An agency theory perspective of the Israeli labor market segmentation: Past, present, and future

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Human Resource Management Review 20 (2010) 186–193

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Human Resource Management Review

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An agency theory perspective of the Israeli labor market segmentation: Past,present, and future

Aaron Cohen a,⁎, Yehuda Baruch b

a Division of Public Administration, School of Political Science, University of Haifa, Israelb Norwich Business School, University of East Anglia, UK

a r t i c l e i n f o

⁎ Corresponding author. Tel.: +97248240041; fax:E-mail addresses: [email protected] (A. Cohen

1053-4822/$ – see front matter © 2009 Elsevier Inc.doi:10.1016/j.hrmr.2009.08.001

a b s t r a c t

Keywords:

In this paper we use agency theory to present a process of the dichotomization of the Israeliworkforce into two structures, each representing distinct organizational cultures. The firststructure is the private sector, led by the high-tech industry; a model where the principal hasstrong control over the activities of the agent. The second is the public sector, an opposingmodel in which the principal has virtually no control over the activities of the agents and as aresult, the effectiveness within this sector deteriorates. We argue that such conflicting systemscannot exist side by side without affecting each other and we suggest a role for human resourcemanagement (HRM) in future developments. Within the public sector it is the responsibility ofthe principal, the Israeli government, to gain more control over the agent and employprofessional HRM systems for this purpose.

© 2009 Elsevier Inc. All rights reserved.

Agency theoryIsraeli labor market segmentationOrganizational culture

1. Introduction

The Israeli workforce has gone through significant changes in its composition, values and attitudes. There is very littleresemblance between the idealist immigrants who aspired to form a new socialist society and contemporary Israeli society,anchored in capitalist ideology and competitive labor markets. Some of these changes occurred as an outcome of significantevolution in the workforce throughout the world, manifested by technological progress and globalization, resulting in changes ofvalues and attitudes. Even when we take these changes into account, it seems that the current Israeli workforce has very little incommon with its origin.

In this paper we argue that the current Israeli workforce is split in its characteristics, values and attitudes between two mainsectors, the private one, particularly the high-tech industry, and the public one. Using agency theory, we propose that these twosectors represent two different models of principal–agent relationship. In the private sector, the principal developed a system thatenables control over the agent's activities based on outcomes and compensation. This leads to the development of the competitiveculture that characterizes this sector. In the public sector, the principal has little control over the agent's activities and there arefew control mechanisms based on performance remuneration. As a result of this division, we can identify a variety of emergingnew values and attitudes.

The above split of the workforce becomes even more complicated when considering the diverse nature of the Israeli labormarket. Some ethnic and cultural sub-groups seem to form a better fit between their values and qualifications and the culture ofthe public sector than with those of the private sector. In the private sector and especially within the high-tech industry, HRM isprofessional and fairly developed, while the public sector lags behind. We argue that the principal in the public sector shouldresume more control over the agents to prevent further deterioration in the characteristics and values of its workforce.

We support the arguments above by using both historical evidence and current data from the Israeli workforce.We analyze thehistorical development of the Israeli workforce as well as its values and attitudes. This analysis is divided into two eras. First, we

+97248257785.), [email protected] (Y. Baruch).

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discuss the early days, when Israel was first established. We then cover the latest decades, focusing on the current state of theIsraeli workforce and HRM practices.

2. The conceptual framework

2.1. Agency theory

We utilize agency theory as the main framework for explaining the dichotomization of the Israeli workforce and the associatedHRM systems. According to this theory, an agency relationship is in effect whenever one party, a principal, hires another person, anagent, who possesses specialized knowledge and skills (cf. Eisenhardt, 1989; Jensen & Meckling, 1976). The theory's mainassumption is that human beings by nature are selfish, thus agents and principals will most probably have differences in interestsand attitudes towards risk, leading to divergent decision-making preferences (Eisenhardt, 1989).

Agency theory is concerned with resolving two problems that can occur in agency relationships. The first is the prospect ofconflict between the desires or goals of the principal and the desires or goals of the agent. The second is the principal's difficulty inmonitoring and verifying what the agent is actually doing. The problem here is that the principal cannot verify whether the agenthas behaved appropriately (Eisenhardt, 1989).

Proponents of agency theory assume that each party acts in its own self-interest. This assumption gives rise to the so-calledagency problem because the interests of the principal and agent may conflict. The agent may avoid fulfilling obligations or engagein self-serving behaviors, such as using work time and organizational resources for personal gains. The more autonomy andindependence the agent enjoys and the greater the specialized knowledge required in performing the task, the more significantthis “moral hazard” becomes (Holmstrom, 1979).

The concept of moral hazard was first developed in the insurance industry, where an insurance policy may create an incentivefor the policyholder to cause an accident, such as the loss of a business through arson (Arrow, 1985). “Information asymmetries”that provide one party (the agent) with informationwhich is not available to the second party (the principal) can give rise tomoralhazard. To reduce themoral hazard inherent in agency relationships, principals developmechanisms, or “rules of the game,” to (1)monitor agents' actions and (2) reward agents when they act in accordance with the principals' objectives (Jensen, 1983). Whenan agent has high autonomy, independence, and highly specialized knowledge, monitoring becomes challenging and expensive,leaving the principals to rely on incentives in order to reward agents for appropriate outcomes (Tosi & Gomez-Mejia, 1994).

Lack of proper and accurate information flow from the agent makes it difficult for the principal to design and implement acontract that spells out how the agent should behave under various circumstances, making it impossible for the principal to ensurethat the agent takes appropriate decisions (Alchian & Woodward, 1988). This imbalance in the distribution of informationbetween principals and agents is referred to as information asymmetry (Rutherford & Buchholtz, 2007). Jensen and Meckling(1976) asserted that this discrepancy in information availability to the principal in conjunction with incomprehensive contractsleads to agency threats of adverse selection and moral hazard. Hendry (2002, 2005) refers to adverse selection as the risk ofselecting incompetent employees. According to Lubatkin, Schulze, Ling, and Dino (2005), the moral hazard is the risk ofcontracting individuals who withhold effort or misappropriate firm resources. Eisenhardt (1989) advocates monitoring theactions of agents and/or deploying incentivemechanisms, often in the form of outcome-based compensation, in order to overcomethose problems.

This is where the role of HRM within the organization becomes essential in the interplay between the principal and the agent.What is termed ‘Best Practice’ (Huselid, 1995; Pfeffer, 1998) builds on a universalistic approach suggesting that HRM is a keyimpact factor in generating overall organizational performance (Tzafrir, 2006). This impact of HRM on firm performance wasvalidated by a number of studies in various countries and contexts (Combs, Liu, Hall, & Ketchen, 2006; Zacharatos, Hershcovis,Turner, & Barling, 2007), as well as specifically in Israel (Harel & Tzafrir, 1999).

In the next section wewill describe themain stages of the changes in the Israeli workforce and labor markets as well as in theHRM systems. This will enable a better understanding of the forces and constraints that led the Israeli system to its currentstatus.

2.2. From idealism to realism –the first era (1948–1980) – socialism and collectivism

A systematic evaluation of any system requires a deep understanding of its roots. Although the historical roots of Israel extendto the Bible, widespread methodical evaluation for the case of Israel is a relatively modern 20th-century development (Baruch,2001; Zand, 1978). The impact of external and internal environments on the workforce and HRM coincides with the growth of theJewish state and refinement of its business systems and processes, as well as with other international phenomena such asglobalization (Tzafrir, Meshoulam, & Baruch, 2007).

Israel gained its independence in 1948, and since its early days has been characterized by fast growth as well as by a continuousstate of war with the Arab nations surrounding it. Israel was led by the strong socialist ideologies of the pioneering generation thatimmigrated to Israel, mostly from Eastern Europe, to form a socialist society (Lewis, 1972). One result of this ideology was theformation of a strong union movement that was a dominant power from the beginning, even before the state gainedindependence, with the major trade union, the General Federation of Labor (GFL), having strong economic and political power.Consequently, socialismwas the leading socio-economic ideology during the first decades of Israel's existence (Tzafrir et al., 2007).This led to a dominance of collectivist values in Israeli society (particularly in the Kibbutz, a worker owned and managed

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agriculture cooperative), which helped generate a strong sense of cohesion in the country and enabled it to cope with enormousdifficulties, particularly regarding security, which remains a major issue even today. The heterogeneity of the population wascaused by a number of waves of mass immigration from various countries (Lecker & Shachmurove, 1999). Further diversityoccurred from having a significant minority of Arab citizens. From a demographic perspective, Israel had a population of 600,000people at its founding, which has since grown more than tenfold to 7,243,600 people (Central Bureau of Statistics, 2008).

Several internal and external forces that characterized this period greatly influenced the Israeli workforce, the HRM professionand its activities. The first was a major immigration wave during the 1950s, bringing people from all over the world to settle inIsrael. During this period, the government sponsored major construction projects — housing and industrial development,transportation infrastructure, and utilities such as water, electricity and telephone networks. The government played a major rolein the ownership and management of these large infrastructure organizations (e.g., the telephone company) and encouraged avery centralized market, while at the same time, discouraged private industry. Organizations mostly applied internal labormanagement strategies — emphasizing formal and contractual relationships, bureaucratic organizational structures, narrow jobdesigns, paternalism and long-term commitment. They were also heavily unionized with an internal focus, giving seniority-basedpay and job-related training (Baron & Kreps, 1999).

Another important force at this time was GFL, a single trade union, which represented more than 80% of all salaried workers(Rosenstein, 1984). Over the years, in addition to its network of health, social services, educational, and athletic organizations, theGFL developed a network of labor-owned economic enterprises dominating almost every industrial sector in the country andmaking the GFL the primary employer in Israel after the government. Indeed, workers often joined the GFL as a means by which togain employment in GFL-owned enterprises (Harel, Tzafrir, & Bamberger, 2000). The GFL became one of the largest employers inIsrael (through its holding company, Hevrat HaOvdim), employing 22% of the Israeli workforce (Shirom, 1983, p. 89).

Until the mid-1980s, the Israeli industrial relations system was highly corporatist in nature (Haberfeld, 1995). It owned thecountry's largest steel, chemistry and construction companies, as well asmany other basic industries. As amajor employer, and thesole trade union, the GFL had a tremendous influence on the HRM management function. Labor relations were a major HRMactivity, dictatedmainly by a very powerful union and supported by legislation and regulations. One example of the GFL's strengthwas the unified employment contract it imposed which could be extended to other unionized organizations through legislation(Tzafrir et al., 2007).

With a mostly socialist government, strong union, and socialist values, remuneration was determined by collective bargainingwith the public and union sector, typically resulting in significant pay increases that were linked to the costs of living. The HRMfunction during this era focused mainly on administration, recruitment, labor relations and some aspects of skills and managerialtraining. The HRM function held a lowly position. In many organizations, it was not part of the topmanagement team but reportedto the financial or some other operational unit. The human resources function had minimal influence on organizational businessdecisions and strategic direction (Tzafrir et al., 2007).

From an agency theory point of view, the principal, i.e. the government, shared the union's ideology and gave up control overthework of the agents. The agents' work qualitywas hardly an issue in any of the collective contracts between the government andthe unions. This process seemed to be irreversible and the Israeli government (the principal) lost control over the work of theagents (public sector employees).

One of the outcomes of this situation was a growing hidden unemployment in the public sector. The GFL did not confront itbecause it did not want to damage its reputation as a union by firing unneeded or non-performing employees. The governmentpreferred hidden unemployment to direct confrontations with the union. The huge budget dedicated to defense and securityhelped to mask the phenomenon. Many of the industries that belonged to the government and the GFL were the main suppliers ofthe Israeli defense forces. Because the same groups controlled the government and the union, competition was minimal. Productswere purchased without negotiating prices, typically as ‘cost-plus’ contracts.

There was no pressure frommanagement, or the system, to establish organized HRMmethodologies or to improve the level ofHRM involvement. Improvisation did not encourage a new methodology (Baruch, 2001), ending with what Lawrence (1990)called MBWA— ‘management by walking about’. Lack of planning caused organizations not to invest in long-term HRM activities,activities measurements, or analytical methods. Consequently, firms did not take serious measures to improve their HRM systems.

2.3. The second era (1981–present): globalization and the rise of the high-technology industry

This era started in the 1980s and continues through to the present. During this time, external changes have caused shifts andtransformations in Israel's economy and a modernization of its industrial system. The pressures of the 1973 war and the followingglobal and local recessions considerably slowed Israel's economic growth from an average annual growth of 10% in the early yearsto 3.2% in 1980, and 1.2% in 1983 (Central Bureau of Statistics, 1980, 1983). As a result of global and political changes including theloss of the Labor Party's hegemony in 1977, the prevailing ideology has changed and today tends to follow the American capitalistmodel (Sagie & Weisberg, 2001).

These factors forced the country to search for new ways and solutions to ensure its ability to maintain growth and globalcompetitiveness. Concomitantly, the HRM function was exposed to new phenomena. On the one hand, it was faced with recessionmanagement, emphasizing the labor issues of layoffs and complex compensation management. Yet, on the other hand, it had tocope with a changing industrial environment; the introduction of multinational firms, including the exposure of the Israeli marketto foreign competition and the HRM function to professional management; and a shift to private industry dominance.With the riseto power of the Likud (the right-wing party) in 1977 and the subsequent state economic crisis in the early 1980s, the GFL began to

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experience its own economic crisis. By 1993, several of the GFL's largest enterprises were either bankrupt or close to it (Harel,Tzafrir, & Bamberger, 2000). The hidden unemployment of the first era also contributed to the collapse of both the GFL-ownedfirms as well as to some of the government owned businesses, in sharp contrast to the success of the private sector.

In the first era, the Israeli market was relatively isolated because of geographic and political constraints. The conflict with theArab nations and the dominant socialist doctrine limited private entrepreneurial efforts and foreign investments; however, since1977 all governments have adopted the principles of liberalization and privatization, following Friedman's (1962) free marketeconomy concept. Furthermore, peace efforts have signaled to foreign companies and investors that Israel is no longer a riskypartner, supplier, or purchaser. The 1993 Oslo peace accords significantly contributed to this view (de Fontenay & Carmel, 2001).These processes have opened Israel to the international market. Indeed, Israeli firms are constantly striving to establish businessties with overseas companies (Lavie & Fiegenbaum, 2000; Sagie & Weisberg, 2001).

One of the important processes in the second erawas the growth of the high-tech sector that later emerged as the alternative tothe diminishing GFL and government industry organizations. Though the first high-tech organizations were founded in 1967–1970, it was only at the beginning of the 1980s that Israel witnessed a huge upsurge in the industry. Several factors encouraged theformation of strong high-tech organizations in Israel. External factors included the internet boom beginning in 1995 andtelecommunications expansion beginning in the early 1990s. The globally tight labor market for skilled IT professionals which isclosely related to the internet boom, was another reason and found Israel in a so-called ‘war for talent’ (Chambers, Foulton,Handfield-Jones, Hankin, &Michaels, 1998). A final external factor was the financial boom and the related globalization of financialflows including both risk and equity markets (de Fontenay & Carmel, 2001).

Internal factors that encouraged the high-tech industry that aremore specific to Israel include the availability of a highly skilledtechnical workforce, resulting from the downsizing of technical professions in the defense industry and the immigration of Russianscientists in the 1980s, as well as the national culture of entrepreneurship (Haour, 2005). From a national values systemperspective, the Israeli population is characterized by high need for achievement and high work-role centrality (Mannheim,Baruch & Tal, 1997), a further positive element in explaining Israel's success in using human talent.

The Israeli military also plays a significant role in directing high-ability youths into computing and engineering. Several keyunits and programs take the brightest high school graduates, train them in intensive science and engineering programs anddisperse them in strategic military areas (de Fontenay & Carmel, 2001). Finally, the simultaneous opening of a number ofsubsidiaries of largemultinational corporation (MNC) in Israel also spurred the high-tech surge. In sum, Israel's substantial stock oftechnological human capital, and the absence of other dominant industries have generated comparative advantages in high-technology activities that require the use of very skilled labor, particularly in engineering related areas (de Fontenay & Carmel,2001). In sum, these many internal and external factors have led to the development of a very skilled labor force, giving Israel acomparative advantage in the high-technology marketplace.

Globalization is interconnected with technological advances. During the last decade the Israeli high-tech industry expandedrapidly, with one of the highest rates of company start-ups in the world (Sagie & Weisberg, 2001). The waves of immigrationfrom Russia contributed to the technological evolution; many of the new immigrants became successful software or hardwareexperts. As the beneficiary of the most precious commodity in high-technology – sophisticated engineers and programmers –Israel managed to secure billions of dollars in overseas investments. Multinational corporations, including Microsoft, Intel,Motorola, and IBM, opened branches in Israel not only for production but also for research and development (Sagie &Weisberg,2001).

During this period, the country's civilian workforce more than doubled, mostly due to immigration from the former SovietUnion (Central Bureau of Statistics, 1970, 2002). The country faced the new challenges of managing a multi-cultural, multi-valueworkforce. At the same time, women increasingly joined the labor market (46.5% in 1999 as compared to 29.6% in 1970 — CentralBureau of Statistics, 2000). While much has been done to combat discrimination at the organizational and the national levels,much still remains as gender discrimination continues to manifest itself in Israeli management, as it does across the globe(Ozbilgin & Tatli, 2008). Income gaps, low status jobs and the lack of penetration into managerial ranks require further attentionand commitment from both human resources and management (Halperin-Kaddari, 1997).

Other types of discrimination also exist, by blocking the Arab population from employment in the defense industry, itpractically closes much of the high-tech industry to this group. As a result, many educated Arabs opt for public sector employment.A study conducted by Cohen, Zalamanovitch, and Davidesko (2006) showed that Arab students who are in their last year ofacademic education preferred employment in the public sector over employment in the private one. They explained this finding asa way for Israeli Arabs to avoid discrimination which occurs more frequently in the private sector.

Finally, the fact that union membership has declined substantially, down to 23% in 1995, following a reduction between 1985and 1995 of 77% (ILO-World Labor Report, 1999) or 42% (as reported by Shirom, 1995) – amajor change from the 80%membershipof the 1970s – has had a significant impact on HRM. Harel et al. (2000) summarized the situation, stating that “factors related to (1)the desire for a collective voice and (2) bureaucratic pressure had a significantly greater impact than previously thought on thepropensity of an individual to be a union member” (Harel et al., 2000: 482).

Israel's transformation from a physically, socially and economically small, struggling society to a globally competitive societyimposed new demands and challenges on the workforce as well as on HRM. The first era was characterized by HRM functionsfocused primarily on administration and maintenance. The second era required professional HRM to deal with the new andextremely different internal and external demands. Large and complex organizations, an educated workforce, and strong nationaland international competition have forced the human resources profession to adapt in order to remain a viable unit of modernorganizations. The alternative was to become a relic of the past.

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3. Current state

3.1. Structural characteristics

The processes described above led to the establishment of two different and, inmanyways, contradictory organizational/sectorsystems in Israel. The collapse of the GFL corporations coupled with the collapse of the government owned businesses shifted theemphasis within the Israeli industry to the private sector, particularly to the high-tech industry. The fast growth of this industryled not only to structural changes but also to changes in the nature of work values in Israel and the nature of the psychologicalcontracts within the labor market. The managerial culture as well as the HRM practices of the high-tech organizations thatcontinued to progress in Israel is rooted in North-America, particularly the culture of the United States.

From the agency theory point of view, this means that employers and HRM systems are designed to reduce uncertainties in therelationship between the principal and the agents. The Israeli workforce was challenged with innovative, updated systems thatwere in contrast with the dominant values of collectivism and security established during the first era. Individual contracts, jobanalyses, performance appraisal, and pay systems that are tied to performance were all prevented in the previous era mainly bythe GFL. The loss of power for both the Israeli union movement and the labor party reduced their ability to reject these newmechanisms. This also enabled new high-tech firms to enforce their main terms before starting to operate in Israel, i.e. no unionand no collective agreements. Such terms were not possible during the days that the GFL ruled the Israeli workforce. These high-tech industries with their different managerial and HRM systems succeeded in Israel in general despite occasional local failures.The HRM systems within the high-tech sector followed the US model of professionalism and paved the way for systematicmanagement of human capital (Baruch & Rosenstein, 1992; Tzabbar, Vardi & Baruch, 2003). As it is recognized that such anapproach leads to better organizational performance, the case of Israel is no different from numerous studies around the globeshowing that high-quality HRM leads to improved organizational performance (Harel & Tzafrir, 1999).

High-tech is now the major driver of the Israel economy, emphasized by a growth rate which is the highest of all Israeliindustrial sectors. During the first half of 2000 high-tech growth rate was 12%, while the conventional industry growth rate wasonly 2%. High-tech contributes 75% of the growth in Israeli GNP. In human capital terms, Israel has a high proportion of scientistsand engineers in the population, with approximately 130 scientists and engineers for every 10,000workers. This compareswith 80and 75 per 10,000 in the US and Japan, respectively. At 3.5%, Israel has the greatest R&D expenditure in theworld as a percentage ofGDP and the highest number of start-ups in the world in relation to its population size (Chorev & Anderson, 2006).

The high-tech industry also became a role model for other organizations in the private sector and, to a certain extent, in thepublic sector as well as it applied modern selection methods, relative to that time, such as psychological tests, assessment centers,and scientifically validated tools. HRM systems in other Israeli organizations across all sectors becamemore popular. Within a fewyears, for example, less scientific measures such as graphology ceased to be applied in the vast majority of Israeli organizations.

In contrast, the public sector largely continued to keep to the managerial and HRM systems from the first era, although somenew practices diffused to the public sector, like assessment centers (Dayan, Kasten & Fox, 2002). From the agency theory point ofview, the absence of control by the principal over the behavior of the agents mostly remained in the public sector.

The GFL influence, which had been significantly reduced, maintains some of its power within the public sector. Collectiveagreements still prevail with the exception of top managerial positions, in which individual contracts are the norm. As a result,performance related payment does not exist in the public sector. Tenure is an important factor in promotion and generatesautomatic pay increases. Full job security is granted following one or two years' probation period and terminating people is almostimpossible even when performance is poor during the probation period (Rosenblatt & Ruvio, 1996). Selection is based on internaljob posting and internal committees that include union members. Professional job analysis is not applied, severely limiting theability to manage. Overall, with few exceptions, the Israeli public sector provides an opposing model to the one formed by thehigh-tech industry. Rather, the control of the principals over the activities of the agents remains minimal or on the verge of non-existence.

This dichotomized structure demonstrates the two extreme formulations suggested by agency theory. The private sector ischaracterized by mechanisms that allow comprehensive control by the principals over the activities of the agents. This controloperates via a variety of HRM strategies and practices, such as selection, performance related pay, and careermanagement. The Israelipublic sector, including civil service organizations, all municipalities, the education system, the majority of the health care systems,railway transportation, airport authority, police force, defense forces andmore,maintain themain features held during the first era. Insome public sector organizations, formal nepotism still exists (e.g., where collective agreements give priority in recruitment of familymembers). The Israeli private sector led by the high-tech industry is flourishing, and is considered successful in Israel and abroad. Incomparison, the public sector is declining in terms of measurable parameters. The quality of services provided is low, citizen trust inthe public sector has declined and, as a possible consequence, Israel is ranked lower in educational attainment in internationalcomparisons. (Vigoda-Gadot & Mizrahi, 2008). This strongly supports some of the main arguments advanced by agency theory.

3.2. Determinants of the dichotomization of the Israeli workforce

The factors leading to the dichotomization of the Israeli workforce are political, ideological, economic and societal. Followingthe agency theory, it can be argued that the principal, the Israeli government, is responsible for this situation. More specifically, theunstable Israeli political system is a significant factor in influencing the overall system. During its 60 years of existence, 31governments were formed in Israel, with an average of two years per government. Such a short period induces instability. This

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resulted in preferences for short term planning in the political system, reflected in decisions regarding the Israeli workforce ingeneral and the public sector in particular. A government that realizes the risks of short span in charge will hesitate to make harddecisions with potentially negative consequences for re-election prospects. Activating control mechanisms such as job analysisand differential pay would not be popular with the electorate. Therefore, the state of the Israeli political system is a major factorpreventing the principal from applying control mechanisms over the agents. The above-discussed situation reinforces the statusquo within the Israeli public sector.

Anexample supportingour argument is the recent appointmentof twocommittees toexamine the Israeli education system.Onewasformed to examine theelementaryandhigh school systemandother oneaimedat Israeli publicuniversities.After years of consideration,the two committees submitted their recommendations that included reforms in pay structures. Yet, the government refrained fromapplying the recommendations due to its lack of ability to cope with the possibility of losing voters in the coming elections.

At the societal level, the shift from collectivism to individualism is prominent. Sagie and Weisberg (2001) noted that Israelisociety has changed from being ascetic, collectivistic, closed, and relatively homogeneous, to a materialistic, individualistic, openand pluralistic society. Collectivism was a dominant value in Israeli society and naturally in the workforce in the early stages ofIsrael, when the labor party was dominant and socialism was its leading ideology. Another factor that reinforced collectivisticideology was Israel's mandatory military service in which the group typically overrules the individual. The structural changes inthe Israeli workforce, such as the disappearing of the GFL's various arms and increased privatization, occurred alongside valuechange. Globalization, the strong effect of the American culture, the legitimization of the quest for a better personal quality of life,and the collapse of communism all led to the sharp decrease in the level of collectivism in Israeli culture. It was already in declinewhen Hofstede (1980) collected his data, finding that the Israeli culture at the time leaned slightly more towards individualismthan collectivism. The decreased significance of collectivist values was accompanied by the diminishing popularity of the kibbutz,(Sagie & Koslowsky, 2000). A kibbutz is a collective community, where the community sharesmost of the property, andmany of itsservices are handled locally by its members. It was, at one time, a successful Israeli perfection of communism. Clear erosion of thekibbutz participative ideals occurred during the 1980s and 1990s. The transformation involved privatization of shared facilities,and the introduction of a differential wage system to its members to replace a system of sharing (Sagie & Weisberg, 2001).Economic difficulties and an ideology crisis as well as a significant reduction in government financial support by the Likud partywere blamed as the cause of the retreat from egalitarian values.

The shift in values has political and economic aspects as well. The socialist ideology that previously led the government to anover-involvement in the Israeli market has been replaced in the last two decades by a more dynamic and competitive marketeconomy approach (Sagie & Weisberg, 2001). As part of this trend, significant state owned and GFL-owned companies have beenprivatized or are no longer operating. Currently, the decline of collectivism in Israel has had a decisive influence on the tendency ofworkers to join trade unions. With employees in the private sector becoming more inclined to adopt free market competitionnorms including employment contracts with no trade union protection (Sagie & Weisberg, 2001), a much sharper decline in theunionization rate has been observed in the private as compared with the public sector.

These developments have made it easier for the high-tech industry to develop HRM systems based on individual evaluations,achievements and pay. Some aspects of collectivismhave turned out to be an advantage for employees in the high-tech industries. Forexample, collectivismvalues aremanifested by strong loyalty to thefirm. The implication for high-techfirms is a low turnover rate as aresult of strong commitment to the firm (de Fontenay & Carmel, 2001). Another significant implication of Israeli collectivism is thatIsraelis are more comfortable working in teams, employing mutual support in the workplace for the benefit of the group or the firm.This is in contrast to the case in America—where teamwork is a forced uncomfortable behavior thatmust be explicitly learned. Thesecollectivist skills are similar to the desired characteristics of high-tech start-up employees (de Fontenay & Carmel, 2001).

In the public sector, collectivism operates in an entirely differentway. The impact exists regardless of whether the employees trulybelieve in it. The public sector is characterized by structural but not necessarily functional collectivism. Collectivism is demonstrated incollective agreements, in relatively strong unions, and in the refusal to adopt differential pay systems that would tie remuneration toperformance. Formal job security prevents termination of contracts. Nevertheless, employees in the public sector do not necessarilybelieve in collectivist values. Agency theory indicates that employees in the public sectorwould use collectivism as ameans to achievetheir self-interests, namely compensation that has very little to do with their behavior or contribution to the principal's organization.Under these circumstances, the major role of HRM is dealing with unions via power struggle, where the union has an advantage.

Within the Israeli public sector, the principals face a classic agency problem with respect to the employees. Informationasymmetries between the employees and the administrators generate steep agency costs for the latter if they attempt to directlymonitor employees' behavior. Except for physical attendance, employees in the public sector are subject to very few structuredtime constraints. Customary rules, such as the tenure system that provides employment security and tenure based promotionsystem, give most employees an unsurpassed amount of freedom. This freedom presents the administrators with a majorchallenge: how to prevent employees (agents) from taking advantage of their privileged position. For example, some employeesmay invest minimal effort in their work andmuch effort into self-serving endeavors. There are nomanagerial tools for aligning theinterests of the employees with those of the management in the public sector. As a result HRM cannot become professional or aleading factor in gaining competitiveness, as is the case in the private sector.

4. Discussion

We employed agency theory to demonstrate two contradicting models that dominate the current Israeli work environment.These two opposing structures are the public sector and the private sector which is dominated by the high-tech industry. It should

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be noted, that all the characteristics and practices described in this paper are unique to the high-tech industry and might notreflect those industries that prevail in other segments of the private sector.

In the private sector, the principal is largely controlling the agents' activities via contemporary HRM systems and by tyingwages to performance. This phenomenon is particularly prominent in the high-tech sector, and has diffused too much, but not all,of the rest of the private sector. In the public sector, which is represented by the government, the principal's lack of control over theactivities of the agents means that HRM systems have limited power in exerting any control over the activities of the agents.Compounding this issue, principals in the public sector have to follow collective agreements and past precedents. Thewage systemis based only on collective agreements, recruitment and selection can be subject to bias, promotions are exclusively internallybased, and there is very limited opportunity to terminate employment. The result is a growing ineffectiveness in the public sectoracross a number of parameters.

Can the two systems, operating alongside each other in a small geographic area, continue to co-exist in the future? Thedirection for the future is unclear, especially about what the sectors may learn from each other. It is also subject to a mutualdiffusion of values, beliefs, and work practices. Both sectors recruit from the Israeli educational system, with the high-tech sectordepending heavily on this system tomaintain competitiveness. The educational system is part of the public sector, operates with alow budget, and cannot hire or employ high-quality teachers at all levels. The result might be lower competence of future scientistsand engineers. If this happens, multinational firms will be less inclined to operate in Israel. The lower level of services andinfrastructure issues that result from the ineffectiveness of the public sector might also cause investors to consider options otherthan Israel. Under such circumstances, the private sector will suffer from the weaknesses in the Israeli public sector.

Finding a way forward is complex and challenging. It is the principal's responsibility to increase its control over the activities ofthe agents. So far, the lack of control seems to lead to negative outcomes for the public sector as well as for those who rely on itsservices. Improving this situation means considering differential wages in the public sector, increasing the authority and power ofHRM systems in this sector and enabling principals to apply modern HRM systems already being used in the Israeli high-techindustry. The lack of quality in the outputs from the public sector negatively affects many aspects and parameters, including thegeneral quality of life. This should be clear to Israeli policy makers. The complexities of applying these HRMmethods in the publicsector are obvious and have been described in the case of the UK public sector (Burgess & Ratto, 2003; Propper & Wilson, 2003).

We argue that the combination of political instability and dichotomization of the labor force hinders long-term planning andactions that might pose risks to the survival of political parties. There is a clear danger of ineffectiveness diffusing, spilling over intothe private sector that will end with negative consequences, reversing the positive gains achieved in the private sector. To tacklethis problem, Israel should continue privatization, and come to the realization that the consequences of doing nothing are verydangerous. Israel has to rely on its human capital, and professional HRM is a proven way to gain the best of this capital.

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