Who Needs Job Security?

By Omer Moav, Ofer Cohen

The benefits of a flexible labor market.

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In early November 2006, the union of temporary employees at Israel’s Ben-Gurion International Airport declared a strike that left the country’s gateway to the world virtually incapacitated. Airport baggage handlers, who had taken over the sorting area and barricaded themselves inside it, refused to load or offload cargo, delaying flights and forcing thousands of furious travelers to wait for hours to pick up their luggage. The pretext for the strike was the Israel Airports Authority’s announcement that it intended to fire one hundred twenty provisional workers, who had been employed for less than five years. In response, the union declared that its members would not return to work unless the more senior temporary workers were given tenure—that is, immunity from dismissal. The leader of the strike, social activist Dr. Ami Veturi, declared in a press release that “we demand what is necessary for every person in Israel: a decent livelihood, job security, and a respectable life.”1
The baggage handlers’ strike at Ben-Gurion airport, terminated after several days by an injunction of the National Labor Court, ultimately failed to achieve its goal. Nevertheless, the strike demonstrated just how important “job security” is to large sections of the Israeli workforce. A steady job, after all, provides the worker with a livelihood over an extended period of time. No less important, it affords a sense of security and psychological well-being that is monetarily unquantifiable. It is not surprising, therefore, that a survey published in May 2007 by BDI, an Israeli company specializing in business and marketing information, found that Israeli workers, as a rule, prefer job security to higher wages.2
In fact, Israeli employees enjoyed a particularly high level of job security for many years, largely on account of the centralized character of Israel’s economy during the early decades of the state. Collective agreements made between Israel’s labor federation, the Histadrut, and other labor unions with their employers—most notably the government—provided far-reaching protections to a significant segment of the workforce. These agreements and the extension orders that followed them, as well as subsequent Israeli employment legislation, have made the process of firing workers cumbersome, lengthy, and expensive.3 Additionally, the practice of granting tenure to long-term employees has become commonplace in the public sector and is viewed by many workers as a major advantage over private employment. The prospect of immunity from dismissal after only a few years of work compensates for the less-than-glorious salaries offered by government jobs.4
To be sure, since the late 1980s, the Israeli economy has undergone sweeping changes, resulting in the decline of organized labor.5 Nonetheless, the number of workers benefiting from job security—while steadily declining—remains substantial. Nearly 800,000 workers are employed in the Israeli public sector, almost a third of the total workforce.6 Over 80 percent of these workers are covered by collective agreements that grant them immunity from dismissal. Some workers in the private sector, especially those who are unionized, also enjoy similar arrangements, though on a much smaller scale.7
Naturally, the changes that have taken place in the Israeli labor market have been cause for concern among social activists. Faced with the decay of the old, centralized, and inflexible employment model, these activists are struggling relentlessly to preserve workers’ traditional employment protections. Many of them continue to identify job security with collective agreements that grant workers the privilege of tenure, and with legislation that restricts an employer’s capacity to dismiss his employees.8 From the activists’ viewpoint, the abolition of these mechanisms is simply malicious, transforming workers into what member of Knesset Shelly Yachimovich of the Labor party called a “poor, desolate, and defenseless population.”9
Despite the grain of truth in these warnings, which indeed merit some attention, the overall picture of the changing Israeli economy is far more complex. Both empirical and theoretical research shows that, in truth, inflexibility in the labor market causes significant economic and social damage. Not only does it impede economic growth and lower the general standard of living, it also extracts a heavy price from the weaker elements of society, making it increasingly difficult for them to improve their condition. Other countries have already learned this lesson, and some, such as Denmark, have adopted alternative welfare policies that provide workers with income security without undermining the flexibility of the labor market. As we will argue in what follows, if Israel wishes to position itself at the forefront of the global economy and maintain its moral stature in the process, it must learn from the experience of these countries and act accordingly.
Any discussion of job security—or more precisely, labor-market inflexibility—and its impact on a country’s overall economic performance must adopt a wide perspective. That is, it must take into account not only the characteristics of the local economy, but also the position it occupies, or strives to occupy, in the global market. From this panoramic viewpoint, it is evident that the sclerotic disposition of the Israeli labor market saps Israel’s social and economic strength.
While the moral and social significance of the changes brought about by globalization can be debated, the new reality they have created—and the unavoidable choice it presents—is beyond doubt: adapt or be left behind. The ever-increasing integration of the world economy on account of the free international exchange of goods, capital, information, and human resources unquestionably leaves many victims in its wake, but it also continuously generates new opportunities. Both multinational corporations and individual entrepreneurs seize these opportunities, for example, to transfer production facilities from developed to developing countries, which offer cheap labor and other economic incentives. For developed industrial economies, this process is painful but necessary. On the one hand, relocation of production centers to the Third World reduces the demand for unskilled labor and consequently raises unemployment—at least temporarily. On the other hand, the general rise in living standards across the globe is accompanied by a demand for technologically advanced exports, and the skilled labor necessary to produce them. Thus, a country that wishes to reap the fruits of globalization and achieve high growth rates has no choice but to adapt swiftly to the dynamic global economy and utilize its comparative advantages effectively.
However, a country’s ability to compete successfully on a global scale depends to a large extent on the flexibility of its labor market. When employers are relatively free to hire and fire their workers, they are capable of responding promptly to economic changes and, as a result, can reallocate resources from less profitable sectors of the economy to other, expanding industries. By contrast, in countries with high dismissal costs and restricted managerial flexibility, it becomes immensely difficult for employers to increase the efficiency of production and incorporate technological innovations.10 As a result, they may find themselves on the losing side of the intense competition that now typifies international trade.
In addition to hindering the efficiency of production, an inflexible labor market discourages capital investment. Entrepreneurs are thus far from eager to invest heavily in businesses that suffer from a lack of managerial flexibility. As a result, potentially profitable ideas are abandoned because employers fear the prohibitive cost of firing workers should the need arise. Entrepreneurs thus prefer to focus on lower-risk projects, at the expense of efficient resource allocation. Alternatively, they may choose to invest their resources in other countries that offer preferable conditions for setting up and managing a business.11
Advocates of job security claim that tenure increases motivation by providing employees with a sense of partnership in their employers’ success.12 Experience, however, proves otherwise. Workers who know that for all practical purposes they cannot be fired do not appear to feel particularly motivated. The only exception is those cases in which advancement is contingent upon performance. Unfortunately, in workplaces where tenure is granted, opportunities for advancement are limited from the outset, since workers in management positions enjoy tenure arrangements as well and are in no hurry to vacate their positions.13
A brief overview of the Israeli public sector reveals the extent to which tenure agreements have become a breeding ground for inefficiency and underemployment. The dynamics of this phenomenon were explained in an article published in Haaretz in April 2003:
Managers in the public sector report that a worker’s productivity usually rises in the period immediately following tenure approval for an average of one year. During that period the worker feels a sense of commitment to the superior who recommended tenure and strongly identifies with his workplace. After a year to a year and a half, however, the worker’s productivity stabilizes and slowly begins to decline. The sense of security which tenure creates instills a certain apathy in the worker. After several years, managers say, tenure becomes the kiss of death.14
This observation should hardly come as a surprise. Complaints from managers in the public sector regarding unjustified absences and outrageous work ethics are regularly voiced in the Israeli media. For example, Israel Broadcasting Authority (IBA) chairman Moshe Gavish, originally from the private sector, was shocked by the disorderly workplace at the IBA. In an interview with The Marker in July 2007, he said:
This place has technicians who can start working at 5 P.M. and write down that they have been working since 8 A.M. Since this is what has been established in the [collective] salary agreement, they are not writing that for no reason. It is because of these people that whenever I was interviewed… six people [from the IBA] would show up—while two people would come from Channel 2, and one from Channel 10. This was required under labor agreements signed by my predecessors. They established that a reporter in the IBA works four days and doesn’t work on Thursday or Friday but receives a salary for those days, which is calculated as overtime to boot. People agreed not to introduce new equipment, because that would render the technicians superfluous.15
Former director of the Israeli Finance Ministry’s Wages and Labor Accords Unit, Yuval Rachlevski, has also strongly denounced the conduct of workers in the public sector: “The public service is riddled with lies and misrepresentations. It is all done in broad daylight, without shame or any qualms over the long, greedy arm picking the public purse.”16 In addition to being a disgrace and a constant source of aggravation for those in need of public services—which is to say, the entire population of Israel—such displays of inefficiency, apathy, indolence, and, at times, even greed have disturbing economic consequences. After all, a decline in worker motivation leads to low productivity and detracts from the quality of public services. Ultimately, this harms the overall production capacity of the economy.

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