1. Background and Context of Public Sector Pay in Israel

OECD countries are facing increasingly complex governance challenges in increasingly uncertain and fast-changing environments. This requires a workforce with the right skills and leadership to find innovative solutions to emerging and persistent policy problems. The future of work in the public sector will require a more agile public sector workforce with new digital capabilities and management systems that adapt to fast-changing circumstances. This requires fit-for-purpose public employment policies, including pay systems, to ensure the public sector is able to attract and retain the right skillsets, and motivate and reward performance.

The Coronavirus (Covid-19) pandemic has underscored the urgent need for flexible and skilled public sector workforces. Across the OECD, the designation of ‘essential workers’ and large-scale adoption of remote working to mitigate the spread of the pandemic has transformed workplaces and work methods. Public sector workforces are working in new ways, and many changes that were expected to take years occurred almost overnight: for example, dispersed teams, digitalisation of workplaces, and the reconfiguration of management practices. Public sector agencies are learning how to use new technology and tools ‘on-the-go’, often alongside old procedures and processes. And individual public servants are adapting work and personal time to meet family and caring commitments.

There are three important components to an efficient and effective public service that is able to manage challenges such as the COVID-19 crisis effectively. First, the workforce composition, including skills, competences, values, and motivations, provide the foundation. Second, Human Resource Management (HRM) systems plays a central role in determining the way the workforce is selected and managed, paid, incentivised, trained and promoted. Third, social dialogue and the quality of labour relations help shape an efficient and inclusive public sector.

In 2019 the OECD Council adopted the Recommendation on Public Service Leadership and Capability (OECD, 2019[1]) which codifies these areas across 14 principles for a fit-for-purpose public service. This Recommendation, agreed to by all OECD member countries, presents a normative framework to structure and guide civil service reforms. Pay and effective labour relations are fundamental to many of these principles, in particular the need to attract and retain skilled employees, develop performance-oriented cultures, ensure employee voice, and offer an effective range of terms and conditions of employment.

This report looks at how Israel could develop a more strategic approach to pay to attract and retain new emerging skill sets and support a performance culture in the public sector. To achieve these goals, Israel faces two challenges. The first challenge is to update the relatively rigid pay system without jeopardising trust and professionalism in the public sector. The second challenge is to deliver effective public services in cooperation with public sector unions, which exert considerable influence on public sector reform. This report focuses on these two challenges. This first chapter is an introduction that presents the context. The second chapter examines the pay system, its challenges, strengths and recommended reforms. The third chapter addresses the challenges of restoring more systematic social dialogue as a way to reduce labour disputes and increase the efficiency of the public service.

The State of Israel, founded in 1948, has no formal written constitution. Instead, a system of basic laws and rights have a constitutional status. The parliament, the Knesset, has passed eleven “Basic Laws”.

In Israel’s public sector, pay is determined through collective bargaining. In the public sector, article 29 of the Budget Fundamentals Law gives the Ministry of Finance authority on public expenses, specifically including compensation of public employees. The Minister of Finance has veto power over any agreement relating to wage conditions in a supervised body. Hence, the Ministry of Finance centralises the three functions of budget, pay, and social dialog/collective bargaining. All collective agreements in the public sector are overseen by the Ministry of Finance’s Public Sector Wages and Labour Agreements division.

The Civil Service Commission (CSC) is the employer for the central government’s ministries and agencies, which makes it the largest employer in Israel. In addition, the CSC is also a regulator of government ministries, determining regulations and procedures related to the recruitment, promotion, evaluation and training of human capital, as well as in the field of organizational structures and standards. The areas of responsibility of the CSC include determining job standards, recruitment practices and the appointment of civil servants, terms of employment, termination of employment and pensions. The CSC is also empowered by law to set ethical and disciplinary standards and procedures, and other rules published in the Civil Service Regulations Code. Through its role, the CSC has developed extensive knowledge and experience, and should therefore be seen as strategic partner in pay reform in the institutions it regulates.

The right to join a union is established in the Collective Agreements Law of 1957. Union membership is not mandatory, but a representation threshold is reached when a third of employees join a union, in which case even non-members pay the union a service fee and are entitled to all the benefits of a collective agreement. Those mandatory union dues are meant to resolve the ‘free rider’ problem of employees who get the benefit of the social agreement without contributing to it. However, this method of financing unions is relatively rare. In France, only members of unions pay membership charges. And in the United States, in 2018 the US Supreme Court ruled that unions were no longer allowed to charge non-members.

The General Organisation of Workers in Israel, the Histadrut, dates to the early twentieth century before the founding of the state of Israel and played a major role in the political and economic development of the country. It was part of the labour movement which belonged to the government coalition until 1977. This helps explain the comprehensive system of protective labour legislation and a high rate of union participation. The Collective Agreements Law and the Settlement of Labour Disputes Law in 1957 governs collective agreements. In the 1990s, about 60% of the workforce were members of a union, which contrasts with the decline in union membership in other OECD member countries. In more recent years, the rate of membership in Israel dropped from a peak of about 80% in the 1980s to about 25% in 2012. However, in the business sector, the rate of union membership rose from around 6% in the 1980s to 10% in 2012. In the public sector, most workers (excluding employees under personal contracts and the defence workers) remain unionised.

The Histadrut, renamed “the New Histadrut” remains an important partner in the public sector, coexisting with other social partners such as the Grade School Teachers’ Union, the High School Teachers’ Union, the Doctors’ Union and the Leumit National General Union. In Israel, unions play an important social role and are not only active in labour relations. For instance, the Histadrut used to offer its members social benefits, health services, pension funds, etc. until the 1990s.

The judiciary also plays a key role in this institutional setting. In 1969, the Labour Courts Law created a separate judicial system to solve collective and individual legal labour disputes. The Labour Court System is composed of five Regional Labour Courts and an appeals instance, the National Labour Court. Regional Labour courts have, in equal numbers, members from labour and from management, sitting with professional judges. Labour Courts, since their creation in 1957, are a partner in social dialogue alongside the unions.

Another group of important actors in the system are the line managers of ministries and agencies. Although they have little authority to determine pay reforms, they are a central actor in the broader system. There is no successful reform without leadership to effectively manage change. To be implemented and accepted, a reform of the pay system needs political will but also senior and middle managers who support it.

Successful managers require a level of autonomy and authority to make management decisions that impact the operational efficiency and effectiveness of their organisations. When they have the right tools, the skills to use them effectively, and the right enabling environment, managers can negotiate with employees and unions to build buy-in for change and reforms required to develop modern fit-for-purpose organisations.

In Israel, there is an important triangle of power between line management, unions and the Ministry of Finance, and each has a role to play in an effective system to implement successful and accepted reforms. However, the way things are organised today, line managers’ roles are rather reduced. This is partly due to a perception that some prefer to act as advocates for their employees vis-a-vis the ministry of finance, rather than as management vis-à-vis the unions. This may in part be due to the fact that some managers are members of the same unions, and covered under the same collective agreements, as their employees, although most higher level manager are employed under personal contracts. In many well-functioning OECD countries, social dialogue depends on a clear distinction between employer (the management) and employee.

Reforms that could help to empower managers could include establishing a common Senior Civil Service for administrative leaders and senior managers, decentralisation of some management authorities, and increased autonomy in allocating the budget. The OECD has developed a Senior Civil Service System model that can be used to guide Israel in this regard. The model highlights two important facets of an effective senior civil service, represented by the two axes of the diagram in Figure 1.1. The first facet is focused on identifying the right kinds of skills needed and appointing people with those skills to the right positions. The second is focused on providing the right management tools, accountabilities and incentives to get the job done. This suggests that it is essential but insufficient to appoint people with the rights skills to leadership positions; they also need a support operating environment. This requires consideration of the incentives and tools available to managers to engage in productive negotiation with employees and their representatives to achieve effective outcomes and reforms.

As shown in Figure 1.2, Israel has a relatively large public sector comprising 19.7% of total employment in 2017; two percentage points above the OECD average (OECD, 2019[2]). The share of public employment has been declining – in 2007 it accounted for 22.6% of total employment, or approximately 700,000 public servants (OECD, 2019[2]).

As shown in Figure 1.3, compensation of government employees in Israel represents 10.4% of GDP and 26.3% of total government expenditure – this is higher than the OECD average of 9.2% and GDP and 22.8% of total expenditure (OECD, 2019[2]). This high share of spending on public employment potentially reduces available funds for other areas, (e.g. public investment, which is below the OECD average) that could contribute to enhancing quality in public service delivery. Compared to 2007, compensation as a percentage of GDP has remained stable, whereas compensation as a percentage of total expenditure has risen slightly, by 1.5% (OECD, 2019[2]). Given this significant investment in public servants’ compensation, a central challenge for Israel is enhancing the way this money is spent to ensure it meets strategic goals to attract, reward and retain various skill sets and professional profiles. Public sector compensation can also be a lever for increased organisational effectiveness, e.g. through trading targeted pay increases for the reform of outdated job contracts, or greater flexibility on working hours and location.

Employment frameworks are the collection of employment policies, terms and conditions that determine how governments recruit and manage their workforce. With many governments experiencing growing pressure to adapt to technological change and compete for desired talent, employment frameworks generally aim to find an effective balance of flexibility to meet changing service needs and security to retain key skill sets.

One way of categorising employment frameworks is to distinguish between career-based and position-based systems (see Figure 1.5). In career-based systems, recruitment is made through competitive selection early in public servants’ careers, with higher-level posts open only to public servants. In position-based systems, both internal and external candidates are recruited for a specific post. Israel’s system is predominantly career-based.

Both systems have their advantages and disadvantages. Position-based systems can be more flexible and allow the public sector to adjust more quickly when circumstances change. Career-based systems can be better at maintaining cross-government values and a dedicated and independent workforce; however they may be less responsive to timely change and reform. When it comes to pay-setting, career-based systems theoretically emphasise internal pay equity, whereas position-based systems may prove more flexible to match external market wages.

No country has a pure system. Regardless of their initial employment framework, nearly all OECD member countries have implemented recent reforms to balance different needs such as flexibility, openness, transparency and professionalism, common values, and independence. Career-based systems tend to be found in continental Europe, though in France and Germany there is a more recent trend towards position-based reforms. The Netherlands and Sweden are examples of position-based systems.

Another related way of categorising employment frameworks is through the use of civil service status. In continental Europe and South-Eastern Europe, a large share of public employees are employed with a special status under civil service legislation, especially at the central government level – a practice more commonly associated with career-based systems. On the contrary, most North and Eastern European countries use contractual employment under the general labour-law, often based on collective agreements. However, many studies (e.g. (Demmke and Moilanen, 2012[3]) note that, even in traditional career-based systems, the use of labour-law contracts is increasing. Furthermore, there is a tendency, especially in European countries, to apply the status of civil servants only to core areas such as the police and justice.

Most OECD member countries use a mix of these types of contract. Figure 1.6 below shows the distribution of civil servants and other employees across the central public administrations of OECD countries. Civil servants tend to perform different functions (Figure 1.7), have more job security, and different recruitment processes compared to other public employees; however the delineation between these categories varies from country to country. In career-based systems, people working in the category grouped as ‘other public employees’ may be used for temporary forms of work or for project-based/time-bound work. However, in position-based systems, such as in Nordic countries, other public employees tend to be protected by negotiated agreements that provide them with high levels of job stability and benefits. In France, nearly 25% of public employees do not work under the dominant career-based system, and increasing the number of contractual agents is a reform priority. In Germany, there is a traditional dual system with parallel career-based and position-based systems. Though Belgium has a career-based system, characteristics of the position-based system are found in certain positions, especially for senior management.

A dual system where traditional core functions (such as police and justice) are career-based and services such IT are position-based could be optimal. Positions that require particularly high degrees of independence, and accountability are usually filled by civil servants who have career-based contracts with merit-based recruitment and high job security. Career-based systems are also useful when specific human capital investments are required over the course of a career, such as for teachers.

Conversely, technical jobs, such as an IT programmer required to complete a short-term project, may not need to be employed on a long-term contract if there is no need to invest in her or his skill set the way it would be for a junior civil servant at the outset of their career. When competencies are changing and there is a need for adaptation, position-based contracts can be more flexible and productive.

Israel’s dominant employment framework resembles a career-based system. Despite certain advantages referred to above, the complexity and scale of career-based systems may act as a barrier to much-needed reforms, such as revising outdated job descriptions or even organisational charts. In Israel, the challenges associated with the broad career-based system led to the creation of a new employment framework called a ‘personal contract’. Five percent of public sector employees (around 10% of government ministry employees – see Figure 6) have personal contracts. Employees with personal contracts are mainly professionals such as lawyers, economists or IT specialists.

Personal contracts were meant to give hiring managers the flexibility to recruit staff for specific positions outside the formal scope of collective agreements and to set pay more flexibly. However, following a number of decision by the Labour Courts, after five years, conditions associated with these contracts relating to job security and tenure now converge with those covered by collective agreements, reducing the gains to managers in terms of flexibility. Therefore, personal contracts provide for the same working conditions and constraints as public statutory positions (i.e. career-based).

Moreover, increasing the number of personal contracts over the longer term at the expense of the career-based contracts could also generate a risk of a fragmented internal labour market and inconsistent treatment of public sector staff. For example, workers with different wages may collaborate on similar tasks and share the same working conditions, which may lead to conflict.

The advantages of both systems can be maximised (and downsides minimised) through a clear and transparent set of rules for when and how these contracts are used. The OECD’s Recommendation on Public Service Leadership and Capability calls for a transparent set of rules for applying contracts such as personal contracts: the implications for pay, mobility and career are very important in attracting the right talents and need to be known by all applicants. The coexistence of both contract types without clear criteria to apply one over the other may blur the conditions of recruitment and weaken the attractiveness of the public sector and the building of common values among employees, hence reducing trust in the workplace. Israel could launch a strategic reform to better distinguish the benefits and risks between different contractual types and produce guidelines to ensure consistent application.

One common thread linking various public sector reform efforts across OECD countries is the need to embed flexibility and agility in organizational structure and practices while upholding principles of accountability and transparency. The Coronavirus (Covid-19) pandemic has underscored this need for agility and adaptability. New procedures and protocols governing remote working, accelerated hiring processes, and fast-track mobility programmes were developed with unprecedented speed. This agility manifested itself differently across countries depending on specific institutional and legislative contexts and measures taken to counter the pandemic. It therefore provided a stress-test on existing public sector policies and practices, including the salary and labour relations systems.

In Israel, there were three main labour agreements signed with the main union in the Public sector, the "Histadrut", during the first year of the Covid-19 pandemic (Figure 1.8). The main priority of all agreements was to protect public sector workers, and keep them formally employed, as oppose to the private-sector, where at the peak of the crisis in April, nearly half of the workers were temporary laid off and received financial support from social security.

During the first half of 2020 there was a shift in policy: The first two agreements tried to minimize the number of workers in active duty only to those that were essential for keep business continuity. The third agreement, however aimed to bring back all workers and grant employers flexible tools in order to maintain restrictions due to the virus.

The first agreement (22.3-18.4) signed with the Histadrut was intended to ensure minimum business continuity. Therefore, approximately 30%-50% (excluding Health and security sectors) of public workers, those who were defined as Essential Workers, continued to work while the rest were required to use their annual paid leaved. Essential workers were defined as those dealing with the consequences of the spread of the virus or maintaining functional continuity and core services. The Second agreement (19.4.2020-30.4.2020) was a continuation of the first agreement, with vacation days added by the employer.

The Third agreement signed at the beginning of May, enabled the continuation of public service activity in a flexible and efficient manner while addressing the restrictions by the Covid-19 pandemic. According to the agreement, all employees will return to work, except those who cannot be employed in light of the decline in market activity, or in light of legislative restrictions (border workers and so forth). It was decided that employees who could not return to work or whose employment was reduced would be entitled to a special payment. The pay is based on 67.5% of their base salary, to be paid by the employer.

This third agreement required management flexibility to employ as many employees as possible efficiently. In this framework, it was agreed that employers in the public sector will be able to change employee hours of employment (including splitting the work into shifts), adjust the work week, change the definitions and content of jobs, make employees mobile and implement innovative technologies. All this, at the decision of the employer without paying a wage supplement. With the return of many workers that were on vacation from work, teleworking was allowed in order to keep restrictions on the number of people in a room. In most of the public sector, this was not allowed before Covid-19.

Although this agreement is valid for the "corona period", the tools of flexibility provided in it are ground-breaking in the context of Israel’s public service management, and will likely enable the public sector to operate efficiently during the crisis, along with providing a flexible response to employees who cannot be employed. This could provide an opportunity for the public sector to expand the management tools in the hands of its managers and continue to operate flexibly even after the period of the Covid-19 crisis. Israel should reflect on the experience of the Covid-19 pandemic crisis to identify new practices that stand to make the public sector more efficient and productive into the future.


[3] Demmke, C. and T. Moilanen (2012), The future of public employment in central public administration, https://www.oeffentlicherdienst.gv.at/moderner_arbeitgeber/personalentwicklung/international/dokumente/Study_The_future_of_public_employment.pdf.

[2] OECD (2019), Government at a Glance 2019, https://doi.org/10.1787/8ccf5c38-en.

[1] OECD (2019), Recommendation of the Council on Public Service Leadership and Capability, http://dx.doi.org/OECD/LEGAL/0445.

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