Israel’s coronavirus unpaid-leave plan may keep people jobless, experts warn

When the coronavirus pandemic hit Israel in the spring, bringing with it a broad-based national lockdown, Moshe Ben Ishai was among the many business owners who had a difficult decision to make. Should he keep his employees on the payroll at Nirometal Ltd., where he is CEO, even as revenues were shrinking? Or should he put them on unpaid leave and let the state pick up the burden of supporting them?

Nirometal makes equipment for professional kitchens — stoves, workstations, pantries, dishwashers and ovens for hotels, catering services and restaurants. As restrictions on gatherings tightened, his business activity dwindled, except for his work with the Israeli army and the prison service. He decided to put some 40 of his 80 workers on furlough, keeping the rest in order to serve his remaining clients.

“We were left with just 50 percent of our workers,” he said. “We are now working at 80% of our production.”

As Israel’s first lockdown was imposed in mid-March bringing the economy to an almost total standstill, Finance Ministry officials scrambled to find a solution for businesses that were forced to close down or cut back on their operations.

They came up with a plan under which businesses were allowed to put all of their workers on furlough — unpaid leave — regardless of how much their revenues were hurt. The furloughed workers could register with the Employment Services Agency and be immediately eligible for unemployment benefits from the National Insurance Institute.

The program was initially rolled out for two months, but was later extended until June 2021, once the government realized that the pandemic was not going to disappear anytime soon and many industries including travel, food, and entertainment would be out of work for a prolonged period of time.

The furlough program, set up in a flurry as a response to pressing needs, took the responsibility of the workers’ salaries off the shoulders of employers, easing their cash flow issues as revenues diminished or disappeared.

The message to employers was: don’t worry about the salaries, the government will take care of your workers. Meanwhile, unemployment benefits, although just a percentage of their former salaries, let those employees maintain a basic standard of living and gave them a measure of relief. They could continue spending and thus at least part of the economy would keep on chugging. Such went the thinking.

The program gave employers two choices: each worker could be either kept on or put on 100% furlough — but could not be downgraded to part-time. It was an all-or-nothing situation, with no government help provided for anything in between.

As a result, unemployment surpassed one million people for the first time in Israel’s history in April, with the majority of the jobless on furlough.

The jobless numbers dropped as the outbreak came under control. But with the second wave of the pandemic, when the number of infections soared to record levels, Israel imposed a second lockdown in September and saw a renewed spike in joblessness.

“Hundreds of thousands have not yet returned to work since March, including employees in sectors that were badly hurt by the crisis,” the head of Israel’s Employment Service, Rami Garor, said in September. “Such a long unemployment period is likely to force hundreds of thousands into ‘chronic unemployment,’ to create a lost generation of young people experiencing long-term unemployment, as well as other repercussions,” he said.

With the infection rates declining once more the nation has started gradually reopening its economy, with pressure from some ministers to quickly lift the restrictions facing opposition by other cabinet members — among them the prime minister — who want to move more cautiously.

As of October 29, there were 966,802 people seeking work signed up at the Employment Agency, of whom 613,690 had been furloughed, according to data provided by the agency.

Israel has had almost 320,000 coronavirus cases since the start of the pandemic. On Tuesday, the death toll stood at 2,678.

Meanwhile, other countries have also scrambled for solutions to their economic crises. Many, including Austria, Germany, Holland, Denmark, Sweden, the UK and the US, have put a furlough program into place, but a more flexible one than that implemented in Israel.

Some of these, unlike Israel, had such programs — called Short Term Work (STW) — in place for years, and adapted them when needed. Other countries, such as Denmark, implemented them quickly as a response to the pandemic.

These programs work largely according to the same basic principles, according to the Taub Center for Social Policy Studies in Israel and the Aaron Institute for Economic Policy at IDC Herzliya. Business owners ask to join the Short-Term Work program, once their employees agree. The employees go down to part-time but still get their full salaries from their employer, who is later compensated by the government for the difference.

Before being accepted into the program, the owners need to show that their business had previously been sound and that the crisis was causing damage that is deemed temporary. The amounts due are calculated retroactively, according to hours the employers and workers say were worked de facto.

Binary option

The Israeli model by contrast gave employers a “binary option,” said Yotam Margalit, a senior research fellow at the Israel Democracy Institute and faculty member at Tel Aviv University, in a phone interview. “They could either keep the worker employed basically at the same level of employment as before, or fully furlough the worker.”

The problem with this approach, according to Margalit, is that it gave employers no flexibility. Some might have preferred to keep their workers on for fewer hours, he said, as business activity slowed but did not stop altogether.

A more flexible model would have cost the government less, as it would have had to cover only the hours of lost work rather than pay unemployment compensation for entire salaries, he noted.

“We suggested that the ministry add short term work to its model, so that those employers who wanted to could choose to keep some workers at whatever percentage of the job they could offer, considering the impact of COVID-19,” Margalit said.

With STW, Margalit explained, “the employer still employs the workers, albeit at just let’s say 60% of their original salary, and the government saves a lot of money because instead of paying the full furlough, now it is paying only 40% of what the full furlough compensation would have been — so everyone gains, the worker, the employer and the government.”

The STW would have given the government “another tool, another option in its arsenal,” he said. “The option of something that is in between.”

Besides saving money for the state, the STW model also keeps alive the employer-employee relationship, a key to getting unemployment levels back down again, Margalit added.

Easier to let go

“Part of the concern with the binary option we have in Israel is that employers have a strong incentive to put workers on furlough, amid the high economic uncertainty. And once they have furloughed a worker, and that worker hasn’t been coming to the office for 3-6 months, it is easier psychologically to let them go,” Margalit said. “It becomes both logistically and psychologically easier, because as time goes by the employer becomes more accustomed to managing without that worker. You come up with solutions for that missing worker, and that sort of sets the stage for companies then to manage without them.”

With an STW model, he said, even if the workers work at lower capacity and fewer hours, they are still a part of the business and are still connected to their employer.

“For all these reasons, there is concern that without some kind of version of STW, we are ultimately contributing to a higher unemployment rate. We are adding people to the ranks of unemployed.”

Creating a ‘moral hazard’

The Israeli Manufacturers Association has also called on the government to implement a more flexible furlough model, said Natanel Haiman, the head of the association’s economics division. This will help keep employer-employee bonds alive.

The Israeli model, he said, also creates a “moral hazard” –– certainly once it was extended until June 2021 — because for low-earning workers there is not much of a difference between their pre-pandemic salaries and their unemployment benefits.

“We are seeing that in the industry,” he said. “Workers are telling their employers they prefer to stay on furlough, and when people want to employ workers, it is not always easy to find them.”

Indeed, Nirometal’s Ben Ishai said that when he asked some of his workers back, not all of them were interested in returning to work because of the unemployment benefits they were getting. “They preferred to stay home,” Ben Ishai said. “The system creates no motivation to go to work.”

He added that had the furlough system been more flexible, he may have held onto his some of his workers at least part-time in order not to risk losing them.

“It takes a lot of time and effort to train them,” he noted.

When the second lockdown was imposed, he decided to keep all of his remaining workers on the payroll even as revenues fell once more, fearing that otherwise he’d lose them.

“It was very attractive to me to save 30%-40% of my costs by putting workers on furlough,” he said. “But I was afraid of losing them. They are professionals, and I can’t find replacements easily.”

Haiman, of the Manufacturers Association, emphasized that the “moral hazard” issue is only a very marginal problem, and the majority of people very much want to go out and work. Indeed, he said, the demand for jobs is still significantly higher than the supply.

Still, in part to address this issue, the Manufacturers Association suggests that the government not only adopt a more flexible furlough model but also provide one-time grants to people who get a job — a cash incentive to get them back to work. “The government is not eager to do this because they would have to pay,” Haiman said. “But it would in fact be a win-win for all: the government pays the bonus but saves on unemployment; the employer gets a worker and the worker gets the grant and a job.”

The IDI’s Margalit said that 23 OECD countries had some kind of STW before the COVID-19 crisis hit, and 80% of the others added it during the crisis. “It basically became a tool almost all OECD countries adopted, in some version or the other, and for various reasons Israel decided not to add it.”

Even during the second lockdown, when the element of surprise had faded and the need for a hasty response had passed, the government decided to largely stick with the same rigid all-or-nothing model.

Systems that don’t talk with one another

There are a number of reasons for the decision not to adopt an STW model of the type used elsewhere. The Finance Ministry figured that the flexible model would not meet the needs of businesses that had to shut down completely, such as restaurants, travel, entertainment and event halls, nor would it result in appreciably fewer jobless people, it was thought.

The ministry didn’t want to lull employers into feeling the government would subsidize their workers’ salaries whenever there was a crisis, and felt it would be hard to wean businesses off the subsidized-salaries model once the crisis passed.

Plus, it would be harder to monitor cheating in an STW system, the ministry feared.

There is another significant reason. In Israel, information is not shared and synchronized between systems as would be needed to determine eligibility for the subsidies. The tax system would need to provide information to the National Insurance Agency to verify data received from employers and employees regarding the number of hours worked, and that doesn’t happen. It is also necessary to see how much each salary declined, yet Israel has no data regarding how much employers pay their workers each month. This data becomes available only every half a year.

“In Israel, the systems don’t talk to each other and employers report salaries but not employment levels, hours worked,” said Benjamin Bental, emeritus professor of economics at University of Haifa and chairman of the economics program at the Taub Center, and one of the authors of the Taub, Aaron Institute report. “So, the authorities don’t know if the salary was paid for full-time or part-time work.”

‘Unprepared,’ like in the Yom Kippur war

Still, the lack of systems in place was not a reason not to implement a more flexible furlough plan, he said. “It is all a matter of organization; it is not a big deal, and certainly not impossible. The systems exist, you just need to upgrade and make them more sophisticated, and track data in a systematic way. The system needed to change anyway, it needed to be made more flexible. This was a good chance to do it and we missed that opportunity.”

Between the first and the second lockdown, Israel had ample time to reorganize, he said. But it didn’t.

The country entered the crisis with record low unemployment — just 3.9% before the pandemic hit. This made the nation complacent and unprepared for an employment crisis. There were no contingency plans or vocational training programs in place. Thus, the coronavirus caught Treasury officials off guard.

So, the thinking was, let’s do something simple and quick, because setting up a whole new model would have been too complex. And that simple and quick plan was implemented not just once, but twice.

Bental compared Israel’s response to the coronavirus and its unpreparedness in dealing with the huge waves of unemployed to the Yom Kippur war, in 1973, when Israel was found to be inadequately prepared militarily.

“In essence, nothing has changed since then,” he said. “We were not prepared then, and we were not prepared now. Our ability to look forward is very poor, and it is very evident at times of crises.”

Data compiled by the Taub Center and the Aaron Institute indicate that Israel is likely to have lost more working hours than countries that had a flexible furlough program, causing a higher loss of output.

There are drawbacks to the flexible model, however, Bental said. The main one is that it keeps the workers tied to their original workplace, whereas if the virus creates a “whole new world” in which businesses disappear and others are created, “it may actually be better to have workers who, like atoms, are free floating and can join other structures, free to find employment elsewhere, in a different manner.”

Other experts believe that the flexible model is good for businesses that want to retain highly paid, skilled workers, and less appropriate for those whose workers earn less and can learn the skills, like waitering, very quickly.

Whether Israel was completely wrong in twice setting up a largely inflexible system to combat the coronavirus-triggered unemployment crisis, or perhaps cleverer than the rest of the OECD countries, it should make sure it has the ability to deploy an STW model in the future, said IDI’s Margalit.

“It is certainly a tool we would want policy makers in Israel to have at their disposal, both for managing the COVID crisis and in the future, whenever a financial crisis hits. It would be a useful tool for a short-term response to a crisis,” he said.