1. National Insurance Institute of Israel Research & Planning Administration REDUCING UNEMPLOYMENT INSURANCE COVERAGE IN A FLEXIBLE LABOR MARKET Miri Endweld and Esther Toledano

2. Labor Market Flexibility Adjustment of wages and employment according to changes in economic circumstances The chief factors affecting macroeconomic flexibility: - Labor costs - Employment patterns - Institutional arrangements

3. Evidence of flexibilization of the Israeli labor market over the past two decades: Employment patterns: Personal contracts Privatization Outsourcing Hiring workers through manpower agencies – temporary employment, low wages Institutional arrangements: Reducing of direct taxes on labor Eliminating of employer taxes Tightening unemployment compensation eligibility criteria

4. Other key developments in labor market: Mass immigration from former Soviet Union; Influx of foreign workers; Decline in demand for unskilled workers. Extended rise in unemployment rates - from around 4% in the early 1980s, rising to 7% in the mid 1990s and stabilizing at 10% over the past few years; growth in expenditure on unemployment benefit payments

5. Reaction of the Israeli government: Limitation of expenditure on unemployment benefit by imposing an additional, highly significant restriction on eligibility criteria, effectively eliminating vocational training from the equation.

6. Possible conceptual reasons: (1) Unemployment insurance encourages exploitation of benefits. (2) Generous unemployment insurance is a possible cause of labor market rigidity - and consequent high unemployment rates.

7. MAXIMUM ELIGIBILITY PERIOD FOR UNEMPLOYMENT COMPENSATION – 2002 (days)

8. AMENDMENTS TO ISRAELS UNEMPLOYMENT INSURANCE LAW SINCE THE 1990s: In the decade 1990-2000, the Parliament approved several strictures, such as: Requiring young people up to age 35 to accept any job offered them; Persons whose salaries were higher than the national average before becoming unemployed will receive reduced benefits; The qualifying period for immigrants was rendered equal to that of veteran Israelis; The maximum period for payment of unemployment compensation to unemployed persons under 35 was reduced from 138 to 100 days.

9. The most significant changes introduced in July 2002: Qualifying period for unemployment compensation was extended from 6 months of work within the 12 months - to 12 within 18 months; The maximum period for payment of unemployment benefits to persons aged up to 25 was reduced from 100 to 50 days; Unemployment benefits were cut back by 4%; Unemployment benefits for persons participating in vocational training were cut back by 30% (new applicants only).

10. UNEMPLOYED PERSONS AND UNEMPLOYMENT COMPENSATION RECIPIENTS (monthly average) – 2000-2005 Unemployment Compensation RecipientsUnemployed Persons Year Job-Seekers*Total % of Work Force Number % % of Work Force Number 37.780,65043.392,5968.8213,8002000 38.790,62344.8104,7079.4233,9002001 31.783,13037.097,00010.3262,4002002 (48.0)(125,950) 23.565,68325.270,45010.7279,7002003 (48.5)(136,655) 20.757,57221.058,35010.4277,7002004 (48.0)(133,300) 23.658,17623.958,8309.0246,4002005 (45.0)(110,880) * Not including participants in vocational training.

11. Changes in Unemployment Benefit Payments – 2000-2005 Total Unemployment Benefit Payments Year % of all NII Benefits Paid Net Change in Real Terms (%) 7.6-0.32000 7.917.42001 7.6-5.12002 5.5-29.92003 5.1-12.92004 4.7-7.62005

12. PERCENTAGE OF UNEMPLOYMENT COMPENSATION RECIPIENTS AMONG ALL UNEMPLOYED PERSONS, BY SELECTED CHARACTERISTICS Decline (%)20042001Characteristics 53.021.044.7Total Gender 54.920.545.5Women 51.121.544.0Men Age Group 56.511.125.718-24 61.119.951.025-34 56.624.757.035-44 45.828.552.745-54 43.134.560.655+

13. PERCENTAGE OF UNEMPLOYMENT COMPENSATION RECIPIENTS AMONG ALL UNEMPLOYED PERSONS, BY SELECTED CHARACTERISTICS - continuation Decline (%) 20042001 Characteristics Years of Schooling 61.732.484.5 0-8 52.220.041.9 9-12 50.716.733.9 13-15 50.225.150.5 16+ Years in Israel 42.131.855.0 Immigrants 43.923.642.1 Veteran Israelis Place of Residence (District) 39.817.929.7 Jerusalem 61.720.653.7 Northern 49.723.246.1 Haifa 51.620.742.8 Central 47.422.041.8 Tel Aviv 58.720.349.1Southern

14. Day Laborers Problem Before the legislation was enacted, 40% of unemployment compensation recipients were day laborers. Subsequently, 50% lost their eligibility for unemployment benefits because of the change in legislation, as compared with 18% of salaried employees. After the Unemployment Insurance Law was amended, about 2/3 of all unemployed persons whose claims were rejected for this reason were day laborers.

15. Summary It is still uncertain whether the stricter eligibility criteria instituted in 2002 and 2003 indeed facilitated flexibilization of Israels labor market. If flexibilization was indeed among the objectives of legislation, its price was paid primarily by the weakest components of the labor market: Young people, the poorly educated and residents of peripheral localities and other places with high unemployment rates.

16. Recommendations (1)Setting the qualifying period at 10 working months out of the 18 months preceding inception of unemployment. (2) Eliminating bias against day laborers in the Unemployment Insurance Law by measuring the qualifying period in months rather than days: to calculate unemployment benefits on the basis of 25 working days per month for all workers, including day laborers (and not on a daily basis as is practiced at present).