National Insurance Institute of Israel

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National Insurance Institute of Israel Research
Planning Administration
REDUCING UNEMPLOYMENT INSURANCE COVERAGE IN
A FLEXIBLE LABOR MARKET Miri Endweld and
Esther Toledano
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Labor Market Flexibility
Adjustment of wages and employment according to
changes in economic circumstances The chief
factors affecting macroeconomic flexibility -
Labor costs - Employment patterns - Institutional
arrangements
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Evidence of flexibilization of the Israeli labor
market over the past two decades

• Employment patterns
• Personal contracts
• Privatization
• Outsourcing
• Hiring workers through manpower agencies
  temporary employment, low wages
• Institutional arrangements
• Reducing of direct taxes on labor
• Eliminating of employer taxes
• Tightening unemployment compensation eligibility
  criteria

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Other key developments in labor market

• Mass immigration from former Soviet Union
• Influx of foreign workers
• Decline in demand for unskilled workers.
• Extended rise in unemployment rates - from around
  4 in the early 1980s, rising to 7 in the
  mid-1990s and stabilizing at 10 over the past
  few years
• ? growth in expenditure on unemployment
  benefit payments

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Reaction of the Israeli government
Limitation of expenditure on unemployment
benefit by imposing an additional, highly
significant restriction on eligibility criteria,
effectively eliminating vocational training from
the equation.
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Possible conceptual reasons
(1) Unemployment insurance encourages
exploitation of benefits. (2) Generous
unemployment insurance is a possible cause of
labor market rigidity - and consequent high
unemployment rates.
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MAXIMUM ELIGIBILITY PERIOD FOR UNEMPLOYMENT
COMPENSATION 2002 (days)
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AMENDMENTS TO ISRAELS UNEMPLOYMENT INSURANCE
LAW SINCE THE 1990s

• In the decade 1990-2000, the Parliament approved
  several strictures, such as
• Requiring young people up to age 35 to accept any
  job offered them
• Persons whose salaries were higher than the
  national average before becoming unemployed will
  receive reduced benefits
• The qualifying period for immigrants was rendered
  equal to that of veteran Israelis
• The maximum period for payment of unemployment
  compensation to unemployed persons under 35 was
  reduced from 138 to 100 days.

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The most significant changes introduced in July
2002

• Qualifying period for unemployment compensation
  was extended from 6 months of work within the 12
  months - to 12 within 18 months
• The maximum period for payment of unemployment
  benefits to persons aged up to 25 was reduced
  from 100 to 50 days
• Unemployment benefits were cut back by 4
• Unemployment benefits for persons participating
  in vocational training were cut back by 30 (new
  applicants only).

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UNEMPLOYED PERSONS AND UNEMPLOYMENT COMPENSATION
RECIPIENTS (monthly average) 2000-2005
Not including participants in vocational
training.
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Changes in Unemployment Benefit Payments
2000-2005
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PERCENTAGE OF UNEMPLOYMENT COMPENSATION
RECIPIENTS AMONG ALL UNEMPLOYED PERSONS, BY
SELECTED CHARACTERISTICS
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PERCENTAGE OF UNEMPLOYMENT COMPENSATION
RECIPIENTS AMONG ALL UNEMPLOYED PERSONS, BY
SELECTED CHARACTERISTICS - continuation
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Day Laborers Problem

• Before the legislation was enacted, 40 of
  unemployment compensation recipients were day
  laborers.
• Subsequently, 50 lost their eligibility for
  unemployment benefits because of the change in
  legislation, as compared with 18 of salaried
  employees.
• After the Unemployment Insurance Law was amended,
  about 2/3 of all unemployed persons whose claims
  were rejected for this reason were day laborers.

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Summary

• It is still uncertain whether the stricter
  eligibility criteria instituted in 2002 and 2003
  indeed facilitated flexibilization of Israels
  labor market.
• If flexibilization was indeed among the
  objectives of legislation, its price was paid
  primarily by the weakest components of the labor
  market Young people, the poorly educated and
  residents of peripheral localities and other
  places with high unemployment rates.

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Recommendations
(1) Setting the qualifying period at 10 working
months out of the 18 months preceding inception
of unemployment. (2) Eliminating bias against
day laborers in the Unemployment Insurance Law by
measuring the qualifying period in months rather
than days to calculate unemployment benefits on
the basis of 25 working days per month for all
workers, including day laborers (and not on a
daily basis as is practiced at present).