Undeniably, high worker turnover is not without its shortcomings. Reducing the average time that employees spend working in a particular field prevents them from gaining experience and discourages employers from investing in professional training. Nevertheless, the disadvantages of the opposite policy, which allows employees to become careless and incompetent, are far greater than its benefits. This can be seen, for example, in a broad study published last year by economists Andrea Bassanini and Danielle Venn. Analyzing data collected in member states of the Organization for Economic Cooperation and Development (OECD) between 1979 and 2003, the study examined, among other things, the impact of employment protection legislation (EPL) on total productivity levels.¹⁷ Bassanini and Venn found that as worker protections grew stronger and more encompassing, the growth rate of labor productivity decreased.¹⁸

There is no escaping the uncomfortable fact that although an “un-fireable” worker enjoys a sense of security, he or she also tends to become progressively more inept and thus fails to drive the economy forward. In an age of globalization, such cumbersome drawbacks can cost a society dearly, and evidence suggests that those who will pay the highest price are precisely those who cannot afford to.

 

Elected officials and social activists who campaign for job security argue that it is a social policy that protects the weak and the needy. A closer examination, however, reveals that such a policy usually has the opposite effect: Instead of creating opportunities for employment and financial well-being, it reduces them; and instead of improving the wretched state of the poor, it perpetuates it.

One does not have to be a professional economist in order to understand this problem. Managerial inflexibility reduces production efficiency; as a result, it inevitably cripples the growth of a country’s Gross Domestic Product (GDP), undermining the welfare of society in general. Unfortunately, the underprivileged sectors of society, whose dependence on government largesse is especially great, suffer the heaviest blow. Government entitlement payments constitute a major source of income for these segments of society, which are unable to afford such essential services as education and healthcare on their own. A low level of economic growth reduces government earnings from taxation, thereby limiting the government’s ability to provide a high level of public services. Ultimately, it makes generous entitlements for the needy impossible.

The overall damage to society as a result of stringent and inflexible employment policies is not limited to the problems cited above. In addition to reducing the quality of public services provided to the poor, such policies also deny the underprivileged access to employment. As we noted above, potential employers are less likely to fire employees when the process of dismissal is long, complicated, and costly. The desire to avoid exorbitant compensation costs tends to dissuade managers from employing additional workers, and it deters entrepreneurs from investing in projects that create jobs. Low turnover rates reduce the number of job openings and, consequently, generate fewer opportunities for those seeking employment.¹⁹

It is clear that such a situation benefits only those who are already employed. Weaker groups are shut out of the job market and often find it difficult to secure an adequate income. Young people, women returning to the workforce after raising children, and immigrants do not benefit from stringent employment protections. In fact, they are actively harmed by them. An interesting example of this was presented by a World Bank study that examined the effects of new severance-pay legislation in Chile. The study demonstrated unequivocally that young people and unskilled laborers were the first to be adversely affected by such legislation. Because their productivity relative to other groups is low, and their earnings are near minimum wage, the heightened cost of dismissal makes it unprofitable to employ them. As a result, they are eventually pushed out of the workforce.²⁰ Adriana Kugler, an economist from the University of Houston who has studied the performance of the labor markets in the United States and Europe over the past decades, stated that

This conclusion is supported by many empirical studies, all of which undermine the claims of Israel’s social-justice lobby that its efforts in defense of collective agreements and employment tenure are carried out in the name of equality.²² In fact, these regulations only intensify the distress and frustration of those who do not benefit from equally effective protections. Even labor-union officials admit that tenure disenfranchises the weaker classes of society. In an interview with the Israeli website Ynet in 2001, Yaakov Zlotnik, former chairman of the Histadrut’s Department for Professional Association, said, “the problem is that today, those who are paying the price for the improved conditions of the senior workers are the new workers, who have to wait for years in order to receive tenure and better conditions.”²³

Tenure regulations and the high cost of dismissal not only reduce the number of job opportunities, however. They also motivate employers to search for cheaper alternatives. Many times they find what they are looking for in secondary labor markets operated by service providers and temporary employment agencies. These agencies hire workers to perform specific tasks for low wages without social or supplementary benefits. The secondary employment model, which increases flexibility in the short-term labor supply, has become more and more widespread in recent years.²⁴ It is viewed by policymakers as an effective arrangement that improves the rate of economic growth without disrupting the status quo established with permanent workers and the unions that represent them. The problem, however, is that the social costs of this arrangement are far too high.

Indeed, studies show that an ever-increasing reliance on temporary workers can raise unemployment rates instead of lowering them. The reason is simple: Employers prefer laying off temporary workers and hiring others in their place rather than paying the high costs of employing them on a permanent basis. In these cases, a high turnover rate does not create new long-term jobs, but only temporary positions. This makes it difficult for job-seekers to find steady employment.²⁵ Moreover, the secondary labor market tends to perpetuate existing social inequalities, since the widespread use of temporary employment usually reduces investment in workers’ training. This, in turn, lowers temporary workers’ chances of finding future employment. Finally, in order to make themselves more attractive to potential employers, these workers are forced to accept lower wages. According to data from the Israeli Central Bureau of Statistics, the average monthly salary of contract workers in Israel in 2005 was NIS 4,300—about 60 percent of the average wage of NIS 7,000.²⁶ The primary victims of this form of employment are, once again, the weakest segments of the population—the undereducated, new immigrants, minorities, young people, and women—all of whom are overrepresented in Israel’s secondary labor market.²⁷

Unfortunately, the widespread use of contract workers is not limited to the Israeli private sector. Over the past few years, it has become increasingly popular in government offices and the public sector in general. This trend merely adds insult to injury: By making use of subcontractors and temporary employment agencies, the government is granting de facto approval to the mistreatment of temporary workers. As a result, the government is betraying its basic commitment to the well-being of the weaker classes of society and increasing the harm already inflicted upon them by the stringent regulations that protect the public sector’s tenured employees.

Ironically, the use of subcontracted labor is an unmistakable byproduct of Israel’s extremely inflexible labor market. The well-meaning activism of job security advocates has thus paved the way for the rise of what is essentially a modern slave trade, operating under lawless and immoral conditions. In light of this gloomy reality, the only possible response is a profound restructuring of the Israeli labor market.²⁸ In considering how this might be accomplished, we can learn a great deal from the successes and failures of other countries faced with similar dilemmas.

 

Although the development of the Israeli economy has been greatly influenced by its unique political, social, and cultural history, there is nothing unique about its problems. They have troubled and continue to trouble many other developed countries. In fact, the majority of Western industrialized economies, especially in Europe, have experienced firsthand the negative consequences of an inflexible labor market.

Of course, these countries do not exercise uniform employment policies. If we were to judge their economies by the level of protection they offer to their workers, we would find Portugal, Italy, Germany, Spain, Sweden, and Greece, with their generous tenure benefits, at one end of the spectrum. At the other end we would find the United States, Britain, Australia, Canada, Switzerland, and New Zealand, which have relatively high turnover rates.²⁹ This division helps to delineate two distinct political and economic models. On the one hand, there is the European welfare state, which attempts to protect workers and the general public from economic hardship by, among other things, regulating labor relations. On the other hand, there is a free-market economy that seeks to increase prosperity by promoting competition and entrepreneurship.