The Bank of Israel - Vol. 1

By Haim Barkai; Nissan Liviatan | Go to book overview

12
The “Russian Immigration Wave”
and the New Inflation Step, 1990–94

MASS IMMIGRATION

Economic developments in the first half of the 1990s were dominated by mass immigration from the Former Soviet Union. The influx began shortly before the beginning of 1990, continued at a rate of nearly two hundred thousand a year for the next few years, and added up to three quarters of a million by the end of the decade (augmenting the 1990 population of the country by 17%). Since the analysis of the full economic implications of this major event falls outside the scope of this study, our discussion confines itself to the macroeconomic effects of the mass immigration and, specifically, its impact on the disinflation process.


LABOR-MARKET EFFECTS

The immigration wave had a direct stimulating effect on demand, resulting in a boost to investment and economic growth. Concurrently, it generated excess supply by bolstering the stock of labor. Thus, the decline in real business-sector wages precipitated by the 1989 recession continued even more vigorously (figure II.2) and the unemployment rate climbed from 6.4% of the civilian labor force in 1987 to 10.6% in 1991 (figure II.3).1 The unemployment rate remained at this high level for another two years and thereby exerted downward pressure on the annual inflation rate, which plunged discontinuously in 1992 from 18%-20% to 10%-12%, where it would stay for the next four years (figure II.1).

The immigration wave also had a contributory effect on the ongoing erosion of the power of the Histadrut. The low-inflation environment reduced the importance of COLAs and national wage agreements, which the Histadrut had

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