The Public Sector Pay System in Israel

Executive summary

Across the OECD, governments spend approximately 9.5% of GDP and 20% of public expenditure in public sector workforce compensation. Events such as the COVID-19 pandemic underline the value governments get for this money: public servants have a critical role in keeping citizens safe and economies functioning. To do this, public sector workforces must be skilled, engaged, and able to plan for and adapt to change. A modern and fit-for-purpose pay system – underpinned by constructive labour relations – enables governments to attract, retain and reward high-value skill sets and talent. This, in turn, contributes to productive and sound public governance.

In Israel, the overall framework for public sector pay has remained substantially unchanged since the 1950s. Since then, globalisation, digitalisation, and socio-economic and demographic change in particular have given rise to new skills needs and work practices, underpinned by new technology. The future of work in the public sector will require the public service to be more forward-looking, flexible and fulfilling to an increasingly diverse range of public servants. This will require a commensurate modernisation of the pay system to attract and retain the talent needed in Israel’s public sector and to increase the efficiency of public service delivery. To achieve this, Israel faces a double challenge. The first challenge is to update the pay system while maintaining trust and professionalism in the public sector. The second challenge is to improve bargaining with public sector unions, which exert considerable influence on public sector reform.

In this context, this report examines how Israel’s Ministry of Finance can use the public sector wage bill more strategically. The goal is to develop a more flexible, high-performing and outcome-oriented public sector workforce. The report finds scope for (i) reviewing the principles underpinning public sector pay, job classifications and allowances, and (ii) developing a more proactive and constructive approach to collective bargaining to facilitate this. More specifically, the report provides the following key recommendations to the government of Israel:

Rationalise the system of allowances

Allowances are an important component of public sector pay in Israel. Examples include special pay for training, or for car ownership. Many of these allowances are, however, outdated, and no longer correspond to the reason they were introduced in the first place. Now, they are simply perceived as entitlements. Incorporating these allowances into the regular salary structure will make pay more transparent and predictable for both employees and management. It can also help attract external candidates and boost civil service mobility. This rationalisation of the salary structure does not have to affect the overall wage bill.

Identify key competences to align pay with market levels for certain profiles

The public sector needs to be an attractive employer for high-value and future-oriented skill sets that are increasingly in demand in the private sector. In Israel, pay in the public sector is still determined largely by seniority and rigid, outdated pay tables, which makes it difficult to target pay adjustments to attract and retain high-value skills. Linking pay more closely with competences and performance rather than with static factors such as education or seniority would enable targeted pay increases for certain profiles and boost attractiveness and retention.

Simplify the job classification system

A more flexible job classification system in the Israeli public sector would enable greater responsiveness to changes in technology, new ways of working, and unforeseen shifts in operating conditions. Reducing the number of distinct job categories would give greater flexibility to employers to make targeted changes. Revised job profiles that focus on competences is key to embedding greater flexibility, i.e. the understanding that all jobs will and must change their scope. Revising the job classification also presents opportunities to better match pay with market wages for skill sets that are hard to recruit.

Empower line managers to engage in collective bargaining

Collective bargaining does not only focus on wages. It can be a strategic tool for improving working conditions in exchange for management reforms that improve aspects such as flexibility and technological modernisation. This requires increased involvement of line managers and ministries as key partners in the collective bargaining process. They need to be empowered to negotiate with their unions within a well-defined legal and budgetary framework.

Create institutions for alternative dispute resolution

The quality of labour relations is one of the key parameters of a well-functioning collective bargaining system. The frequent recourse to strike action -- and high number of working days lost in Israel’s public service as a result -- demonstrates scope to improve social dialogue. Developing viable alternatives to strike action could help resolve conflicts, find agreements within the framework of collective bargaining and thereby strengthen the overall system. Options for mitigating the recourse to strike action could include dispute resolution commissions or independent arbitration and mediation committees. Broadening the range of tools available to social partners to achieve their aims can thus help reduce economic and social disruption.

Limit the scope and timing of strike action to encourage more effective negotiation

Strike action by unions should be seen as a last resort in negotiations with employers. In the Israeli public sector, however, unions have the ability to call a strike with relatively few constraints in terms of motive and timing, whether an existing collective agreement is in place or not. Unlike most OECD countries, Israel does not protect essential services from strike action. Revising the laws and guidelines that structure labour negotiations and strike actions could result in more productive outcomes for government, public employees and the citizens who use public services.