The Central Bureau of Statistics has stunned Israel's political and business community. Without warning, it indirectly admitted that its method for measuring unemployment is not the accepted methodology used by the OECD. Starting this year, it is forced to calculate the unemployment rate on the same basis as used by the rest of the OECD's members. As a consequence, Israel's unemployment rate - one of the most important macroeconomic figures, along with GDP growth - has jumped 20%.
Israel joined the OECD in late 2010, and must therefore update and amend its method for measuring the unemployment rate.
According to the Central Bureau of Statistics, the unemployment rate was not 5.4% at the end of 2011, but 6.5%. The Central Bureau of Statistics announced on February 28 that the average unemployment rate in 2011 was 5.6% of the civilian labor force, or 174,000 unemployed persons. That figure has now been revised to 227,000 - an increase of 30.4%. An unemployed person is defined as a person aged 15-64 who is seeking work, but is not working (cannot find a job).
A top economic official in Jerusalem told "Globes" about the shock among Israel's economic leaders who received the news a few days ago. "We're also in shock, and cannot understand the change. Governor of the Bank of Israel Prof. Stanley Fischer saw the numbers and is demanding explanations. He hasn’t yet received them, and he does not find what he was told convincing."
Fischer is one of the most highly regarded professors of economics in the world. "The real problem will be for research on the Israeli economy - a critical factor for formulating policy. The reason is simple: the moment, in a few years hence, that a researcher wants to analyze unemployment trends in Israel, he will be shocked by the sequence of numbers (a jump from 5.6% to 6.5%), for which he will have no explanation. Statistically, this is hard to explain," said another top economic source. A top Bank of Israel source admitted that he did not understand the change either.
Beyond the fact that the Central Bureau of Statistics' blow came without warning, and lacks many explanations, the main problem is that the explanations it offers are unpersuasive, and fail to shed light on the real reasons for the jump in unemployment. Firstly, the Central Bureau of Statistics says that, as part of the change in methodology, it was decided to include regular soldiers and career officers and NCOs serving in the IDF as employed. Until now, the unemployment rate only considered the civilian labor force, not the military, which is not the accepted methodology in OECD member states.
"This change should lower the unemployment rate, because the employment rate of IDF servicemen is 100%. This means that the increase in the unemployment rate between the two surveys is not because of this change, and is therefore doubly surprising," says Psagot Investment House Ltd. research department head Uri Greenfeld. He adds, "The unemployment rate of the civilian workforce (without the IDF) is much higher, because the unemployment rate in the Army is zero."
Another change relates to the number of communities sampled, which was increased by 100 communities to 470 communities from 370 communities sampled in the previous quarterly Labor Force Survey. "This means that more smaller and peripheral communities are included in the Central Bureau of Statistics surveys, and since these communities tend to have lower employment rates than the big cities, it contributes to the increase in the unemployment rate," says Greenfeld. These communities are reportedly Israeli-Arab communities. He adds, however, "Even this change cannot explain such a large jump in the unemployment rate from the fourth quarter of 2011 to February 2012."
This exposes another problem: the Central Bureau of Statistics seems to have neglected communities with high unemployment rate, which apparently explains part of the low unemployment rates previously announced for the Israeli economy. This means that one of the great contributions of Israel's joining the OECD is that the Central Bureau of Statistics must now measure unemployment according to the OECD's methodology, bringing the statistics closer to reality - and that reality is shown to be much bleaker than was thought a few weeks ago.
The Central Bureau of Statistics also claims that labor market trends have not changed, and that the unemployment rate continues to decline. "This point seems a bit odd to us, considering that a number of different surveys, such as the Bank of Israel's Survey of Companies and the Manufacturers Association's Expectations Survey of Manufacturers, indicated a negative trend in the labor market in the past few months, and that many companies reduced their workforces in the fourth quarter of 2011, and that they intend to continue reducing their work forces in the current quarter," says Greenfeld.
In contrast to the practice for other surveys, the Central Bureau of Statistics does not see fit to provide regular press briefings or explanations for the massive change it made last week. The change will require an immediate and sharp revision to unemployment forecasts by the government's economic and financial agencies, which is liable to cause considerable confusion and possibly even great harm to the economy among foreign investors, since Israel's unemployment rate was already expected to rise in 2012, due to the ongoing global economic crisis. For example, Psagot has revised its unemployment forecast for 2012 to 7.5%.
A blow to credibility
Israel's low unemployment rate has been a point of great pride for Prime Minister Benjamin Netanyahu, and even more so for Minister of Finance Yuval Steinitz, since the establishment of the government in early 2009. They based their claims for the government's economic success on the low unemployment rate. The Central Bureau of Statistics' bombshell has severely damaged its credibility.
A few months ago, the question arose why, in a year in which hundreds of thousands of Israelis went on to the streets to protest the high cost of living, the inflation rate, as measured by the Consumer Price Index (CPI), fell by 18.5% from 2.7% to 2.2%. The fact that Central Bureau of Statistics figures for real estate prices have long contradicted the figures published by the Ministry of Finance also does not help the Central Bureau of Statistics' reputation.
Published by Globes [online], Israel business news - www.globes-online.com - on April 1, 2012
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