for industry data. As of 2019. Aharon Institute for Economic Policy.
[3] Regev, A. and Brand C. (2015). The causes of the widening fertility gaps between Israel and the OECD: A multi-year industry comparison. State Status Report – Society, Economy and Policy. Taub Center.
[4] Raising the standard of living in Israel by increasing labor productivity. Bank of Israel, Special Report of the Research Division, August 2019.
[5] OECD data, Hours Worked.
[6] Differences in the characteristics of workers in Israel, compared with OECD countries, along the distribution of wages and skills and the examination of wage returns of human capital. Bank of Israel, September 2019.
[7] Lee, J. and Lee, Y. K. (2016) Can working hour reduction save workers? Labour Economics, 40, 25-36.
[8] A study conducted in South Korea found that reducing one hour of work per week led to a decrease of about 8% in the rate of injuries at work (Lee and Lee, 2016, see Source 7).
[9] In 2010-2016, about 31.9% of the employees in the economy worked 45-59 hours a week, about 12.7% were employed 60 hours and more. Andblad, M. (2018). Overtime in Israel – characteristics and trends. Publication number 131 of the National Insurance Institute’s series of studies.
[10] See Source 9, page 2.
[11] Regev, A. and Brand C. (2015). The causes of the widening fertility gaps between Israel and the OECD: A multi-year industry comparison. State Status Report – Society, Economy and Policy. Taub Center.
[12] The OECD employment outlook 2021 report emphasizes that thinking about time as divided only into work-leisure does not take into account time that is outside of work but is not leisure, especially sleep time and eating time. The report shows that “poor-time” workers are workers whose low pay requires them to work long hours in order to produce minimal material well-being, and they are left without time for leisure and with little personal time for the needs of sleep and eating.
[13] Haraldsson, G. D. and Kellam, J. (2021). Going public: Iceland’s journey to a shorter working week. Autonomy.
[14] Haraldsson, G. D. and Kellam, J. (2021). Going public: Iceland’s journey to a shorter working week. Autonomy; Park, Y. and Park, W. (2017) The impact of a workweek reduction on labor productivity. KDI Policy Forum, 267, 1-9.
[15] Haraldsson, G. D. and Kellam, J. (2021). Going public: Iceland’s journey to a shorter working week. Autonomy; Crepon, B. and Kramarz, F. (2002) Employed 40 hours or Not Employed 39: Lessons from the 1982 mandatory reduction of the workweek
[16] OECD. Employment outlook 2021
[17] Stronge, W. and Jump, R. C. (2020). The day after tomorrow: Stress tests, affordability and the roadmap to the four day week. Autonomy.
[18] Haraldsson, G. D. and Kellam, J. (2021). Going public: Iceland’s journey to a shorter working week. Autonomy.
[19] Microsoft Japan has shortened the work week to 4 days – productivity has jumped by 40%. Calcalist, 4.11.19.
[20] Regev, A. and Brand C. (2015). The causes of the widening fertility gaps between Israel and the OECD: A multi-year industry comparison. State Status Report – Society, Economy and Policy. Taub Center.
[21] In 2019, labor productivity in Israel was $ 46.9, and working hours per worker averaged 1,898, while average productivity in OECD countries was $ 56.4 and working hours 1,743.
[22] OECD. Employment outlook 2021
[23] [23] Dube, A., Lester, T. W. and Reich, M. (2012). Minimum wage shocks, employment flows and labour market frictions. IRLE Working Paper No. 122-12.
[24] Brochu, P. and Green, D. A. (2011). The impact of minimum wages on quit, layoff and hiring rates. IFS Working Paper 06/11.
[25] Brochu, P. and Green, D. A. (2011). The impact of minimum wages on quit, layoff and hiring rates. IFS Working Paper 06/11.
[26] Owens, M. F. and Kagel, J. H. (2010). Minimum wage restrictions and employee effort in incomplete labor markets: An experimental investigation. Journal of Economic Behavior & Organization, 73, 317-326.
[27] Riley, R. and Bondibene, C. R. (2015). The impact of the national minimum wage on UK businesses. Report to the Low Pay Commission. National Institute of Economic and social Research and Centre for Macroeconomics; Croucher, R. and Rizov, M. (2012). The Impact of the national wage on labour productivity in Britain. E-Journal of International Labour Studies, 1, 3-4.
[28] Card, D. and Krueger, A. B. (1994) Minimum wages and employment: A case study of the fast-food industry in New Jersey and Pennsylvania. The American Economic Review, 84(4): 722- 793.
[29] Cengiz, D., Dube, A., Lindner, A. and Zipperer, B. (2019). The effect of minimum wages on low-wages jobs. The Quarterly Journal of Economics, 134(3), 1405-1454.
[30] [30] Dustmann, C., Linder, A., Schonberg, U., Umkehrer, M. and vom Berge, P. (2021). Reallocation effects of the minimum wage. The Quarterly Journal of Economics, qjab028.
[31] Economists in support of a federal minimum wage of $15 by 2024, Economic Policy Institute.