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BOI study on Israeli Labor Market Dynamics

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A new study published by Dr. Alon Binyamini of the Bank of Israel Research Department presents an empirical macroeconomic model that combines discussion of a variety of labor market variables and characteristics. The study analyzed developments in the Israeli economy during the years that preceded the COVID-19 crisis. It also presents an analysis of policy alternatives for the future, in view of structural changes that are likely to take place in the labor market as a result of this crisis.

Here are some of the Highlights:

The study presents a detailed macroeconomic model of the Israeli labor market. Two analyses are presented based on this model, the first retrospective, and the second prospective.

The model presented in the study combines theoretical and empirical views. It is based on a modern macroeconomic theory for labor market analysis, and it is calibrated and estimated using the Bayesian method. As such, the model enables an analysis that is, at the same time, both qualitative and quantitative. The analysis also helps to identify developments in the economy, discuss macroeconomic risks, various policy alternatives, and the interrelationships between them and monetary policy.

The unemployment rate in Israel declined from about 10 percent in 2009 (a high rate that was due to the Global Financial Crisis) to about 3.5 percent in 2019 (before rising as a result of the COVID-19 crisis). According to the study, the main contribution to this significant decline is the gap between the growth rate of labor productivity and that of real wages during those years—a gap which made it more worthwhile to employ labor, thereby contributing to the decline in unemployment.

Looking forward, and considering structural changes that are likely to take place in the labor market due to the COVID-19 crisis, labor market policy has to take into account the development of the ratio between job vacancies and unemployment (“labor market tightness”), and not just the development of the number of unemployed.

During the decade that preceded the COVID-19 crisis, the unemployment rate in Israel declined from about 10 percent in 2009 (a high rate that was due to the Global Financial Crisis) to about 3.5 percent in 2019 (before rising as a result of the COVID-19 crisis).

Looking forward, the COVID-19 crisis led to the adoption of new approaches and changes in the labor market. Insofar as these changes are adopted following the abatement of the crisis as well, they become structural changes in the labor market that are likely to be accompanied by a temporary impairment of the matching between employers’ needs and requirements and employees’ capabilities and preferences. Such a development should be reflected in unemployment that declines only gradually despite the high level of job vacancies.

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