Industrial Relations in Times of Transition

The 12th Caesarea Economic Policy Planning Forum, July 2004

Policy Paper No. 54

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  • Cover Type: Softcover
  • Number Of Pages: 155 Pages
  • Center: Eli Hurvitz Conference on Economy and Society
  • Price: 60 NIS

A proposal for resolving the problem of concentrated ownership and conflicts of interests in Israel’s financial markets in order to encourage the creation of financial intermediaries outside the banks that can compete with the traditional banking system and improve the quality of the consumer products.

A proposal for resolving the problem of concentrated ownership and conflicts of interests in Israel's financial markets in order to encourage the creation of financial intermediaries outside the banks that can compete with the traditional banking system and improve the quality of the consumer products. The proposal was prepared for the 12th Caesarea Economic Policy Planning Forum in July 2004.

This research was conducted in preparation for the Israel Democracy Institute's annual economic conference, "The Caesarea Conference." Industrial relations was the chosen topic for the conference because of the volatile and adversarial industrial relations that have developed in Israel over the years. During 2002-2003 some major economic reforms were initiated. These had a dual impact on the industrial relations system. First, some reforms aimed at privatizing the public sector:  freezing wages, dismantling the tenure system that characterized the public sector, and making changes to the pensions system and retirement age. The seemingly massive scope of reform was ostensibly intended to address the nation's serious budgetary constraints but, in fact, was designed as a response largely to the structural features of the Israeli labor market. This was an explicitly neo-liberal reform with a "That cherite"  flavor. The Ministry of Finance explained it as necessary "flexiblization" of the labor market, while others viewed it as a "union busting" program. Yet, it was generally understood on all sides that industrial relations would not look the same again.

A second feature of the economic reforms relates to their objective of promoting growth at a time of growing inequality in Israeli society. Much of the inequality in Israel is attributed primarily to labor market disparities. As noted, some of the reforms aimed at shrinking the public sector and weakening public employees' rights. However, none of the reforms instigated aimed to remedy distributional problems or to seek amore equitable infrastructure in the labor market. The only related reform sought to reduce social expenditure, mostly that diverted to welfare (known as "income assurance") and to promote a proactive approach that seeks to transfer welfare recipients to the labor market. Although in its infancy, the reform is intended as a means of reducing welfare dependency, but it does not aim to draw people into the labor market by favorably changing working conditions.

The outcome of all these reforms could be sketchily characterized as structuring a project in which the state as employer is expected to retract, the state as regulator is expected to withdraw, and the state as negotiator with its traditional social partners rejects its role or the actual significance of negotiations. This marks a peak in the transformation of the Israeli industrial relations system, which was designed in the past on corporatist and social democratic premises, upholding values of equality and full employment, state accountability and ongoing deliberations over social matters. These changes are reflected in all common measures of industrial relations. For example, membership rates in trade unions have declined dramatically from over 80% in the early 1980s to approximately 35–40% at present. Similarly, coverage of collective bar gaining agreements declined from over 80% to approximately 50% at present. The use of collective agreement extensions also declined and has almost ceased completely . At a more qualitative level, the change is evident in the substitution of autonomous self-regulation by collective labor relations with a growing use of individual contractual agreements, on the one hand, and a growing use of state regulation and public intervention in the labor market, on the other hand. Both labor protection and concessions are gradually being transferred from the domain of collective negotiations to that of legislation, executive regulation, and judicial precedents.

To illustrate the impact of these reforms on the industrial relations system, two major topics were selected for this study: (a) the resolution of labor disputes in the public sector and (b) the problem of low-wage workers in the private sector. In both cases the problems are empirically described and structurally explained, and policy recommendations are provided.

A. Industrial Disputes in the Public Sector

During 2003, several strikes attracted public attention. Most notable were the threat of a mega-strike of the entire workforce in response to the government's reform of the pensions system and a 100-day strike in several ministries, in response to the government's intention to carry out structural re-organization of the public sector . These strikes created a dual assumption:  first, that the strike rate in Israel has significantly increased and second, that the fundamental problem in Israel's industrial relations system is the significant number of strikes. This study addresses both assumptions.

Empirically , the study demonstrates that while an international comparison indeed shows that the strike rate in Israel is relatively high, the number of strikes has not changed over the years. The change observed by the public is that strikes have become more volatile and intense, measured mostly by their length. While strikes in Israel used to be relatively short, there are now fewer, but highly visible, instances of long strikes that can last for up to a few months. Strikes are concentrated almost completely in the public sector and specifically, within public administration.

Conceptually the study emphasizes that while strikes are the visible part of the nation's turbulent industrial relations system, the real problem must be traced to its roots, namely the problem of industrial disputes. It is argued that strikes are a symptom and not the malaise itself. The study demonstrates that consent-based methods for resolving industrial disputes, which were developed in the heyday of the corporatist system, have all been marginalized and neglected. These include arbitration, mediation, a special institute for the resolution of interest disputes in the public sector, and others. In the absence of consent-based solutions, the only outlets for resolving disputes are the strike and adjudication. Consequently, strikes are no longer merely a strategic event in a process of dispute resolution, but the dispute resolution process itself. Similarly , the labor court is using its adjudicative power not just to settle legal disputes but also to encourage mediated solutions to strikes.

Policy efforts to address the problems of industrial disputes over the last year have focused on two major components. First, there are pending proposals to restrict the use of strikes, inter alia by means of requiring democratic elections before commencing industrial action, patterned on the British reforms in the 1980s. Second, there are proposals to abolish the labor courts system and merge it with the general judicial system. Given the diagnosis of the problem, the essence of these proposals is to eliminate the remaining outlets for the resolution of disputes and to strengthen the managerial prerogative of the public employer. These proposals resonate with the emphasis on strikes as the problem of industrial relations, but not with the view that alternative dispute resolution methods have ceased to function. In other words, these proposals seek to void disputes altogether by strengthening the employer's power to act unilaterally.

The study proposes alternative lines of response that are aimed at restoring the two-sided, consent-based resolution of industrial disputes. This approach views strikes and adjudication as sub-optimal methods of handling industrial disputes because they are not necessarily geared to advance long-term and stable industrial peace. However, it differs sharply from the approach that seeks to transform the system into a one-sided, power –based approach for dispute resolution. While the study emphasizes the importance of the labor courts and the strike as an institution, it outlines various measures that can restore mediation, arbitration, fact finding, and other ADR (alternative dispute resolution) solutions as a preferred substitute. Unlike consent-based dispute resolution methods, binding arbitration, a long-contested solution, can be instigated in extreme situations (e.g., essential services) and only as a default measure. The parties to the dispute can avoid this step by consensually adopting alternative dispute resolution mechanisms. The recommendations further propose that a four -party (state-employers-labor-civil society) council should be established. The council should adopt guidelines and norms for employment in the public sector, advance resolution of industrial disputes, and disseminate best practices. Moreover, it should have a consultative standing in large public disputes that combine economic industrial disputes with political ones. The council's position should be semi-mandatory:  while consultation with the council is mandatory , the governing branches of government can reject its recommendations on reasonable grounds. Together, the various solutions aim at restoring a consent-based equilibrium to the industrial relations system.

B. Low-Wage Workers in the Private Sector

Similar to the consent-driven approach that structures recommendations for the section discussing dispute resolution in the public sector, the discussion of the low wage workers in the private sector was based on the need to mediate the conflicting needs of flexibility and security ("flexicurity").

It has been demonstrated that the decline of the corporatist industrial relations system is related to a growing rate of inequality in the labor market. Increasing polarization in the system has augmented the vulnerability of weak groups in the labor market. This vulnerability is reflected in the growing share of the working population that earns low wages (i.e., 60% of the median wage). By 2002, over 25% of workers received low wages, a rate higher than observed in OECD countries. Low wages are a product of several factors:  (a) low wages per hour, (b) low wages per month or year (attributed to part-time and contingent employment), and (c) poor enforcement of labor standards. Except for the group of workers who voluntarily work part-time and, therefore, earn low wages, the low wages of other groups are indicative of hardship in the labor market. This is further characterized by several ancillary features of low-wage employment:  the absence of protection against dismissals, short-term employment, low share of workers with pensions and savings, little unemployment insurance coverage, no portability of rights despite high level of mobility , and a very deficient protection of statutory rights. Among low-wage workers, Arabs, migrants, women, workers with high-school education and less, and workers who are employed through employment companies ("Manpower") are all over represented.

There are various solutions to the low-wage phenomenon and its accompanying features, such as minimum wage, wage subsidies ("negative income tax"), measures for portability of rights, social security measures, and more. Specifically, the study demonstrates that a trickle-down theory, according to which economic growth can alleviate the problem, is empirically unfounded. Economic growth over years had no positive impact on the skewed distribution of wages in the Israeli labor market. In fact, the contrary is shown. In choosing among the various alternative policy options, competing interests must be balanced, such as flexibility v. protection, security v. perverse incentives and alleviating the problem of low wages v. reduction of public expenditures. The study does not explore the most appropriate mix of measures that are currently needed (the "end norms"), but rather focuses on the system of interest representation that can level competing interests and ensure that they are all heard and taken into consideration in policy-making.

In order to achieve appropriate representation of interests in policy-making, the institutional gap that has developed must be addressed. At the macro-level, establishment of an industrial relations council, which was recommended in the context of public sector disputes, also has an important function in general policy-making. Its four -party structure and semi-mandatory position can ensure its consultative role in policy-making. At the mesa-level, the study emphasizes the continued importance of branch and state-level agreements, particularly in issues that require general coordination – such as vocational training, pensions, and the portability of rights. At the firm-level, the study notes the striking disappearance of workers' committees, which traditionally were the result of active collective agreements and relationships. Consequently, more and more workers, especially the lower earners, work without an address for grievances, large or small. This gap is the most difficult to address. The study recommends considering the European model of works councils but also notes its disadvantage – and even its precarious nature – with regard to peripheral workers in the secondary labor market. However, while there may be disagreements on the most appropriate solution, the actual gap is undisputed.


The two examples of the general problem presented here indicate that the problems, and, hence, the solutions, as well, are interrelated and should be viewed vis-à-vis one another. The parity approach to disputes resolution and the approach that seeks to level multiple interests in policy-making are grounded in the same logic. That is, civil society is situated at the center, values deliberations and holds them to be an important part of a rich democratic culture, and prefers, ceteris paribus, consent-and consensus-driven solutions.

It is certainly easier to dissolve industrial relations altogether than to reconfigure the system and establish institutions based on consent, good-will, and mutual respect. Yet, the study argues that those who would wish collective industrial relations to disappear cannot expect that the problems described and diagnosed here can really be eliminated in such a way. The proposals outlined in this study are only a preliminary stage in the effort to grasp the scope and nature of transformation in Israel's industrial relations system. Consequently, the most salient recommendation proposed here is to establish a public commission to assess in more detail, and with a higher level of representation and legitimacy, the future of the industrial relations system.