Bank of Israel: Minimum wage hike won't ease poverty

Raising the minimum wage will not alleviate poverty, concludes the Bank of Israel in a new report. It estimates that the minimum wage revision will reduce the incidence of poverty by 0.1%. The Bank of Israel said, "In order to reduce poverty by a significant amount, improved compliance with the Minimum Wage Law is required."

Moreover, the Bank of Israel estimates the upcoming minimum wage hike will increase direct salary costs in the public sector by NIS 427 million from 2011-13.

Under an agreement between the Histadrut (General Federation of Labor in Israel) and the Economic Organizations Liaison Committee in December 2010, the minimum wage was raised to NIS 3,890.30 in April, and will rise to NIS 4,100 in July 2011 and to NIS 4,300 in October 2012. The agreement was expanded to the public sector in March 2011. The agreement's application to workers and employers in the business sector who are not represented by the organizations that signed it depends on an expansion order, which the Minister of Industry, Labor, and Trade is supposed to give. If the minimum wage hike is expanded to the overall economy, it will result in two 5% consecutive hikes to the nominal minimum wage, and increases of 5% and 2.4%, respectively, in real terms.

The Bank of Israel concludes, "A minimum wage is intended to assure a suitable standard of living for low wage workers, and to reduce the incidence of poverty and wage gaps between employees. However, the weak compliance with labor laws, particularly the minimum wage law, seen in data from Israel, takes away from the impact of these laws. There are studies which point to a weak negative impact of updated minimum wage on employment levels, and this is in any case dependent on the economic environment and on the industry. Due to the limitations of minimum wage to extricate people from poverty, many countries operate other tools which are intended to increase the income of low wage earners, such as a progressive tax system and negative income tax."