JERUSALEM — ALREADY burdened by the 20-month Palestinian uprising, Israel is now facing another major challenge: rising unemployment. The jobless rate has jumped to 9.7 percent, the highest rate here in two decades. The increase - attributed to effects of the uprising, a drop in exports, and an overregulated socialist economy - has prompted a hurried search for solutions.
Israel has a well-developed network of social services, economists note, so no Israelis are starving. But the implications of high unemployment are unusually grave for a country whose development has depended on immigration. Unless Israel can create opportunities for them, thousands of prospective Jewish emigrants from the Soviet bloc may continue to opt to move instead to the United States or other Western countries.
``No one wants to go to Israel, because they know that the economy is sick,'' says Johns Hopkins University economist Steven Hanke, coauthor of a report on the Israeli economy. Dr. Hanke notes that in recent years there has been a net outflow of Jews from Israel.
The Israeli economy also suffers from other signs of incipient recession, including sluggish growth and falling industrial production. Meanwhile, high deficits, now between 6 and 7 percent of gross national product (GNP), have spurred fears of a new round of inflation.
At a special session on Monday, Israel's Cabinet approved a mix of approaches for dealing with the unemployment problem. One is to create jobs by investing $140 million in new government funds to upgrade Israel's infrastructure of railroads, highways, ports, and telecommunications facilities. Another is to force unemployed workers back into the job market by scaling back unemployment benefits.
The heart of the program approved Monday is a series of measures to promote business expansion, including tax incentives, aid to factories in distress, and changes to minimum wage law.
In a move likely to spur employment in defense industries, Finance Minister Shimon Peres and Defense Minister Yitzhak Rabin earlier agreed to a one-time supplement to the defense budget of $75 million to offset the costs of the Palestinian uprising.
The Cabinet plan will now go to the Israeli Knesset, or parliament, where opposition is already gathering to the proposed change in minimum wage law. The change would allow businesses to define as wages allowances and fringe benefits already paid by the employer.
Israel's economy ground to a halt for two hours last Sunday as over 1 million workers staged a two-hour work stoppage to protest the rising unemployment, which has left 140,000 Israelis out of work.
Some economists trace the roots of Israel's economic malaise to a gradual downturn that began in late 1972, the effects of which have been partially masked by billions of dollars in annual transfusions of US aid.
A serious slowdown in economic activity began last year, spurred by a drop off of Israeli exports and the Palestinian uprising. The fear now is that unemployment, which has already reached 25 percent in some communities in Israel, could pass the overall 10.4 percent peak set during Israel's worst recession in 1967.
According to a recent report issued by Israel's central bank, the uprising shaved 2 percent off Israel's GNP in 1988, thanks to a $650 million loss in revenue from tourism and exports to the occupied territories. The report also said investors and consumers may have been deterred by the climate of uncertainty created by the uprising.
Many economists see more fundamental structural problems behind rising unemployment rates.
A report soon to be released by Jerusalem's Institute for Advanced Strategic and Political Studies says one factor has been the low productivity of Israel's work force.
During the last two years real wages have risen over 20 percent while productivity has increased by just 1 percent, pricing Israeli goods out of foreign markets, according to the report entitled ``Where Are Israel's Workers?''
Declining productivity is just one result of a system of bloated government budgets, high taxes, and excessive regulation that have smothered economic growth in Israel, the report says.
``Exports and the intifadah [uprising] are phony excuses for an economy that's completely failing,'' says Hanke. ``This is something that's been coming down the road for years.''
Dan Zakai, a senior analyst at Israel's central bank, says the economy is also feeling the first effects of a baby boom that began in Israel after 1967 and that is now beginning to swell the number of new entrants onto the job market.
Mr. Zakai notes that the unemployment problem has fed on itself. As the economic situation has worsened, more people have sought jobs to compensate for the lost income of family members who have been laid off. Although 50,000 new jobs were created in 1988, unemployment rose by 10,000.
In January and again in June the government responded to the drop in exports by devaluing the shekel by a total of 18 percent.
By reducing the cost of Israeli goods on foreign markets devaluation is designed to boost exports and stimulate industries at home, increasing the number of jobs.
But the positive effect of the devaluation has been offset by price increases at home. Following January's 13 percent devaluation, prices in Israel rose by 11 percent within four months, prompting fears of higher inflation.
To completely solve the unemployment problem, Israel will need to find some way to end the Palestinian uprising. That would provide a major boost to tourism, for which Israel - because of warm weather, good beaches, and holy sites - is ideally suited.
``The amount of things that can be done is very different if you have peace,'' says an Israeli economist.