The average wage is soaring, and it is not certain that it is happening for the right reasons

Wages in the economy have jumped by 7% in the last year, but many Israelis do not feel the wage increase in their paychecks. According to economists, the reason is that workers who earned little are no longer necessarily in the labor market in a way that pushes the average up, and not because we are all earning much more. Where have about a quarter of a million workers disappeared to, and what is the significance of the wage increase in relation to the Bank of Israel's upcoming interest rate decision?

Bank Hapoalim noted this week that wages in the business sector jumped by 7%, and that their rapid rise poses a certain risk to inflation in the future, but they also noted that in the last year, this wage increase has barely affected inflation. This is a paradox, because a worker who earns more money can also spend more money and push prices upward. However, this phenomenon has not occurred.

Bank Hapoalim offers an explanation for this, which is an increase in labor productivity. In other words, companies that managed to maintain a similar number of employees or even fewer employees who worked the same number of hours as before, but profit increased. A similar explanation could be the cooling in hiring juniors for high-tech companies.

A decade low and the fictitious increase

Alex Zabezhinsky, chief economist at Meitav Investment House, examined this question using several indicators. If everyone's wages improved, then the total wage in the economy should also rise. However, in practice, it seems that the rate of increase in the total wage in the economy has actually moderated, especially in the current year compared to recent years, down to a decade low.

Another sign that this is not a "real" increase is the gap between jobs and the rate of wage increase. Zabezhinsky explains that the phenomenon of an increase in the growth rate of the average wage compared to a decrease in the number of workers has repeated itself several times in recent years, and that the average reflects a change in the mix of workers.

Another variable that affects the average wage is the reference point and comparison to anomalies in the economy. Thus, for example, when the data for June is published, newspaper headlines are expected to scream that the average wage in the economy has climbed sharply, but the comparison will be to June of last year, when Operation "Shield and Arrow" began, during which an unusual decrease in wages was recorded.

According to Zabezhinsky, the data presented by the Central Bureau of Statistics is incomplete; in the USA, for example, there is an additional indicator that examines a focus group and the monthly changes in their wages.

The effects of the war and the connection to emigration

Another phenomenon is a tight labor market with historically low unemployment alongside a decrease in labor force participation — or in other words: hundreds of thousands are leaving and disappearing from the labor market.

A report by the Ministry of Labor, which surveyed the market last year and was published last month, shows that unemployment data is at a historically low level and stood at 3.5% this year. The employment rate, by contrast, stood at 60.3%, lower than the period before the war (61%).

The report also shows that the employment rate of men in the northern settlements dropped significantly from 79% before the war to 64% in the second half of last year. The employment rate of Arab women improved and stood at 48.6%, but the rate of Haredi men integrated into the market has "frozen" in recent years and stands at 53%.

A study by Prof. Momi Dahan from the Hebrew University, published this year, shows how strong the phenomenon is following the war. Most of the population that reached working age after the events of October 7 joined the pool of non-participants in the labor market. Prof. Dahan also found that the annual growth rate of the working-age population dropped from about 2% to 1.7%, and he attributes this, among other things, to Israelis who left the country.

"Although the unemployment rate remains low in historical terms and has barely changed," wrote Prof. Dahan. "However, it would be a wrong conclusion to say that the labor market was not affected by the war. It seems that the main change is reflected in the detachment from the labor market of nearly a quarter of a million Israelis if one compares the number of non-participants in May 2026 to that which was in September 2023."

Consumption in the economy has not yet returned to its level

The phenomenon of young men detaching from the labor market began even before the war. A study by the chief economist at the Ministry of Finance last year pointed out that in recent years there has been a decrease in the participation rate of young people up to age 34. In the years 2014-2022, the sharpest decrease was recorded for Arab men (8%) and Haredim (6%).

"These findings raise concerns regarding economic trends in the medium and long term," the study stated.

In Zabezhinsky's view, the Bank of Israel's concern is not rooted only in the rate of wage increase in the economy but also in that same population that does not participate in the labor market. According to him, economic consumption in the services sector (hospitality, restaurants, education) has not yet returned to its level on the eve of the war.

"In service sectors, both in consumption and in credit card data, demand still looks low. These are sectors where, once the economy returns to a normal state, and people return to buying services there, it is much harder to replace workers with technology, and then the pressure on wages and, accordingly, on inflation might increase, because there are not many available workers," concluded Zabezhinsky.