Category Archives: Economics

The State of the Acute Care Hospitalization System in Israel

A new Taub Center study (the first in a two-part series) published last month looks at Israel’s hospitalization system and paints a comprehensive picture of the system as it stands in 2019. In terms of the key metrics that are commonly used to measure hospital quality, the research suggests that there are systemic failures in planning, budgeting, and regulation by the government especially in light of the increasing needs of Israel’s aging population.

Israel’s general hospitalization system largely operates in the framework of an “internal market,” which was created with the passage of the National Health Insurance Law of 1995. In this market, entitled health services are provided according to patient needs, and they are financed and regulated by the State.

Medical services are provided through Israel’s four health funds: Clalit, Maccabi, Meuhedet and Leumit, whether by purchasing them from public medical centers or through the health funds’ direct provision of services. In general, hospitalization services are acquired from “public” hospitals, whose major activity, immaterial of their legal standing, is supplying healthcare services in the framework of the National Health Insurance Law, although the status of these hospitals has not been defined in the law.

Out of 44 general hospitals, 19 are government-owned (meaning employees are civil servants and the budgets are included within the framework of the State budget, for example Sheba and Rambam hospitals), and 12 are owned by health funds (for example, Soroka is owned by the Clalit health fund but provides services to members of all health funds).

In addition, there are also independent, non-profit hospitals (like Shaare Tzedek), companies for public benefit (like Hadassah), and limited companies (such as Assuta Ashdod). The State owns and operates about a quarter of all of Israel’s hospital beds and 47% of general hospital beds. The Clalit health fund owns about 30% of general hospital beds, making the State and Clalit the two main providers in Israel’s hospital market.

The public nature of hospitals with various forms of ownership giving service under the National Health Insurance Law, and the State’s obligation to them, has never been defined. The situation is particularly serious in light of the fact that the State, as both funder and regulator of the system, is also the largest owner and operator for general hospitalization and essentially competes with other hospitals that are dependent on the state for their budgets and regulation.

This situation harms the managed competition laid out in the law as a means to ensure efficiency and public satisfaction and to also ensure that the State fulfills its basic role as an independent regulator of the system.

By law, the State is responsible for ensuring public healthcare services, and accordingly, for licensing and funding hospitalization beds and other infrastructure, as well as determining the size and location of hospitals. In Israel, the number of hospital beds per 1,000 population is relatively low: 2.2 versus 3.6 in the OECD and 4.1 in European countries with healthcare systems similar to Israel’s.

Adjusting for Israel’s relatively young population, the number of beds reaches 2.5, which is insufficient to make up the gap between Israel and other countries. Moreover, while the number of beds per 1,000 population is trending downward in most countries, that trend is especially sharp in Israel, with a 22% decline in a fifteen year period (versus an OECD average of 15% and about 20% in countries with similar systems between 2002 and 2017).

This is in spite of Israel’s relative growth in needs and in the number of elderly people in Israel as compared to other countries.

As previously mentioned, the average number of curative hospital beds in Israel is low, particularly in the geographic periphery of the country.

In the Northern and Southern periphery, the number of beds per 1,000 population is the lowest, 1.32 and 1.55 respectively, while Jerusalem hospitals have the most, 2.36. It is important to note that the number of beds per 1,000 population has declined in all districts, although in Jerusalem, Tel Aviv and the North, the decline has all but stopped, while in the Center and South, it has continued.

In addition, average distances to the nearest hospital for relatively simple medical cases are longest in the Northern district (more than 19 km), then Judea/Samaria (more than 18 km), followed by the Southern district (about 16 km). This is relative to much shorter distances in Tel Aviv and Jerusalem of about 3-4 km. Average distances to regional centers, for more complex medical treatments, are about 45 km in the Northern district and about 41 km in the Southern district, while in Jerusalem and Tel Aviv the distances remain about only 4 km. These differences are also reflected in longer waiting times for hospitalization in the periphery.
Among other reasons, this situation stems from inefficient planning of additional hospital beds. This includes expanding hospitals beyond the optimal 800-bed range in areas which already have a high proportion of beds per population, instead of adding beds and resources to hospitals in the periphery which are in the optimal size range and/or building an additional hospital in the south.
General ospitals in Israel by number of beds

Despite the relatively low number of hospital beds, the number of hospital discharges per 100,000 population in Israel is similar to the OECD average – about 15,000 annually – although lower than the average in countries with similar systems, which is about 16,000 annually.

The average number of curative hospitalizations per bed (bed turnover rate) in Israel in 2016 was particularly high: about 66 versus an OECD average of about 41 and about 44 in countries with similar systems. Israel’s bed turnover rate reflects relatively short hospitalizations on the one hand (about 5 days per patient in contrast to an average of 6.7 days in the OECD countries and 6.2 days in countries with similar systems), and particularly high bed occupancy rates on the other hand.

The average bed occupancy rate in Israeli hospitals is exceptional at about 94%, versus an average of 75% in both the OECD countries and those countries with similar systems. That is, the system is quite limited in its ability to absorb new patients, as it is treating “newly arrived” patients on the one hand and managing a high occupancy rate on the other.
Curative hospital bed use

The data indicate a curative care hospitalization system that is characterized by a diminished ability to handle emergencies. This is in addition to a potentially lower level of treatment quality due to relatively short hospitalizations and additional pressures to shorten hospitalizations due to those waiting for treatment at home and in the emergency rooms, as well as the inability of hospitals to compete with each other due to high occupancy rates.

In light of the disparities between needs and hospital infrastructure in Israel, particularly in the periphery, the addition of curative hospital beds – that are efficient and accessible – is inevitable within the next few years, even when accounting for technological advances that allow expansion of services given in the community setting. Before additional investments in the system are made, though, it is worthwhile to redefine the government’s involvement in the marketplace.

Just a Taste: A Picture of the Nation 2019

A Picture of the Nation 2019, published last month by the Taub Center thanks to the generous support of the Koret Foundation, tells the story of Israel’s economy and society. The overall picture that emerges shows a rise in the standard of living alongside numerous challenges and areas in need of improvement.

The education system in Israel has shown visible signs of strengthening in the past few years along with continuing signs of weakness. For example, between 2010 and 2015, per-student expenditure in Israel has increased by approximately 25% while in other OECD countries, the growth was only 4%.

Nevertheless, in real terms, per-student expenditure in Israel remains lower than the average in other countries. Similarly, improvement in Israeli students’ scores on international achievement exams was greater than in other countries, however, Israeli students’ scores remain lower than the average scores in other countries.

The Ministry of Education’s efforts to increase the number of high school graduates obtaining bagrut (matriculation) certificates at the highest level (five units) in math and English, as well as their efforts to increase public awareness regarding the importance of these fields to future employment prospects, has led to a 20% increase in the number of students taking the bagrut exams in these subjects at the highest level since 2013.

In addition, the share of students in technology education – among the Ministry of Education’s declared goals in the past few years – has grown in the majority of Israel’s population. The total share of the 12th grade student population in technology education rose to 40% in 2017.

The most significant growth took place among students in high technology studies, characterized by high scholastic and bagrut achievements, with a disproportionate number of these students coming from strong socioeconomic backgrounds. The number of schools offering this course of study has also increased.

However, there are significant differences between population sectors and genders. The share of Arab Israeli students in high technology studies is sharply increasing, in particular among the Druze and Bedouin, where the share is higher than among the Jewish population.

The rate of bagrut qualification in the high technology track is similar for Jewish and Arab Israeli students (about 85%), and even among Bedouin, the share of those with bagrut qualifications in 2017 rose to 74%. This is a very positive trend that can lead to better integration of the Arab Israeli population into prestigious sectors of the Israeli labor market in the future.

In terms of gender differences, in the Jewish sector, the share of girls in the high technology track is substantially smaller than their share in the student population, particularly in State-religious education. However, in the Arab Israeli sector, the opposite is true.

Here, too, the change is especially striking in the Druze and Bedouin sectors. Among the Bedouin, the gap between female and male students is the largest: the share of girls studying in the high technology track rose from 6% to 21% between 2006 and 2017, and among boys, it rose from 6% to only 12%.
Fig 2 ENG

Employment and labor force participation rates continue to rise, while unemployment rates are hitting historical lows of around 3.5%. The greatest improvement is among women, and especially Arab Israeli women. It is apparent that the sharp rise in their employment matches the rise in their education and enrollment rates in higher education. These changes are likely to continue to impact developments in Arab Israeli society.

The increase in labor force participation rates is due in part to steps taken by the State to encourage employment in various population groups. These measures include programs for integrating Arab Israelis and Haredim into the labor market; broadening the criteria of eligibility for work grants (negative income tax); investments in day care for young children; and the “Families First” program of the Ministry of Labor, Social Affairs and Social Services (in conjunction with JDC and the Rashi Foundation).

However, despite the efforts of the welfare system to encourage employment, expenditures on programs aimed at optimizing integration into the labor force, such as vocational training programs, investing in employment centers and in programs aimed at integrating individuals with disabilities into the labor market, are among the lowest of the OECD countries.

This lack of investment in raising the skill level of workers is felt strongly in PIAAC exams, an OECD survey measuring skill levels for workers ages 16-65. The survey shows that the skill level among the most skilled in Israel is similar to that of workers in other countries, however, for less skilled workers there is gap relative to other OECD countries, with the gap widening as skill levels decline.

Practically, this means that there are large disparities between the skill levels of workers in the high tech sector (generally among the highest skilled employees in the labor force) and workers in the rest of the labor market; skill levels of workers in high tech are nearly a full standard deviation higher than those of workers in the rest of the economy – a gap that is far greater than in other countries.

The situation is especially worrying among Arab Israelis, whose skill levels are particularly low in all parts of the labor force distribution. The survey findings demonstrate the need to strengthen the weakest sectors of the population.

This short survey is just a small taste of the research presented in A Picture of the Nation. We invite you to read more stories of the economy and society in Israel and the issues of the economy and standard of living, demography, education and higher education, employment, health, and welfare.

 

Happy birthday to Israel! The country’s economy at 71

In the short term, it appears that the past few years have been economically robust for Israel in many respects: the employment rate is the highest it has been in years, unemployment has reached a historic low, wages have risen, and GDP growth is similar to recent years.

Israel experienced higher GDP growth than in other OECD countries – 3.3% in Israel, compared to an average of 2.9% in the OECD in 2018. However, because the Israeli population is also growing faster than in the OECD, Israel’s GDP per capita growth rate (1.4%) remains lower than the OECD average (2.2%).

When looking at productivity (how much the country produces per hour of work), Israel falls well below the OECD average, as well as below the US and the G7 countries, and is not managing to close the gap.
GDP per work hour

In fact, Israel has experienced a slowdown in productivity growth since the early 1970s, and even the rapid growth experienced by Israel’s high tech sector from the 1990s onward has not altered the slowdown.

While this trend is concerning, the lack of productivity growth in the past decade may actually be due, at least in part, to more Israelis entering the labor market. Growth in the economy can be attributed to several factors including human and physical capital, the number of work hours, and productivity.

For over a decade, increasing work hours as more people enter the labor market has been the main source of Israel’s per capita GDP growth. However, the fact that most of the workers joining the labor force during this period were low-skilled workers also had a dampening effect on productivity growth.

Despite this, there was some improvement in the quality of employment during this period due to an increase in workers’ experience and education levels.

Looking ahead, as the already-high employment rate continues to rise (leaving little room for it to keep growing) and the share of Israelis who are of prime working-age falls, the potential for future growth based on increased labor input will decline, and the country will need to look to other potential sources of growth.

The sizable increase in real wages in the past few years is not attributable to improved productivity, as explained above, but rather can be traced to a relative decline in consumer prices. The rise in real wages and the accompanying growth in consumption have occurred not only among high-income Israelis, but among the lowest-income Israelis as well.

Consumer prices have decreased in a number of categories in recent years, yet, despite this, price levels and the cost of living in Israel remain high. The steepest price decrease among consumption categories since 2015 occurred in communications, with substantial price reductions for food, transportation, and recreation/culture as well. At the same time, housing prices rose. It is likely that the decline in prices stems, at least in part, from measures taken by the government to try to lower the cost of living.

In addition to the challenges Israel faces in searching for new sources of long-term economic growth and keeping the cost of living in check, the country will need to address its fiscal system, which is subject to growing pressure.

Israel succeeded in reducing its debt significantly over the last two decades – from 90% of GDP to 60% – by adhering to spending limits and following a plan to lower the deficit to 1.5% of GDP by 2024. However, according to the most recent numbers, the annual deficit reached 3.8% of Israel’s GDP during the past twelve months – much higher than the 2.9% deficit ceiling set for 2018, and already on track to surpass the deficit limit for 2019.

This is exacerbated by the “hidden budget deficit” that has been created through common deviations from the spending and deficit rules by enacting long-term programs with long-term funding implications under “temporary directives” or by transferring governmental activities to off-budgetary frameworks that are not technically bound to the budget spending limits.

Given these trends, the government deficit is set to rise well above its limits in the coming years unless government spending is significantly cut and/or taxes are raised.

In summary, there are several indications that Israel’s economy is doing quite well right now, and that it will continue to be strong in the near future, but several larger challenges must be addressed for these trends to continue in the long-run.

Why are there so many children in Israel?

Fertility in Israel stands at 3.1 children per woman – the highest fertility rate in the OECD, and almost one full child above the next highest fertility countries, Mexico and Turkey. To put Israel’s fertility in historical perspective, among Western countries fertility was last as high as 3.1 in the US toward the end of the baby boom in the mid-1960s, in Italy in 1931, in Germany in 1914, in the UK in 1908, and in France in 1889.
Israel's birth rath relative to the OECD countries

Not only is Israel’s fertility high among developed countries, it is also higher than fertility rates in emerging economies. In fact, despite a magnitude of differences in other areas – including GDP – Israel’s fertility is most similar to that of its direct geographic neighbors: Egypt and Syria.

People often mention two factors that encourage Israel’s high fertility: the cultural aspect, which is anchored in the historical experience of the Jewish people, and particular policies that make it easier for Israeli women to balance work and family (such as leave for sick children, reduced working hours following the return from maternity leave (“nursing hour”), and part-time, flexible positions).

Yet these arguments are less convincing when we compare Jews in Israel to their counterparts elsewhere. Although they share the same history, fertility among Jews in every other developed country is considerably lower – including among Jews living in Europe, where welfare policies are more generous than in Israel.

Another argument is that Israel’s high fertility is driven by certain parts of the population, such as Haredi (ultra-Orthodox) women, having many children (the fertility rate of Haredi women is indeed quite high at around 7 children per woman).

However, the rise in Israel’s fertility over the last two decades has been largely driven by the secular and traditional Jewish populations, whose combined fertility rate is greater than 2.2, which is itself higher than the overall fertility in any other OECD country.

Among the Arab Israeli population, fertility trends have followed patterns similar to those in the rest of the modern world – decreasing significantly since the 1960s in conjunction with increased education levels and employment participation rates among women. As such, Israel’s fertility has risen in recent decades despite Haredi fertility remaining relatively stable and despite a decline in fertility among Arab Israelis.

Furthermore, Israel’s fertility is not only exceptional because it is high. It is also exceptional because strong pronatalist norms cut across all educational classes and levels of religiosity, and because fertility has been increasing alongside a rise in the age at which women first give birth and increasing education levels — at least in the Jewish population. From an international perspective, these are extremely unusual patterns.

For example, Israeli women are having more kids even though they are having them later in life and working more. In fact, non-Haredi Jewish women in Israel have higher employment rates than women in any other OECD country, except for Iceland. Around the world, both increased age at first birth and increased labor force participation are generally correlated with declining fertility, yet the trends in Israel do not follow suit.

Additionally, in almost every other developed country, more educated women have fewer children than less educated women. However, by age 40, Israeli women with a college degree have the same number of children as those whose highest level of education is high school.

To a large degree, the reasons behind Israel’s fertility trends remain a mystery. However, they will continue to impact Israeli society. As direct result of these fertility patterns, a higher percentage of children in Israel are being born to older and more-educated parents than is the case in other developed countries.

This has implications for education, social and health policy. Older parents tend to be wealthier and more financially stable, which influences their own children’s outcomes across a wide range of domains, and parent’s levels of education also have indirect effects on outcomes for other children in their neighborhoods, which allows for positive spillover effects.

As policy makers look into the future, these implications of Israel’s exceptional fertility profile need to be taken into account.

Household Debt in Israel

Executive Summary

The level of household debt in Israel (as a percentage of GDP) is low compared to many developed countries around the world, yet has been on the rise over the past decade as a result, in part, of the low interest environment, the rise in housing prices, and an increase in the supply of credit and private consumption that have occurred with the entry of non-banking entities into the market.

The study examines household’s level of debt by income decile, age group, and sector.

The credit market

In recent years, several regulatory measures have been taken to promote competition in the banking industry in general, and in the consumer credit market in particular.

  • The supply of credit has increased as a result of the entry of non-banking entities into the credit market, the removal of technological barriers, and the integration of new technologies.
  • There are four main sources of credit available to households: banks, institutional bodies, credit card companies, and government credit.
  • Between 2013 and 2017, there was a 148% increase in credit granted by credit card companies, and a 140% increase in total loans granted by institutional bodies. At the same time, the growth rate of total credit granted by banks to households declined: an increase of 3.9% in 2017, compared to an increase of 7.4% in each of the five preceding years.

Household debt in Israel in the past decade

The ratio of household debt to GDP in Israel stands at 42%, while in many other countries the ratio exceeds 100% (as of 2017), yet is on the rise. The expansion of Israeli households’ debt in the past decade stems from a number of factors: the rise housing prices, the low interest environment, and an increase in the supply of credit and private consumption.

  • Israel’s household debt balance at the end of 2017 stood at NIS 530 billion – an increase of 5% since 2016.
  • Between 2008 and 2017, household debt increased by 84%. Total housing debt increased by 70%, while total non-housing debt increased by 114%.

Level of leveraging by income decile

An analysis of household debt level by income decile (according to a long-term household survey from 2016) raises concerns about the financial stability of households in the lowest income decile.

The share of those in debt in the bottom decile is relatively low and stands at only 18%, compared to 56% in the top decile. However, the average ratio between households’ debt and their annual income is approaching 8 in the bottom decile, meaning their total debt is equal, on average, to their total income over 8 years.

By age:

  • Half the total population in the bottom decile is over age 54 and only 9% are under 25, whereas 69% of the top decile are of prime working age (25-54).
  • While, in the top decile, 75% of the indebted population are of prime working age and only 22% are 54 and older, in the bottom decile, only 59% are of prime working age and 35% are 54 and older.

By sector:

  • 23% of Arab Israelis in the bottom decile are in debt, and their median ratio of debt to annual income is close to 2.
  • Only 15% of non-Haredi Jews in the bottom decile are in debt, but their median debt-to-income ratio is higher at about 3.
  • For Haredim, 30% of those in the bottom decile are in debt, and the median ratio is 13.5.

By type of loan and sector:

  • 64% of indebted non-Haredi Jews and 43% of indebted Haredim from the bottom decile took out a consumer loan, compared with 89% of indebted Arab Israelis from this decile.
  • In comparison, 52% of non-Haredi Jews and 72% of Haredim from the bottom decile took out a housing loan, compared to only 15% of indebted Arab Israelis, perhaps because of difficulties Arab Israelis face in putting up collateral for housing loans.

By source of loan:

  • The percentage of those who rely on non-bank sources for non-housing loans in the bottom quintile is 22.5%, compared to 12% in the top quintile.
  • In contrast, the rate of applying to banks for non-housing loans is higher at the higher income levels: 88% in the bottom quintile compared to 92% in the top quintile.

The study’s findings raise concern that the expansion of the credit market and the rise in household debt would particularly affect the financial stability of households belonging to the bottom decile, and that the financial vulnerability of this population is liable to lead to its financial collapse in the case of an economic slowdown.

 

 

 

 

 

Economic growth and workforce diversity go hand in hand

As we say goodbye to 2018 and start the new calendar year, Israel’s labor market continues to be strong and show many encouraging trends: labor force participation rates are rising, employment rates of both men and women are increasing, and unemployment has reached a historic low. The number of job vacancies has also increased, and wages have been continually rising. This increase in employment has also contributed greatly to Israel’s economic growth in the past few years.

In a recent Taub Center study, Researcher Hadas Fuchs and President Prof. Avi Weiss find that over the past decade and a half (since 2003), employment has risen among both men and women and across all population groups: Haredim, non-Haredi Jews, and Arab Israelis. This is a change from the previous decade during which employment rates had declined or remained stagnant among all groups except non-Haredi Jewish women.
Employment rates by population groups and gender

The employment rate for Israeli men has risen by 7 percentage points and the increase was most impacted by a rise in the employment rate of 55-64-year-olds. Among women, on the other hand, employment increased by 13 percentage points and was driven both by increased employment among 35-44 year olds and among 55-64-year-olds, but for different reasons: the former because there has been a major increase in the percentage of mothers of young children who are working, the latter because women close to retirement work more than their predecessors and women’s retirement age was raised from 60 to 62.

All in all, these increased employment rates put Israel in a good position relative to the OECD. In fact, the employment rates of non-Haredi Jewish women and men and Haredi women in Israel are higher than the average employment rates in the OECD, and among non-Haredi Jewish women it is the second highest in the OECD (after Iceland).

But what about Israel’s other population groups?

Despite the gains of the past decade and a half, there are two groups whose employment rates remain particularly low: Arab Israeli women and Haredi men. In 2010, the government set target employment rates for these two population groups to reach by 2020.

After several years of stagnation, the employment rate of Arab Israeli women has increased substantially and stands at about 40%. This is nearly double the rate in 2003 and an increase of more than 6 percentage points since 2016, bringing the rate very close to the government’s 2020 target for Arab Israeli women of 41%. Furthermore, there are indications that this trend will continue. Most of the employment increase for this population group (72%) stems from the improved education of Arab Israeli women, and, because more Arab Israeli women are pursuing higher education, it is likely that their employment rates will continue to rise.

In contrast, the employment rate of Haredi men, after rising by more than 15 percentage points between 2003 and 2015, has declined slightly in recent years. It now stands at about 48% – far from the government’s 2020 goal of 63%. Of those who are working, about 42% of Haredi men ages 30-64 worked part time in 2017 (compared to 15% of non-Haredi Jewish males), mostly due to yeshiva studies.

It is important not only to look at employment trends in Israel in general, but also to break it down by industry. For example, 50% of Arab Israeli men, whose education levels have not risen as much as those of Arab Israeli women, worked in occupations characterized by low wages in 2017: manufacturing, construction, and agriculture. These are physically demanding occupations, and, consequently, Arab Israeli men show a major decline in employment rates from age 50 and on.

In high tech, the sector that attracts the greatest attention in Israel both because of its high wages and its disproportional contribution to Israel’s GDP, tax revenues, and exports, the share of those employed in the industry has increased from 8% to 15% among non-Haredi Jewish men, but among Arab Israeli and Haredi men the percentage has remained negligible. The percentage of women working in the field is also low (as it is in the rest of the world); women made up 32% of those working in high tech in Israel in 2017, and most of them are non-Haredi Jews. Nonetheless, there has been an impressive rise in the share of Haredi women employed in high tech: from less than one percent in the middle of the last decade to about 3%.

If labor market participation is to keep rising in Israel, the participation rates of Haredi men and Arab Israeli women and men must increase. Providing training to population groups that are currently underrepresented in the labor market, or in specific industries, and encouraging employers to aim for diversity in the workplace could help these groups not only join the workforce, but integrate into prestigious, high-paying fields, and thereby strengthen the Israeli economy and society as a whole. Moreover, in addition to training for adults, it is important to improve Israelis’ skill levels earlier on by providing high-quality education from a very young age.

As Director General Suzie Patt Benvenisti put it so poignantly at the Taub Center’s latest international conference (on Israel’s future labor market): “The issues of economic growth and enhancing diversity of the workforce really go hand in hand…Getting more segments of the population – like Arab Israelis and Haredim – more engaged in the workforce is not something that we need to do just because it’s the right thing to do, but because it will have a very positive impact on our economic growth as a country.”

 

Executive Summary: Trends in Religiosity Among the Jewish Population in Israel

What will the religious makeup of Israel’s Jewish population look like in the coming decades? According to the projections of the Central Bureau of Statistics (CBS), the Haredi (ultra-Orthodox) population will compose about 50 percent of Israel’s Jewish population by 2059.

These projections have raised serious concerns for Israel’s future economic growth given the education and employment patterns of contemporary Haredim. However, there are a number of significant demographic shifts occurring, some of which, it seems, have not been fully accounted for in the CBS forecasts…

To continue reading the summary, download the full publication.

Full study available under “Related Materials”

Executive Summary: The Income-Expenditure Gap and Household Debt in Israel

How do Israeli households sink into debt? Given the difficulty of assessing actual debt due to data limitations, the gap between Israeli household income and expenditure can be analyzed alongside characteristics such as socioeconomic status, age, marital status, and type of housing expenditure…

To continue reading the summary, download the full publication.

Full study available under “Related Materials”

Israel’s Labor Market: An Overview

In 2018, Israel’s labor market continues to be strong: participation rates continue to rise, employment rates of both men and women are increasing, and unemployment has reached a historic low. The number of job vacancies has also increased, and wages have been continually rising. The study examines changes that have occurred in the Israeli labor market overall, as well as changes within specific population groups.

The labor market: A general picture

 

Israel’s employment rate has reached slightly more than 78% in 2018 and the unemployment rate is continuing to decline, reaching a low of 3.4%.

  • Overall, the employment rate for men has risen by 7 percentage points since 2003, while women’s employment has increased by 13 percentage points.
  • The employment rates of non-Haredi Jewish women and men and Haredi women in Israel are higher than the average employment rates in the OECD, and among non-Haredi Jewish women, it is the second highest in the OECD (after Iceland). For both men and women, most of Israel’s employment growth between 2003 and 2018 was due to changes in the non-Haredi Jewish population (5 and 10 percentage points for men and women, respectively), mainly because they are the most populace group.
  • When broken down by age group, the greatest impact on the rise in employment among women came from the 35-44 and 55-64 age groups, but for different reasons: the former because there was a major increase in the percentage of mothers of young children in the labor market, the latter due to women close to retirement working more than their predecessors and the increased retirement age. Among men, the most substantial employment rate increase occurred in the 55-64-year-old age group.
  • Wages have continued to rise in 2018 at a fast pace. This increase is consistent with the rapid rise in real wages since 2014 – an increase of 11% in total.Employment rates by pop groups and gender

High tech employment

 

While the high tech sector employs only 8%-9% of Israel’s workers (as of 2017), it contributes 12% of GDP, a quarter of the country’s tax revenues, and 42% of exports. Employment rates in this sector differ by gender and across population groups.

  • Over the past decade, the share of workers in high tech has increased from 8% to 15% among non-Haredi Jewish men, but among Arab Israelis and Haredim the percentage has remained negligible.
  • The share of women employed in high tech is low (as it is in the rest of the world), standing at 32% of those working in the sector in 2017, and those women employed in high tech are mostly non-Haredi Jews.
  • There has been an impressive rise in the share of Haredi women employed in the field: from less than one percent in the middle of the last decade to about 3%.

Labor market trends by population group

 

Arab Israeli employment

  • After several years of stagnation, the employment rate of Arab Israeli women increased substantially and stands at about 40% – nearly double the rate in 2003 and an increase of more than 6 percentage points since 2016 – and is now very close to the government’s 2020 target (41%). Most of the increase (72%) stems from the improved education of Arab Israeli women.
  • Arab Israeli men’s education levels have not risen as much as those of Arab Israeli women, and the increase in their employment rate is relatively low. Low levels of education also affect the employment opportunities available to Arab Israeli men, 50% of whom (as of 2017) work in occupations characterized by low wages: manufacturing, construction, and agriculture. These are also physically demanding occupations, and, consequently, Arab Israeli men show a major decline in employment rates from age 50 and on.
    High tech employment

Haredi employment

  • After rising by more than 15 percentage points between 2003 and 2015, the employment rate of Haredi men has declined slightly in recent years, and stands at about 48% – far from the government’s 2020 goal of 63%. About 42% of employed Haredi men ages 30-64 worked part time in 2017 (compared to 15% of non-Haredi Jewish males), mostly due to yeshiva studies. About 23% of employed Haredi men work in education, most without academic or post-secondary training other than yeshiva study.
  • The employment rate of Haredi women increased by 5.5 percentage points between 2013 and 2018, and stands at 76%. About 51% of Haredi women were employed in part-time positions in 2017, and 55% of those working in part-time positions do so in order to care for their families and households. This is a higher share than for Arab Israeli women (36%) or non-Haredi Jewish women (30%). The share of Haredi women employed in education dropped from 58% in 2004 to 46% in 2017, while the share of women learning technological studies in seminaries is on the rise.

Employment among older adults

  • Israel’s population is aging at a slow pace relative to the OECD, but when taking into account Israel’s high birth rate, the dependency ratio (the ratio between those not of prime working age and those of prime working age) is the highest in the OECD. One possibility for coping with this situation is to raise the retirement age for women.

Rising Housing Prices and Their Impact on Households’ Ability to Purchase a Home

The rising housing prices of the past decade have reduced the ability of the average Israeli household to purchase a home. However, when the ability to buy a home is assessed in terms of total disposable household income, rather than in terms of the number of monthly salaries needed to purchase housing (widely used in the media and public discourse), the findings show a more moderate decline in purchasing ability.

The reason for this is that total disposable household incomes rose more than wages did between 1998 and 2016, due mainly to a rise in the average number of income earners per household.

Measuring the ability to purchase a home

 

From the mid-1990s to 2007, many developed countries experienced housing price increases. Prices dropped somewhat in the wake of the 2008 financial crisis but, by 2017, have risen back to their pre-crisis levels. Since the second half of 2007, real housing prices in Israel have been trending upward (in annual terms). The consistency of this trend over the course of a decade, and the rate of increase, are unprecedented.

A households’ ability to buy housing is usually calculated in terms of the ratio between the average (or median) apartment price and the average (or median) individual wage – called the “average wage index” for the purposes of this study. However, this has many drawbacks as it does not take into account non-salary income or multiple household income earners. Thus, this study uses the “disposable household income index” to evaluate Israeli households’ housing-purchasing ability.

  • Between 1998 and 2016, the average disposable income grew by 2.3% annually, while the average monthly wage increased by just 1%.
  • Between 1998 and 2007/2008, both ratios declined – that is, the ability to buy housing improved. Since then, it has become harder to purchase housing.
  • The ability of households to purchase housing in 2007 declined in most of the OECD countries relative to the end of 1990s. A similar picture emerged in Israel, but a decade later than in the other developed countries.

Ratio of housing prices to disposable income ENG

The ability to purchase housing by household characteristics

 

The figures described above provide a more general picture, but do not necessarily reflect changes in the ability to buy housing that occurred among specific population groups, or in different geographic regions.

  • The disposable income of young adult households (25-34) grew at a rate similar to the average disposable household income between 1998 and 2016, so their ability to purchase housing was no more affected than was that of the general population.
  • The age group whose housing-purchasing ability was most affected (the group whose disposable income rose at a lower rate than the general population) are households headed by individuals in the 35-54 age range, because the income of these households increased at a lower rate than the average for the general population.
  • The ability to purchase housing has declined significantly in Tel Aviv, Jerusalem, and Israel’s Southern District. In the Northern, Sharon, and Gush Dan districts (excluding Tel Aviv), the ability to buy housing declined to a degree similar to the national average.

Housing Prices to Disposable Income Index ratio by locality
Real estate EN

  • Since 1998, the average disposable household income of immigrant families has risen at a faster rate than has the average Israeli disposable income: 2.9% between 1998 and 2016, versus an average annual change of 2.2% for native-born Israelis. This indicates that the ability of immigrants to purchase housing diminished to a more limited degree than the average for the public at large.

Household leveraging

 

A home is one of the largest purchases a household can make, and the vast majority of home buyers are obliged to take out loans in order to fund the purchase. As such, a useful indicator of households’ ability to buy housing is the credit available to them, and their ability to repay loans.

  • The average level of household leveraging – the size of households’ net financial liabilities to creditors as a percentage of GDP – has increased since 2009, which could potentially make it hard for them to receive additional credit in the future.
  • The following trends emerge when examining credit in terms of housing credit, non-housing credit, and net credit: the ratio between housing credit and GDP declined slightly between 2000 and 2007, then started climbing again and slowed around 2013; the ratio between non-housing credit and GDP increased from 10.1% in 2000 to 13.4% in 2009, halted between 2009 and 2013, then climbed until reaching 15.4% in 2017; the net credit to GDP ratio fell steeply from 27.1% of GDP in 2000 to 10.7% in 2009, then the trend reversed and the ratio rose continuously to reach 23.4% of GDP in 2017.
  • The current level of leveraging is only slightly lower than it was in 2000, the year that witnessed the highest leveraging levels recorded.

The data show that rising housing prices have taken their toll on Israeli society. Since the second half of 2007, the ratio between housing prices and disposable income has increased, meaning that it was harder to buy housing in 2016 than it was in 2007.

Nonetheless, using the disposable household income index to measure this shows that the ability to buy housing did not decline as much as one might conclude if using the commonly-accepted average wage index.

Economic Developments in Israel: An Overview

In 2018, employment is at an all-time high, unemployment is at a historic low, GDP growth is similar to recent years, and wages have risen. However, growth potential is declining due to demographic changes and trends in labor productivity, which is not growing at all.

Macroeconomic processes

The picture that emerges from an examination of developments in the major GDP components in recent years is one of stability and “balanced growth.”

  • GDP growth for 2018 is expected to amount to 3.2% — slightly lower than in recent years, reflecting per capita growth of 1.2%.
  • Since 2010, there have been no substantive changes in the relative shares of the main GDP components: private consumption, public consumption, fixed asset investment, exports and imports.
    GDP and its components

    • Most of the volatility in fixed asset investment since 2010 is due to investment activity by the economic sectors: Between 2012 and 2015, the share of this kind of investment in GDP fell by 2 percentage points, but has risen by a little over 1 percentage point over the past two years.
    • In terms of government consumption, the expenditure on the individual consumption component has shown stability over the years, while the collective component has fallen slightly (stemming from a decline in the share of security spending).Israel’s fiscal system is subject to growing pressure. In the 2019 budget, the government is deviating by 3 percentage points from the permissible amount, and it also seems to be on the verge of deviating from the legally specified deficit ceiling.
      • Despite the deficit reduction of the last few years, Israel still has a larger deficit than most OECD countries. Israel’s national debt amounted to 75.6% of GDP in 2016 – a figure puts Israel near the middle of the OECD distribution.
      • Assuming that the government will increase its expenditure in accordance with the relevant legal rules and limitations, it seems that as of 2020 the government will breach the deficit limit as it is set by law, and that the problem is likely to become even more severe in the long run.
      • The budgetary problem is expected to increase further if the government follows through with its plan to increase the defense budget to about 6% of GDP, and peg it to the GDP growth-rate.

        Growth and productivity in Israel

         

        Israel is characterized by higher growth rates than those of other OECD countries. However, the same does not hold when examining growth per capita, and Israel’s productivity is not improving.

        • In 2017, the Israeli economy grew by 3.5%, compared with an average OECD growth rate of 3.0%. However, because the Israeli population grew by 2% in 2017, the GDP per capita growth rate was only 1.5%, compared to 2.4%, on average, in the OECD.
        • Israel is not managing to close the gap between itself and the OECD and G7 average (and the US) in terms of GDP per work hour. Israel’s GDP per work hour fell from 58% to 55.5% of the analogous US figure in 2016.
        • Israel has experienced a slowdown in total factor productivity growth since 1973 (the rate of growth had been much faster between 1961 and 1973), and even the rapid growth experienced by Israel’s high tech sector from the 1990s on has not altered the slowdown.
        • Since 2012, increasing employment has been the main source of Israel’s per capita GDP growth. Despite the fact that most of the workers joining the labor force were low-skilled workers, there was an improvement in the quality of employment due to an increase in experience and education levels. However, the working-age population is shrinking, as is the potential for future economic growth from increased employment rates.

          Prices and the cost of living

          The past few years have witnessed a sizable increase in real wages that is not attributable to improved labor productivity, but rather can be traced to a decline in consumer prices relative to the prices of all products and services produced in the economy. Nonetheless, prices in Israel remain high.

          • Since 2015, wages have risen substantially, across all income levels and population groups.
          • Expanded employment and the rise in wages were reflected in an impressive increase in households’ income and consumption. This was particularly apparent among households in the middle and lowest income quintiles (an increase of 16% and 13%, respectively, between 2012 and 2016), while among the highest income quintile there was a more moderate increase (9%).
          • In recent years, prices in Israel have increased at a significantly lower rate than in the OECD. As a result, gaps between Israel and other developed countries have been narrowing and consumer prices relative to the OECD average have declined by 5.2% since 2014.
            GDP per capita growth
          • The steepest price decrease among consumption categories was found for the communications category, with substantial price reductions for food, transportation, and recreation/ culture as well. At the same time, housing prices rose. It likely that the price decline also stems from measures taken by the government to lower the cost of living.

           

           

How Much Can the Israeli Start-Up Nation Continue to Grow?

Israel is considered the “Start-Up Nation,” but the high tech sector accounts for only about 8% of total employment. Nonetheless, this sector is of great importance to the economy as the source of one-quarter of Israel’s income tax revenues and a major portion of the added value of Israeli exports.

The sector has received support and incentives from Israeli policy makers since its inception, including a recently approved comprehensive government reform to encourage further employment in the high tech sector.

Despite the fact that high tech workers in Israel earn twice as much as workers in other fields, on average, and the large tech companies have been regularly ranked among Israel’s most desirable workplaces, the share of high tech workers has remained more or less unchanged for more than a decade.

The question is, how much room is there for employment in Israel’s high tech industry to grow? Given a number of trends, it seems that efforts to expand employment in high tech are only relevant for a small percentage of the working-age population, at least in the short term.

Basic worker skills: international comparison

According to an analysis of the OECD’s Basic Skills Survey (PIAAC), Israel is characterized by a large prevalence of workers with low skills.

  • The percentage of Israeli workers whose skills are ranked at the lowest skills level in the OECD (the bottom decile) is about 16% of the adult population and only about 7% of Israeli workers rank in the highest skills level (top decile).
  • About half of the adult Arab Israeli population ranks at the bottom of the OECD skills distribution (the bottom two deciles).

These data point to the need for substantial improvements in every stage of Israel’s education system in order to improve the skills of future workers and their employment opportunities.

High tech versus the rest of the labor market

The PIAAC survey results point to stark differences between the skill levels of Israeli high tech workers and those of workers in other fields. The gap between the skills of Israeli high tech workers and the skills of employees in other sectors is almost a full standard deviation – an exceptionally large gap among the developed countries.
Skill level gap between workers in the high tech sector and non-high tech sectors

Another finding that emerges from the survey is that a large portion of the most highly-skilled workers are already working in high tech and it is difficult for others to integrate into the field.

  • Of Israeli workers ranked in the highest skills quintile, 22% are already working in the high tech sector. This is the highest percentage of all the comparison countries. Put differently, 60% of Israelis working in the high tech sector are ranked in the highest skills quintile and the probability of working in high tech declines significantly at lower skill levels.
  • Even science and engineering graduates who do not have high skill levels find it difficult to integrate into occupations relevant to their areas of study (both in Israel and in other developed countries).
  • Individuals who reported low levels of English had almost no likelihood of being employed in the high tech sector, regardless of their skill levels in other areas.
  • A high share of the Haredi and Arab Israeli populations report low levels of English proficiency, as opposed to a high level of proficiency reported among high tech employees. As a result of this, and due to low levels of general proficiency among these population groups (as measured by the survey), it seems that there is limited expected benefit from using professional training as a means of integrating them into the high tech industry (thereby narrowing gaps).
  • Most of the potential to expand high tech employment is found among non-Haredi Jews, who already comprise the majority of high tech workers.

The potential for expanding employment in Israel’s high tech sector

A simulation conducted as part of the study shows that the combination of the high share of highly skilled workers who are already employed in high tech and the low skill level of workers in the other sectors means that the potential for increasing high tech employment is low relative to that in other countries, at least in the short term.

  • The intermediate scenario of the simulation shows the high tech employment growth potential to be about 4% of the working-age population. Among Haredim, this figure is 3% and, among Arab Israelis, only about half a percent.
  • The percentage of workers who may expect to substantially improve their employment status by retraining for high tech (a subset of those with the appropriate skills) is small and stands at only about 1% of the working-age population.
  • There is a notable shortage of women in high tech, and it seems highly likely that a majority of the potential for employment expansion comes from within this group.

Beyond the question of the extent to which it is possible to grow the high tech sector, there is also room to examine whether this is a worthwhile pursuit.

Due to the large skills gap between high tech and other sectors, it is unlikely that expanding employment in high tech would lead to the spread of advanced knowledge and innovative work methods to other fields to a significant degree. It is also possible that expanding employment in high tech may slow development in other areas of the economy, where the employment profile is more varied.

The availability of cheap labor makes it less feasible that employers will streamline processes and adopt advanced technologies, and is likely one of the causes of low levels of investment and low productivity in non-high tech industries.

Therefore, increasing investment and technology adoption in these industries as well as raising the skill levels of the workers employed in them, through appropriate professional training and by improving the education system (in order to improve the skills of the next generation), may be preferable to efforts to recruit additional highly-skilled workers to move into the high tech field.

Mynd the Gaps

Despite being called the “Start-Up Nation”, only about 8% of working Israelis are employed in high tech. While this is the highest percentage in any country, it still means that more than 9 out of 10 working Israelis aren’t part of this world at all.
heb1Furthermore, some groups have an easier time integrating into the field than others: according to the Chief Economist in Israel’s Ministry of Finance, Israeli Jews with degrees in high-tech-related subjects are 1.3 times more likely to end up working in high tech than Arab Israelis with similar degrees.

In the first episode of the Taub Center’s new podcast, DataPoint, we focus on a unique story in the world of high tech: the story of a young Arab Israeli entrepreneur who co-founded a start-up in Tel Aviv. The episode, which is called “Aziz Goes to Tel Aviv,” tells the story of Aziz Kaddan and his company Myndlift.

The Center’s podcast zooms in from Israel’s bigger socioeconomic trends, like developments in high tech, and focuses on individual stories. In doing so we ask the question: who are the people – the millions of data points – who stand behind the numbers?

Aziz, who grew up in the town of Baqa al-Gharbiyye, attended an accelerated program, called Etgar, that allowed him to start working towards a computer science degree while still in high school. Inspired and encouraged by his family from a young age, Aziz co-founded Myndlift at age 21. The company produces technology that helps treat ADHD without medication.

In the episode, Aziz discusses some of the difficulties of being an Arab Israeli entrepreneur, both personally and on a larger scale. He found that he initially had difficulty raising money from Israeli investors, but that this changed over time.

As he says in his own words “I was 21 back in the day, obviously no elite intelligence unit…and hardly anything in common with that investor. So they would look at it as if I’m a guy with a broken leg trying to run a marathon.”

However, once he passed the milestone of showing that his product was making money, Israeli investors “know that you had to pass so many hurdles to get there and definitely it’s a more difficult path for you as an Arab…so they appreciate it more and they jump even more at the opportunity.”

More broadly, Aziz talks about the challenges that arise for the Arab Israeli population because of the geographic concentration of this population group and that of the high tech industry.

While most of the Arab Israeli population is concentrated in the northern part of the country, most of the tech scene is happening in the center. Aziz notes that many Arab Israelis marry and have children early, making the travel from the periphery to the center of the country an even greater logistical burden.

Furthermore, many Arab Israeli entrepreneurs face challenges in networking and connecting with investors. Aziz argues that, in order to encourage Arab Israeli entrepreneurship and improve communication skills for pitching to investors, there is a need to improve English language studies in Arab schools.

During the Taub Center’s recent Herbert M. Singer Annual International Policy Conference on “Envisioning the Future of Israel’s Labor Market,” there was much discussion about issues relating to Israel as the start-up nation, the geographic concentration of job opportunities and workers, and workforce diversity – issues that are all reflected in Aziz’s story.

The Taub Center’s Herbert M. Singer Annual International Policy Conference

The Taub Center’s Herbert M. Singer Annual International Policy Conference

Panelists participating in the conference discussed how much room there is for the high tech sector in Israel to grow in terms of available human capital, labor market differences between the country’s geographic center and periphery, and the challenges faced by particular population groups in Israel in integrating into the workforce.

With the conference’s specific focus on the future, much of the discussion was around what actions can be taken now and in the coming years to prepare for Israel’s future labor market.

For his part, Aziz says he tries to give 15%-20% of his time to mentoring other Arab Israeli entrepreneurs, and hopes, in the future, to encourage Arab Israeli entrepreneurship by investing in companies himself.

Even though he and his co-founder made a very intentional decision to place the current Myndlift office in Tel Aviv, Aziz has a dream to open a satellite office of Myndlift in Baqa al-Gharbiyye, the town where he grew up. He wants to do this for a number of reasons, including that “it will make it much easier for engineers from the Arab community to come and work at a workplace that is close to home.”

Aziz Kaddan in the Myndlift office

Aziz Kaddan in the Myndlift office

In the meantime, however, Aziz says that despite the support he and his company receive from the Arab Israeli community, he doesn’t yet see himself as a role model. He appreciates this support, but also says that it creates even more pressure on him to succeed: “The hopes I raise in the community are the ones I don’t want to shatter,” he says. “I want these hopes to keep getting higher.”

 

Thank you to the Herbert M. and Nell Singer Foundation for making this episode possible! For more information about sponsoring future episodes, contact michalp@taubcenter.org.il.

Mapped out: welfare nonprofits in Israel

Civil society organizations (nonprofits) play a major and growing role in the provision of welfare services in Israel. Organizations active in the welfare field constituted 15% of all the civil society organizations registered in Israel, and the sum spent on their annual activity is approximately NIS 14 billion. These organizations provide a broad range of social services to a variety of target populations, yet, to date, there has been a lack of data on the scope of their activities and funding.

In response to the need for comprehensive data, Taub Center researchers Prof. John Gal and Shavit Madhala, along with Dr. Michal Almog-Bar from the Center for the Study of Civil Society and Philanthropy at the Hebrew University, conducted an analysis of active organizations working in the field of welfare between the years of 2013 and 2016 whose annual revenues exceeded NIS 500,000 – a total of 748 organizations.

The study maps out various characteristics of civil society organizations working in the field of welfare in Israel as well as their level and sources of revenue.

What do we know about these organizations and who they serve?

A little under a quarter of the civil society organizations examined in the study serve the general population, while the majority of the remaining organizations serve youth, the elderly, and people with disabilities.

Some organizations provide services intended for particular sectors within Israeli society. 23% of the organizations in the study are intended for the Haredi sector (Haredim make up about 12% of Israel’s population), while 7% have services designated for the Arab Israeli population (which constitutes about 21% of the total population).

 

Welfare EN

The study also finds that about one-fifth of the nonprofits examined are national organizations, operating in five or more locations throughout Israel, and a similar percentage of the total organizations are new – that is, they have been operating for under 15 years. Among organizations serving the Arab Israeli and Haredi populations, specifically, the share of new organizations is even higher.

In addition, among the Arab Israeli organizations, there is a relatively low share of organizations classified as large – with annual revenues exceeding NIS 10 million.

Where is the money coming from and where is it going to?

The total revenue of the welfare nonprofit organizations examined in the study amounts to NIS 13.8 billion a year. The main source of this revenue is through the sale of services (39%), followed by government funding (34%) and donations and bequests (25%).

Out of the total revenue, 23% goes to organizations working with children and youth, and a similar percentage goes to those focused on the elderly, and to those addressing the general population. When examining revenue by sector served, the study finds that only 2% of the total revenue goes to Arab Israeli organizations, while 20% goes to the Haredi organizations.

A notably high percentage of revenue going to Arab Israeli organizations comes from government funding, while, among Haredi organizations, revenue from donations is prominent.

The researchers found that funding disproportionately goes to the organizations with more resources. The vast majority of the government funding that goes to welfare nonprofits (85%) goes to organizations with an annual revenue of over NIS 10 million (including government allocations). Similarly, about half of the philanthropic donations go to the organizations with the highest revenues (in the top 10%), and only 2% of donations go to Arab Israeli organizations.

 

Organization size EN2

What do these data tell us?

Mapping out Israel’s welfare nonprofits sheds light on the disparities that exist among them. The study finds substantial gaps between older and newer organizations, between large and small organizations, and between organizations active in Jewish society and those active in Arab Israeli society. For example, the largest and most veteran organizations receive most of the governmental and philanthropic funding that is available.

Moreover, the shortage of organizations serving the Arab Israeli society and the sector’s limited share of resources, limit Arab Israeli citizens’ access to the social services provided by nonprofits, despite the sector’s many welfare needs. These findings indicate a need to strengthen the civil society organizations in the Arab Israeli sector so as not to further increase the existing social gaps between Jewish and Arab Israelis.

Socioeconomics in Israel at a glance: what is the picture of the nation?

engupperThe Taub Center’s A Picture of the Nation 2018, generously supported by the Koret Foundation, presents a complex picture of Israeli society by exploring trends in demographics, macroeconomics, welfare, health, education, and employment. We are pleased to share a number of the findings from this year’s booklet, edited by Prof. Avi Weiss, President of the Taub Center.

 

Demographics: Projections about the makeup of Israeli society do not take into account current demographic trends

Israel’s current population is comprised of approximately 74% Jews, 21% Arab Israelis, and 5% defined as “Other.” Haredim are estimated to be about 12% of the total population, and the share of secular and traditional Jews (both those identifying as religious and less religious) – about 56%.

While the total fertility rate in Israel is high and stands at 3.11, almost double the rate in OECD countries, there have been substantial changes across Israel’s population groups in recent decades. Fertility rates have fallen greatly among Arab Israelis, while among Jews there has been an increase in fertility since 1990.

An examination of first grade enrollment in Haredi, State-religious, and State (secular) schools in comparison to fertility rates, and of transfers between education streams from first to eighth grades, reveals that student movement is in the direction from more to less religious streams (see figure).

If the trend of secularization indicated by this student movement continues, the Haredi population is expected to make up about 21% of the population in 2059 (compared with 27% in Central Bureau of Statistics projections).

eng2

Macroeconomics: The standard of living has risen, but price levels remain high

The standard of living in Israel has increased over the past decade. For many years real wages did not rise despite a rise in productivity, but changes in the past few years have reversed this trend and real wages have risen. However, the Israeli economy is characterized by stark polarization. For example, high-tech salaries are 2.5 times higher than wages in the rest of the business sector.

In terms of prices, price levels in Israel are still 14% higher than the OECD average, despite a decline in recent years. In particular, prices declined in industries exposed to competition from imported goods such as clothing and furniture.

Rental prices in Israel have risen on average 2% faster than inflation per year since 2008, meaning that throughout the period demand increased more than supply. Housing prices have risen at an even faster pace since 2008, though in recent months they stopped rising.

 

Welfare: The unemployment rate is lower, but the poverty rate remains the highest among OECD countries

There has been an increase in employment rates in Israel, and the unemployment rate has continued to decrease. At the same time, the poverty rate when measured using disposable income is the highest among OECD countries (see figure).

eng3

The percentage of government expenditure devoted to social spending is increasing, but at a very slow pace, and most of the increase has been in the health and education budgets.

With regard to addressing poverty, specifically, the sum allocated to the implementation of the Elalouf Committee for the War Against Poverty in 2017 was only 31% of the Committee’s budgeted recommendations. However, a considerable sum was allocated to the “Savings for Every Child” program, which appeared among the recommendations but was not budgeted.

Whether more or less well-off, about 37% of Jewish Israeli households spend more than their income. Among households seeking assistance in financial management, those with higher incomes owe more to banks, and those with relatively lower incomes borrow more from family members and friends.

 

Health: Israelis spend a larger percentage out-of-pocket on health services than the OECD average, and the health system is not adequately prepared to cope with the aging population

Health spending out of GDP has remained stable, despite an increase in medical needs due to rising life expectancy and the aging population. This has resulted in a decrease in health spending per person, and an increase in the cost of medical care.

Though there has been relative stability in total health spending, the gap between the share of public expenditure as a percent of total health expenditure in Israel and its share in the OECD has increased almost threefold over the past two decades. As a result, households are spending more out-of-pocket on health services, particularly by purchasing private insurance plans.

An examination of health in the Arab Israeli population shows that life expectancy at birth is four years lower than for the Jewish population, and lower than the average in OECD countries. One of the reasons for this is that the infant mortality rate in the Arab Israeli sector is three times higher than in the Jewish sector. More generally, the lower socioeconomic status of the Arab Israeli population has an impact on health levels.

 

Education and employment: There have been significant changes in the fields of study of students in higher education, and an increase in employment rates in all sectors

One of the goals of the past two Ministers of Education was to increase the share of students studying advanced math. The share of those qualifying for a bagrut certificate with five unit-level math did indeed rise from 10.6% to 13.8% between 2013 and 2016. Another goal of the Ministry – to increase the share of students in vocational tracks – is also proving successful: the portion of students in vocational tracks increased from 33% in 2010 to 36% in 2015 in the Hebrew education system, and from 40% to 43% in the Arab education system.

In higher education, the past two decades witnessed a decline in the percentage of students studying humanities and the social sciences, while the share of students studying business administration, medical professions, and architecture and engineering has risen (see figure).

Among Arab Israelis, the percentage of female students studying science and technology subjects in high school is high and continues to rise steadily, but they tend to pursue degrees and careers in education at very high rates.

eng4

In general, employment has increased among men and women in all sectors – including for Arab Israeli women and Haredi men (for whom employment rates are particularly low). Within the Haredi population, employment rates rose over time in all Haredi streams, both for men and for women. Among Haredi men ages 23-30, Chabad men work at the highest rates, with almost 50% employment in 2013.

Together, these and other important trends presented in A Picture of the Nation 2018 highlight some of the most crucial social and economic issues facing Israeli society. We hope this publication can serve as a resource to the Israeli public and assist Israeli decision makers in basing their choices and actions on unbiased data and professional analyses.

Trends in Religiosity Among the Jewish Population in Israel

Executive Summary

What will the religious makeup of the Israeli population look like in the coming decades? According to the projections of the Central Bureau of Statistics (CBS), the Haredi population will compose about 50% of the Jewish population in Israel by 2059. However, this assessment does not take into account religious mobility between the different sectors.

In this study, researchers Prof. Alex Weinreb and Nachum Blass examine trends in religious mobility among Israeli Jews, as reflected by the movement of students between sectors in the education system, and find that the bulk of the movement is towards less religious streams. The study finds that the State education system is larger than would be expected on the basis of fertility rates in each sector, while the State-religious and Haredi education systems are smaller than would be expected.

First grade enrollment doesn’t match fertility rates

The study determines the number of students in first grade according to type of school supervision, and compares this to their expected number given fertility rates in the various religious population groups

  • As expected, the number of students enrolled in the Haredi education stream increased at the fastest rate between 2001 and 2015: from about 16,700 1st graders to about 28,000. In the State-religious stream the increase was from about 15,000 to about 21,500 students, and in the State education stream from about 45,000 to about 62,500.
  • From 2013-2015, the number of students in the Haredi education stream was about 7.5% lower than expected given fertility rates in the Haredi sector.
  • From 2001 to 2015, the State education system increased at an annual growth rate of over 2% –higher than expected given fertility rates among the secular and traditional populations.
  • During the same period, the increase in the number of students in the State-religious education system was consistent with fertility trends.

Transfers from first to eighth grade show a net flow towards less religious education streams

The study records which religious education stream students belonged to at the beginning of the research period (1st grade) and at the end (8th grade).

  • Almost 98% of the students who attended State schools in 1st grade remained in this stream in 8th grade.
  • The share of those leaving the State-religious education stream was about 20% of girls and 25% of boys. Most of these students transferred to the State education system, and only a few completed the research period in Haredi schools.
  • About 11% of girls and 13% of boys left the Haredi education system. 6.5% transferred to the State-religious system and about 4.5% transferred to the State system.
  • Across the 2001-2015 period, there was a net flow of 9.0% of boys and 6.4% of girls from Haredi to one of the less religious streams by 8th grade (about 60% to religious schools, the rest to State schools). Likewise, there was a net flow of 16.4% of boys and 11.7% of girls away from State-religious schools toward the State education stream.

Religious mobility in Israel: towards secularization

The net flow of students from more to less religious education frameworks seems to indicate the direction of religious mobility in Israeli society: a slowdown in the growth of the Haredi and religious populations and a slight increase in the growth rate of the secular population. The Haredi population will certainly continue to grow, but at a slower pace than expected.

If these trends continue, they will have a significant impact on the future composition of Israeli society. Though the CBS projections predict that for every 100 non-Haredi Jews in 2059 there will be about 50 Haredim, if trends in religious mobility are taken into account, there will be closer to 35 Haredim for every 100 non-Haredi Jews.

EN Projections 2

The Income-Expenditure Gap and Household Debt in Israel

Executive Summary

This study analyzes the gap between Israeli household income and expenditure, and examines this gap alongside characteristics such as socioeconomic status, age, marital status, and expenditure on housing. The data show that expenditure on housing is the most significant factor in determining the gap between income and expenditure among those who are unmarried, and socioeconomic status is the most significant factor among married couples. The study also finds that there has been a rapid increase in the total liabilities of households in recent years, though an international comparison shows that the situation in Israel is relatively good.

A negative gap

A negative current gap – when expenditure is greater than income – is liable to increase a household’s risk of economic difficulties. In Israel, the share of households with a negative gap in the Jewish population stands at about one third of all those aged 25-60: 35% of households among married couples and 39% among unmarried persons (as of 2015).

Housing expenditures

One of the most significant household expenditures is the expenditure on housing (rent or mortgage). The study finds that when households are classified according to the type of their expenditure on housing: rent, mortgage payments, rent and mortgage payments, or no housing expense, households that pay both rent and mortgage payments, have a higher negative gap than those who pay only rent, only mortgages, or neither.

What influences the size of the negative gap? Married and unmarried households

Among unmarried persons, the combined expenditure on mortgages and rent is the most influential factor in determining the size of the negative gap: this expenditure increased the per capita negative gap by 156% relative to households without housing expenditures (when other characteristics are held constant).

In contrast, among households of married couples, socioeconomic class is the most influential factor in determining the size of the negative gap. Having a lower socioeconomic standing (belonging to the bottom income quintile) increases the negative gap by 23% relative to households with a high socioeconomic status (belonging to the top quintile).

In terms of the effect that consumption categories have on the size of the negative gap, the study finds that expenditures on “personal expenses” – including clothing and footwear, laundry services, haircuts, and cosmetics – increases the negative current gap at the highest rate both among those who are married (7.2%) and those who are unmarried (4.6%).

Household indebtedness

In addition to the above analyses on household income and expenditure, the study includes an analysis that classifies liable households by the entity to which they owe money: (1) banks (2) commercial bodies, and (3) family and friends. Most households in debt (93%) owe money to banks, 46%-51% owe money to friends and family, and between 21% and 37% owe money to commercial entities.

An analysis by age group found that total average debt (to all three types of entities) increased with age: the average debt in the 25-29 age group was NIS 150,000, compared to NIS 315,000 in the 50-60 age group.

Comparing total debt by socioeconomic status (income quintiles) shows that there is no significant gap between the quintiles in the amount of debt owed, but there are gaps in the distribution of the entities to which households are indebted.

While the top income quintile owed the highest amount to banks (approximately NIS 174,000), the bottom quintile owed the highest amount to family and friends (approximately NIS 110,000). These data show that, due to the low income of households in the lowest quintile, banks do not grant them high credit ratings, but they manage to raise funds from friends and family.

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An international comparison

An analysis of total liabilities taken by households in Israel shows that since 2007 there has been an increase in the growth rate of liabilities. An international comparison shows that the leverage (the ratio of total liability to GDP) of households in Israel is very low compared to other developed countries: the share of liability stands at 41% of GDP in Israel, compared with an average of 66% of GDP in the OECD.

 

Who are Israeli donors?

Philanthropy in Israel
Modern Israeli philanthropists

In the last few decades, philanthropy in Israeli society has changed and, along with the traditional charitable giving, a new kind of modern philanthropy has emerged. A recent Taub Center study, conducted by Prof. Claude Berrebi and Hanan Yonah, aims to profile modern Israeli philanthropists. The study examines the amount of money donated and the generosity of donors (measured in terms of donation as a percent of income), and explores the links between personal characteristics and the likelihood to donate.

The analysis is based on data collected from the Israeli Tax Authority between 1999 and 2011, and therefore reflects only those individuals who filed tax returns (which is not mandatory for most Israelis).

Total philanthropic donations nearly quadrupled in real terms between 1999 and 2011: from NIS 153 million to NIS 606 million a year. The average annual contribution among philanthropists was NIS 2,776 (about $790). However, because many individuals do not donate consistently – that is, they donate in some years but not in others – in any given year philanthropists who did not donate during that year will be included as having donated zero. When excluding donors who did not contribute in a particular year, the average annual donation was NIS 7,958 ($2,260).

The researchers found that almost 99% percent of all donors claiming a tax benefit in Israel are Jewish. The average donor’s age is 48 and 19% of the donor households are headed by females. About 82% of donors are married and they have 2.89 children on average. About 34% were born outside of Israel, a third originating from Africa and Asia, a third from the Americas, Oceania and Western Europe, and a third from Eastern Europe.

Some 93% of donors report their main income source to be from earned income (i.e., active income) and the most frequently recorded industry category in which donors work was organizations (e.g., NGOs, NPOs, and public organizations).

What do we know about the relationship between donor traits and donor characteristics?

The study examines such things as the scope of donations, generosity, and likelihood to donate across a number of personal characteristics.

Income and industry:

While donors with higher incomes were found to contribute higher amounts on average, those with lower incomes were found to be more generous on average (donate a larger portion of their salaries). It is interesting to see that as income rises above NIS 500,000 there is a moderate reversal in this relationship, and an increase in generosity.

Philanthropists whose main income source was active income (such as salary or business income) contribute on average NIS 1,285 ($370) more than those with mostly passive income (such as rent income or capital gains), but are found to be less generous. This may be because, while donors with active income have a higher level of income on average, their earnings tend to be more sensitive to potential fluctuations and risks.

Philanthropists employed in high-tech, manufacturing, banking and finance are the largest donors and are the most generous relative to philanthropists from other industries. On the other hand, only a small minority of employees in the high-tech sector are donors, and it is possible that philanthropic norms have not yet been established in this young industry, as they have been in more traditional sectors.

Gender, age, marital status and children:

Households headed by women tend to be more generous in their contributions in terms of donating a higher percentage of household income. However, households headed by men tend to contribute higher amounts on average.

The study also finds a trend in age that is quite unique in the academic literature – that philanthropists up to 43-years-old decrease their formal giving both in absolute terms and as a percentage of income, and from 43-years-old and on, they increase their charitable giving with each additional year.

With regard to marriage and children, the study shows that marriage is correlated with lower donation levels, and widowed philanthropists are found to be the most generous. In addition, having more children is positively associated with philanthropic behavior. In fact, there is a marginal increase of NIS 542 (about $155) in charitable giving for each additional child in the household, all else held constant.

Immigrant and minority status:

Philanthropists who immigrated to Israel donate more money than Israeli-born philanthropists, and are also more generous. New immigrants are more generous than veteran immigrants and donate larger sums on average, whereas immigrant philanthropists who have lived in Israel for 21 years or more tend to have similar contribution patterns to Israeli-born donors. A possible explanation for this is that immigrants bring with them a different giving culture, but this gradually converges over time to the level that is customary in the local culture.

In terms of minority status, there is a significant underrepresentation of Arab Israelis in officially reported philanthropy in Israel – despite the fact that they make up about 20% of the total population in Israel, only 1% of reported philanthropists are Arab Israelis.

Philanthropy in Israel

Likelihood to be a philanthropist

Philanthropist households are different from the general population in virtually every category examined, including annual income, family composition, and occupational classification. Israelis with higher incomes, individuals with earned (active) income, and those employed in real estate or organizations (e.g., NGOs, NPOs, and public organizations) are more likely than others to be philanthropists.

Immigrants from America and Europe are more likely to be donors than those born in Israel, Africa, and Asia. In addition, philanthropists in Israel have more children, on average, than the general population.

Overall, the study findings point to a significant increase in philanthropic giving in Israel, but also to differences in philanthropic behavior between donors across a multitude of socio-demographic and economic variables. As such, the study sheds light on some interesting differences between philanthropists and the general population. Through these distinctions emerges a picture of the “new” modern Israeli philanthropists.

Israel’s economy did well in 2017 – will it last?

As we say goodbye to 2017 and kick off the new calendar year, it’s a great time to look back at what has been happening in Israel’s economy during the past year and in recent years in general.

A new Taub Center study by Gilad Brand, Prof. Avi Weiss, and Dr. Assaf Zimring shows that 2017 proved to be a good year for Israel’s economy in a number of ways: the employment rate is the highest it has been for years, the unemployment rate is at a historic low, and wages have continued to increase after a long period of wage stagnation. However, the picture isn’t completely rosy. Other areas of Israel’s economy show worrisome trends, particularly when looking at potential for economic growth in the long term.

Israel’s GDP (gross domestic product) per capita is expected to increase by 1% in 2017, similar to the rise in recent years, but slightly lower than in other developed countries. Therefore, Israel finds it difficult to maintain a standard of living similar to these countries.

In 2017, as in recent years, the main barrier to the growth of Israel’s GDP is the country’s low labor productivity which, according to preliminary estimates, is expected to experience no growth whatsoever this year. Productivity, which measures the amount of goods and services produced per hour of labor, has not risen in recent years. One of the reasons for this is increased employment among population groups with lower skill levels and earning capacity (itself a positive trend).

The relatively good state of Israel’s economy is exhibited by a number of positive trends in the labor market; as noted, the unemployment rate is at a low and the employment rate is high. In addition, participation in the Israeli labor market, which had risen impressively since the early 2000s, seems to have peaked this year. While low employment rates in the Arab Israeli and Haredi (ultra-Orthodox) populations could be a source for potential further growth in employment in the long term, another demographic change – a decline in the share of people of prime working age (25-54) as a result, in part, of Israel’s aging population – likely indicates that the current expansion of Israel’s labor force supply is reaching its upper limit.

So how good do Israelis have it? What does all of this mean in terms of their standard of living?

A major and much-discussed issue that affects the standard of living in Israel is the country’s high price levels. Prices in Israel are higher than expected given Israelis’ relatively low incomes. However, there has been some improvement in this area; over the past few years there has been significant moderation in the pace of inflation, apparently due to the government’s efforts to strengthen domestic competition and ease the cost of living. For example, prices have fallen in sectors like communications and transportation following major government reforms in these areas. Household incomes have increased, and this led to a significant increase in private consumption, without a decrease in savings rates.

However, despite such improvements, Israeli price levels are still among the highest in the OECD. Furthermore, it seems that employment levels are reaching their peak (as discussed above) and that the rise in wage levels is due to an increase in consumption prices, and is not accompanied by increased productivity. This raises concerns that the rise in private consumption may not persist, and that Israel will need to look to other sources in order to close the gap between Israel’s standard of living and that of other developed countries.

English graph

An area that is particularly high on the public agenda is Israel’s housing market, given that the past decade has witnessed the development of a severe housing crisis. Apartment purchase prices have increased more rapidly than rental prices, and the gap between the two has been widening since 2009. Part of this gap is due to falling interest rates (which make mortgages cheaper and investments in apartments more profitable). However, since interest rates have remained at their current level for the past two years, it appears that the recent rise in housing prices mainly reflects expectations of households and investors that both apartment prices and average rents will continue to rise in the future.

Overall, what we can conclude at the end of 2017 is that the Israeli economy has generally grown and improved throughout the year, but when zooming out to look at the long-term trends, many economic challenges loom in the future. The current positive state of Israel’s economy provides policy makers with an opportunity to address these challenges. This interlude can be utilized to implement policy informed by long-term trends and projections, to ensure balanced growth in the future and to achieve optimal realization of the Israeli economy’s potential.

Philanthropy in Israel: An Updated Picture

The full chapter can be accessed using the link on the right.

 

Total philanthropic donations reported to the Israeli Tax Authority between 1999 and 2011 increased by almost four times in real terms: from NIS 153 million to NIS 606 million a year.

This study examines the characteristics of modern Israeli philanthropists based on data from all donors who requested tax credits for charitable donations to recognized non-profit organizations in Israel. The chapter examines the amount of money donated and the generosity of donors (measured in terms of donation as a percent of income), and explores the relationship between personal characteristics and the likelihood to donate.

Philanthropist households differ from the general population in virtually every category examined, including annual income, family composition, and occupational classification. Israelis with higher incomes, individuals with earned (active) income, and those employed in real estate or organizations (e.g., NGOs, NPOs, and public organizations) are more likely than others to be philanthropists. Immigrants from America and Europe are more likely to be donors than those born in Israel, Africa, and Asia. In addition, philanthropists in Israel have more children, on average, than the general population.

Households headed by women and immigrants tend to donate more

  • Households headed by women tend to be more generous in their contributions, in terms of donating a higher percentage of household income.
  • Philanthropists who immigrated to Israel donate more money than Israel-born philanthropists, and are also more generous. New immigrants are more generous than veteran immigrants and donate larger sums on average, whereas immigrant philanthropists who have lived in Israel for 21 years or more tend to have similar contribution patterns to Israel-born donors. A possible explanation for this is that immigrants bring with them a different giving culture, but this gradually converges over time to the level that is customary in the local culture.

Only a small share of Arab Israelis and high-tech employees donate

  • Philanthropists employed in high-tech, manufacturing, banking and finance are the largest donors and are the most generous relative to philanthropists from other industries. On the other hand, only a small minority of employees in the high-tech sector are donors, and it is possible that philanthropic norms have not yet been established in this young industry, as they have in the traditional industry sectors.
  • There is a significant underrepresentation of Arab Israelis in officially reported philanthropy in Israel – despite the fact that they make up about 20% of the total population in Israel, only 1% of reported philanthropists are Arab Israeli.
  • Jerusalem and Tel Aviv are not among the top ten localities with the most generous residents. The study finds that the most generous localities in Israel include some of the more wealthy localities such as Kfar Shmaryahu and Savyon, as well as localities of low socioeconomic ranking such as Modi’in Illit, Hatzor HaGlilit and Tiberias.

Philanthropy EN (3)

A Macroeconomic Picture of the Economy in 2017

The past year was characterized by an increase in employment and real wages, and a decline in the unemployment rate, which is at a historic low. However, per capita growth in Israel is low relative to other countries, and labor productivity growth has stagnated.

GDP is expected to grow by 3.1% in 2017, a rate that translates into a growth of about 1.1% in GDP per capita. These figures are lower than last year’s growth (which stood at 4.0% GDP growth and 1.9% GDP per capita growth), but is similar to the growth rate in recent years. All of the signs indicate that Israel’s economy is in a state of near full employment, and therefore that the current growth rate probably reflects its long-term growth trend, rather than changes in the business cycle.

  • The increase in employment rates alongside the rise in average real wages led to an impressive increase in consumption in recent years, and consequently an increase in the standard of living.
  • Consumption prices in Israel are significantly higher than in other developed countries, but there appears to be a change for the better, and there are signs that prices are to some extent in a process of adjusting to the level of other developed countries.
  • Despite the encouraging data, it seems that in the long term, employment growth is reaching its upper limit and that wage growth is due to a temporary improvement in the trade conditions in the economy, and not from an increase in productivity. This raises concerns that the rapid increase in private consumption will not last for long, and that the country will need to find other sources of growth to narrow the gap between the standard of living in Israel and other developed countries.
  • Housing prices continue to rise at a faster rate than rental prices, thus the return on owning an apartment is further declining. Since interest rates have remained at their current level for the past two years, it appears that the recent rise in housing prices mainly reflects expectations of households and investors that both apartment prices and average rents will continue to rise in the future.

Macro EN (1)

Education and Wage Trends Among Ethiopian Israelis — Differences by Gender

In 2015, the Taub Center published a brief examining the developments in education and employment among the Ethiopian Israeli population between 1998 and 2011. The study found that the education level of those who came to Israel at an older age is low, while Ethiopian Israelis who grew up and were educated in Israel enjoy greater educational achievements.

This policy brief looks more into education and wages among Ethiopian Israelis and, in particular, explores differences between the genders. While Ethiopian Israeli women’s educational achievements are getting closer to the rest of their Jewish peers, the gaps among the men remain large.

Why Does the Start-Up Nation Still Have Low Productivity?

Executive Summary

The Israeli economy is characterized by low productivity, and thus a low standard of living, despite its being a world-class leader in the high-tech field. Why the paradox?

A new study by Taub Center Researcher Gilad Brand shows that the problem lies in the exceptionally large gap in the Israeli labor market between the size of the high-tech and other export-intensive sectors, which are characterized by high wages and rapid growth, and the rest of the market with its low salaries and slow growth. According to the research, the success of the thriving sectors in Israel, unlike in other developed countries, has had little impact on the rest of the economy. Among other things, this is because of low labor mobility which has resulted in the development of two separate economies. In light of these findings, it appears that government support of the high-tech industry has limited impact on the rest of the market and, therefore, other forms of intervention should also be considered.

One market – two economies

According to Brand, the central reason for differential growth between the sectors is that Israel has especially large disparities between the exporting sector (which is primarily made up of high-tech and advanced technologies) and the local sector.

  • Israel’s export sector is highly concentrated and largely rests on high-tech and advanced technologies: 56% of those employed in the export sector work in high-tech and advanced technologies – almost double the OECD average, and the highest share of all the countries examined.
  • Achievements of high-tech workers on the survey of adult skills (PIAAC) are higher than the OECD average, though the achievements of the rest of the workforce are lower than in 20 of 25 other OECD countries.

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Does investment in high-tech have an impact on the rest of the labor market?

Economic literature shows that the benefit the export industry gets from international exposure and competition should trickle down to the rest of the market through labor mobility: higher wages and demand for workers in exporting industries should lead workers to move from local to export industries. As a result, this should incentivize local industries to improve efficiency in order to remain profitable, which in turn would improve productivity and wages. While success in the export sector has indeed trickled down to the rest of the economy in other developed countries, this has not taken place in Israel.

  • There is indeed high demand for more workers in high-tech and advanced technologies. For example, among clerks and office workers there are about 3 job searchers for each available position, as opposed to 1.5 workers for every available job for practical engineers and technicians in science and engineering.
  • There is low worker mobility from local to export industries because the jobs available in export industries require highly trained and skilled labor.

As a result of low mobility, the efficiency, productivity, and wages in the local sector are not increasing, despite the success of high-tech in Israel.

Improving Israel’s labor productivity

The concentration of high-tech products in the export sector is the result not just of Israel’s relative advantages in the field, but also of government incentives given to this sector over the years. Brand finds that, in light of the conditions described above, additional investment in high-tech on its own is unlikely to improve productivity in other sectors. On the other hand, direct investment in local, non-trade sectors could be risky because they have much more limited GDP growth potential than the tradable industries. In addition, improving productivity in the local sector could improve efficiency at the expense of low-skilled workers, who might be pushed out of a job by advanced technologies.

  • Despite the sharp growth in workers in the service and trade sector, its share in the GDP has remained almost identical over the past four decades (45-50%). A growing percentage of workers divide a share of the GDP that is not growing.
  • Israel has import restrictions that diminish the volume of trade – Israel imports only 28% of its GDP – less than the majority of OECD countries.
  • The volume of imports to Israel has decreased by 1.3% over the past decade, and it is the only country in the OECD whose imports declined during this period. It should be noted that the volume of a country’s imports largely determines the volume of exports in a country, through the exchange-rate mechanism.
  • There has been a decline in employed persons in most sectors in the Israel’s export industries.

Overall productivity in Israel would be improved if workers move from the local sector into the export sector where, as stated above, demand for workers is high. Yet Brand notes that “in order to bridge the skills gap between workers in the two sectors, we should think about vocational training that will enable employment mobility and broaden accessibility to employment in the export sector.” Removing trade restrictions and changing government investment policy to allow greater competition in imports and exports could also help to improve productivity by allowing more Israeli companies to benefit from the advantages of exposure to international markets.

Division of Labor: Wage Gaps between Women and Men in Israel

Wage gaps between women and men in Israel have narrowed over the years, but are still large. A new Taub Center study reveals that the most substantial factor behind the disparity is the fact that, on average, women work fewer hours than men, but another key factor is that women are more likely to be employed in lower-wage occupations and industries.

The wage gap between women and men in Israel’s labor market ranges from 32% to 42% (depending on the calculation method used). This difference has been studied extensively, and opinions differ as to its source; some attribute it to discrimination against women, while others maintain that the gap is rooted in essential differences between the genders and in their differing occupational preferences. A study by Taub Center Researcher Hadas Fuchs that was recently published in the Taub Center’s State of the Nation Report 2016, sought to assess the status of women in the labor market, focusing on the causes of the male-female wage gap. Fuchs assessed the gap in light of employees’ personal and demographic characteristics, including number of working hours, education level, and the occupations and industries in which the employees worked. The assessment included data from 2010-2011.

Fuchs’ calculations indicate that the most important factor behind the gender wage gap is the number of work hours, with 57% of the gap being due to women’s smaller position scope (i.e., less than full-time employment) (see Figure 1). In 2015, 34% of working women aged 25-54 were employed part-time, versus 17% of men; even among those with full-time jobs, women worked fewer hours.

Article Graph 1 final

The second most important cause, which is responsible for 14% of the wage gap, is the difference between the occupations and industries in which men and women work. Men work in occupations where the average wage tends to be higher (as shall be seen below). By contrast, the number of years of schooling variable reduces the gap by 5%, as on average, women are better-educated than men – and a higher education level raises the average wage.

Overall, more than two-thirds of the wage gaps arise from the variables that Fuchs assessed, among them one’s years of experience, position scope, family status, and education.  The portion of the gap that is not explained by these variables could  reflect discrimination, but it might also be due to attributes that could not be measured in this study, such as personal abilities, the exact job held by a given employee, or more precise detail regarding occupation. So that the “personal ability” component (which is presumably a major determinant of wage) could be taken into account, Fuchs used a special Central Bureau of Statistics database, which, in addition to the data shown above, also included matriculation and psychometric exam scores. These exams reflect, to a certain degree, the requirements of the labor market, and scores on these exams can thus serve as a good indicator of an employee’s “quality” in terms of remuneration for their work. This database contains information for those who were ages 29-31 in 2008.

One of the most interesting findings obtained through this estimation is that the occupation/industry component has a greater impact on wage gaps [in the 29-31 age group] than in all age groups taken together – a fact that underscores the importance of occupational choice in determining women’s future wages. Among those with academic degrees, this component had the greatest impact on the wage gap, explaining over half of the disparity (as seen in Figure 2).

Differences in matriculation and psychometric exam scores increase the wage gap; their joint contribution to the explained gap was 13%. Fuchs explains this by noting that, although women have a higher matriculation average than do men, five units of mathematics study and the quantitative portion of the psychometric exam have relatively great influence on wage, and women tend to have lower achievements in these spheres. In this calculation, the unexplained wage gap was only 6%.

Article Graph 2 final (update)

 

In light of the major role of mathematics attainment in determining wage, the study examined the gender gaps in this sphere at various stages along the lifecycle. The data indicate that women’s lower achievements in math are discernible from a young age; among Jewish Israelis, girls’ achievements on the Grade 5 GEMS exams in mathematics are lower than those of boys (though girls outperform boys in English), while on the PISA tests their achievements are lower in math and higher in reading. In secondary school fewer girls study math at the 5-unit matriculation level, and their average score is lower.

At the academic level, in all degree programs, women account for at least half (and often more than half) of students, but they tend to study therapy and education-related fields.  In contrast, men comprise the majority in the mathematical and scientific disciplines, which are associated with higher average salaries. In 2014, for example, only 27% of students in mathematics, statistics and computer science were women.

Gender polarization continues into the labor market, where a high percentage of women are still employed in education and a very low percentage in high-tech occupations. Even among computer science graduates, a relatively high percentage of women do not go on to work in this field. The reason for this may be that women enter occupations, such as education, that provide them with flexible working hours and part-time employment options, and avoid occupations that are regarded as demanding in terms of the number of work hours, such as technology, science and finance (as shown by Figure 3).

eng3

Given these findings, it appears that in order to reduce wage gaps, it is important to raise awareness of the impact that choice of academic field has on wage. Additionally, the contribution of mathematical ability to wage, and women’s lower attainments in math-related fields from an early age, highlight the need to persevere with programs that encourage women to study scientific subjects at a high level.

The question of why women do not enter STEM (science, technology, engineering, mathematics) fields, which are considered prestigious and known to offer high salaries, should also be examined in greater depth. Fuchs notes that the reason for this may be that women are still thought to be their children’s primary caregivers, and to bear most of the responsibility for housework. If this is indeed the reason, then one should consider the possibility of offering work-schedule flexibility and shorter work days to both men and women, which would enable suitable women who so desire to enter these fields, fulfill their potential and reduce overall gender wage inequality.

 

An unusual year: looking back at 2016

In 2016, Israel experienced interesting and surprising macroeconomic trends. The economy witnessed a higher GDP growth rate than in the previous two years, as well as growth in labor force participation and wages. The question is whether the economic growth of 2016 indicates a return to Israel’s average economic growth rate prior to the global economic slowdown (beginning in late 2011) or whether 2016 is an exception and the economy will return to sluggish growth in the coming years. Brand and Weiss find evidence indicating that 2016 was merely an outlier and that a return to slow growth may be on the horizon.

In the years following the financial crisis, and particularly since 2012, Israel experienced a considerable slowdown in economic growth. Between 2012 and 2015, GDP per capita growth decreased from an historic average of almost 2% a year to an annual growth rate of about 1%-1.2% a year. Israel’s economy improved in 2016 and growth of GDP per capita for the full year, which has not yet been published, is expected to stand at 1.5%.[1] This is a slightly lower rate than in the past, but higher than the two prior years. However, the Bank of Israel predicts that GDP per capita will return to a growth rate of about 1% in the coming years.

Labor productivity graph

There were positive developments related to wages in 2016, as well. Real wages rose by 2.3% in the first three quarters of the year, after a 3.1% increase in 2015. These wage increases are exceptional in comparison to the very low increases in real wages in previous years and are inconsistent with stagnant productivity growth during this period.

When economic growth is broken down into various factors, it seems that the biggest contributor to growth per capita in recent years was the expansion of the labor market, which resulted from a steep rise in labor market participation rates. However, this trend is unlikely to continue in the future for two main reasons: firstly, the share of working-age Israelis is expected to decrease as baby boomers reach retirement and, secondly, further increases in employment are most likely to come from the Haredi and Arab Israeli sectors, where human capital is relatively low or not well-matched to the needs of the modern labor market – thus contributing little to overall economic growth. Therefore, Israel’s economic growth that emerges as a direct result of an expanded labor force is approaching its upper limit and is likely to wane in the coming years.

It is important to note that the increase in labor force participation and decrease in the unemployment rate in recent years is an unusual phenomenon given the sluggish growth in Israel’s per capita GDP, and is due to changes in the composition of demand in Israel’s economy: a shift from exporting industries with high productivity levels to labor-intensive industries, characterized by low productivity.

At the same time that Israel is experiencing a sharp rise in employment rates, there has been a decrease in investment in capital (such as infrastructure, machinery and equipment) and a slowdown in the growth of human capital. Although the data show an increase in investments during 2016 this is largely due to one company (Intel) and does not reflect the rest of the economy. Given low interest rates and a relatively stable economy, it is surprising that investment has slowed in most sectors of Israel’s economy. The danger in these trends lies in the effect they will have on Israel’s potential long-term growth.

The big question that arises from these trends is: why is there not more investment in Israel’s economy? The challenges of investing further in physical capital and human capital may lie in bureaucratic barriers as well as in geopolitical factors.

A possible way to drive growth is to improve the business climate in Israel. Each year the World Bank publishes the “Doing Business” report, which ranks countries by the level of difficulty of conducting business there. This index ranks Israel in 52nd place, below nearly all of the other OECD countries. This low rating reflects the need to streamline bureaucracy – especially in the realms of real estate, foreign trade, domain registration, and property tax payments. In these areas, Israel is ranked very low worldwide and requires a dramatic change to support faster economic growth.

Doing Business

Looking forward, demographic shifts in Israel require greater investment in physical capital and human capital, particularly within those population groups that are growing rapidly in size. Increasing competition among local businesses, streamlining bureaucracy, and removing barriers to imports will all help stimulate economic growth in Israel in the long term.

The positive economic growth in 2016 and the good condition of Israel’s labor market make this an ideal time for policy makers to address the demographic and structural challenges facing the economy. The sooner policy makers implement policies based on long-term economic considerations, the easier it will be to promote balanced growth of Israel’s economy.

 

 

[1] According to the Bank of Israel, Israel’s GDP is expected to increase by 3.5%, and GDP per capita by 1.5%. The Central Bureau of Statistics (CBS) predicts the GDP will increase by 3.8%, and by 1.8% per capita.

The Macro Picture of Israel’s Economy in 2016

At the end of 2016, the macroeconomic picture for Israel is mixed. Although there has been a slowdown in economic growth in the past five years, in the labor market, the situation looks good with signs of movement towards full employment. The data for the first quarter of the year may have raised some concern of a recession, but in the course of the year, the growth figures actually improved and the GDP is expected to grow by 3.5 percent1 — a somewhat lower rate than in the past but higher than the growth rate of the last two years.

This introduction appears in the Center’s annual publication, State of the Nation Report 2016edited by Prof. Avi Weiss.

Summaries of chapters in the “State of the Nation Report” 2016

Gender Differences in the Labor Market: Wages and Employment Polarization

Hadas Fuchs

This chapter examines the determinants of the gender wage gap based on individual and demographic characteristics of workers – including the use of a unique database that includes bagrut and psychometric scores, which serve to a certain extent as an indicator of each worker’s qualifications. In general, Israel’s labor market is becoming more equal from a gender perspective. Women’s employment rates continue to rise, and Jewish women have nearly reached the same employment rates as Jewish men. In addition, the wage gap has been decreasing. The gross wage gap was 39% in 2014 – a gap mostly explained by the different characteristics of female and male workers in the labor market. After controlling for different variables, especially the differences in working hours and choice of occupations between the genders, the wage gap dropped to 13%.

Most of the wage gap is explained by the different characteristics of men and women in the labor market. The most influential factor in explaining the gap is the disparity in working hours between men and women, followed by differences in occupation choice between the genders. While the wage gap is almost nonexistent in the field of education, in industries such as medicine and engineering, the gender wage gap is higher than 20 percent. In other words, although it seems that gender wage gaps exist in at least some occupations, most of the wage gap is related to differences in the number of working hours and in differences in the occupation pursued (which begins to take shape at an early age).

Achievement in mathematical subjects, where men have a large advantage, also has an impact on the wage gap. The lower achievements of women in math and science extend back as far as high school with fewer girls taking high level bagrut exams in math and science and continuing on to academic studies and work in these fields. Although the share of women in academia is overall higher than men, the share of female students in the technology fields has not changed over the years and stands at only 20%-30%. The study found that there is a majority of male workers in the technological fields, which are the most profitable, and even among female graduates with a degree in computer science, there was a drop in those actually working in the field.

 

 

Challenges of Haredi Integration in Academic Studies

Eitan Regev

In recent years, there has been an impressive growth in the number of Haredi (ultra-Orthodox) students in higher education. Between 2008 and 2014 the number of ­­Haredim newly enrolled in academic learning institutions nearly tripled: from 1,122 to 3,227. In 2014, approximately 1,600 Haredi women and 450 Haredi men successfully completed their academic studies – as compared with only 650 Haredi women and 200 Haredi men in 2012. Yet, despite the significant growth in Haredi students, the percentage of university graduates among Haredim (especially men) remains quite low. As of 2014, only about 2.5% of Haredi men and 8% of Haredi women among those aged 25-35 had an academic degree – as compared with 28% of secular men and 43% of secular women.

About 58% of ultra-Orthodox students drop out of their academic studies (academic preparatory (mechina) programs and degree programs), as compared to 30% among non-Haredi Jews. Compared to the general population, a smaller percentage of Haredi students study at universities and a larger percentage study at academic colleges (primarily on Haredi campuses) and at the Open University, which has stringent academic requirements but enrollment that is open to all. Approximately 44% of Haredi dropouts studied in academic colleges and roughly another 40% studied at the Open University.

The majority of Haredi students are accepted to higher education institutions without bagrut or psychometric exam scores – which is due not only to the fact that most study at academic colleges, but also to the fact that the admissions requirements are much easier at the Haredi campuses than for the overall student population. About 79% of Haredi students at academic colleges were accepted without bagrut or psychometric exam scores.

The fact that the majority of Haredi male students do not study core curriculum subjects in high school impacts their ability to complete an academic degree. Without a change in their basic education, it seems that their drop-out rates will remain high. Achievement among Haredim in English (as a second language) is particularly low; when comparing scores on the psychometric English section, a large gap was found between secular and Haredi students (20 points out of 100) compared with a 6-7 point gap for math and near equal performance on the Hebrew verbal section. However, mechina programs and adequate support during academic studies could improve Haredi students’ chances of success.

 

 

Is Less Really More? On the Relationship between Class Size and Educational Achievement in Israel
Reut Shafrir, Yossi Shavit and Carmel Blank

The impact of class size on pupil achievement has been a matter of concern to education professionals for many years. Parents and teachers argue that large classes are detrimental to learning, but education researchers have yet to reach an unequivocal conclusion on the topic. The main challenge in assessing the relationship between class size and pupil performance is controlling for class placement, which is not random and could therefore potentially distort findings.

The present study looks at the topic in the Israeli context, through a hierarchical analysis of the scores of pupils who took the Israeli Meitzav exams in 2006 and 2009 using three models: a model containing only class size, a model controlling for background variables such as prior achievements and parental educational levels, and a model that also includes interaction variables aimed at determining whether class size has a different effect on pupils from populations with weaker educational abilities and lower socioeconomic status than pupils with high educational abilities from higher ­­­socioeconomic status.

The findings indicate that, when controlling statistically for parental education levels and prior attainments, the relationship between class size and achievement is not significant. Thus, small classes do not seem to enhance the achievement of their students. The hypothesis that the impact of class size on achievement varies between social strata and between stronger and weaker pupils was also refuted: no difference in the relationship between class size and achievement was found among the groups.

It is important to note that the study’s findings indicate that class size in and of itself does not ensure improved pupil achievement. Small classes could facilitate the use of teaching methods that may help students achieve – for example, individualized or small-group instruction. However, it is unclear whether teachers working in small classes do, in fact, take advantage of the possibilities that such classes present, including the teaching methods suited to them. They might be using forms of pedagogy similar to those commonly employed in large classes, and effectively neutralizing the small-class advantage.


 

Private Expenditure on Healthcare in Israel

Dov Chernichovsky, Haim Bleikh and Eitan Regev

National healthcare expenditures can be split into two categories: public expenditures, funded by the state, and private expenditures funded by individuals (either via out-of-pocket payments or insurance premiums). The average monthly household expenditure on healthcare in Israel is NIS 906 (in 2014 prices), which represents about 5.9% of average household income, as compared with 3.9% in 1997.

The public health expenditure per capita rose from NIS 4,819 (in 2014 prices) in 1995 to NIS 6,377 in 2014, with an average annual growth rate of about 1.3%. In contrast private expenditures rose during the same period from a total of NIS 2,247 (in 2014 prices) to NIS 3,634 – an average annual growth rate of 2.6%; in other words, double the growth rate of the public expenditures.

Private spending on supplementary care that is not included in the universal health basket (mainly dental care) and for parallel services (i.e., private services for care that is also available through the publicly funded health basket) is higher in places where the availability and use of public services is lower – namely, among Arab Israelis and also to some extent among Haredim. On the other hand, the higher relative spending on parallel and supplementary services among those with higher incomes supports the hypothesis that the public system is insufficient, according to them, either in the type or quality of care provided.


 

Household Expenditures on Preschool Education

Kyrill Shraberman and Nachum Blass

Israel’s education system is, for the most part, operated and funded by the state and local authorities through the State Education Law and the Compulsory Education Law. For most of the state’s existence, the laws applied to children aged 5 and over, except for special cases. However, in the 2012-2013 school year, the government decided on full implementation of the Compulsory Education Law for children aged 3-4, in keeping with the recommendations of the Trajtenberg Committee.

The rise in the number of 3-4-year-old children enrolled in public preschools and afternoon programs since the 2012-2013 school year, along with an overall decline in parental payments for preschool education, indicates that extending implementation of the Compulsory Education Law to absolute coverage of the entire relevant population has indeed benefited the target population, i.e. parents of 3-4-year-olds. However, parents working in a full-time job are still forced to finance a large share of their children’s activities in the afternoon hours (not included in the policy change), and these payments, to a large extent, offset most of the reduction in preschool tuition.

Furthermore, the law has had different effects on different population groups in Israel. Since its implementation, the burden of preschool expenditures increased for those in the middle quintiles to a greater extent than for those in the lowest (first) and highest (fifth) quintiles. Households of higher economic standing enjoyed most of the expenditure decline since less-affluent households already received government support before the full implementation of the law. Moreover, due to limited spots in public preschools or due to a rise in incomes, there was a surge in demand for private preschools in the periphery. This, in turn, increased the relative preschool expenditure burden for households in the periphery during the research period, nearly reaching the level of burden on households in central Israel. Although the expenditure burden is substantially lower among Arab Israeli households, the disparities have been shrinking since 2012, largely due to an expenditure burden reduction in the Jewish sector. The share of children in preschool in the Arab Israeli sector is lower (79% in the 2013-2014 school year) than in the Jewish sector (89% in the same school year).

It is important to note that implementation of the law was followed by reports of crowded preschool classes and questions regarding the quality of service relative to years past. However, beyond the impact that the law’s implementation may have at the household level, the researchers of the study add that the economy as a whole will benefit from the increase in preschool attendance which will ultimately lead to upgraded human capital in Israel.

Despite the rise in public expenditure on preschool education, the national resources allocated to preschool education, relative to GDP, did not change. This resulted in a rise in the public share at the expense of the private share, in financing preschool education.

 

 

 

Israel’s Economic Growth: On the Way to a Lost Decade?

Gilad Brand

The growth in GDP per capita in Israel fell in recent years, and this chapter attempts to examine if this figure indicates a decline in the long-term potential growth of the economy.

Of the components underlying GDP growth in recent years, the increase due to employment rates was the largest, and accounted for about half of all growth in the past five years.  This increase was largely due to the rise in labor market participation among women and population groups who generally have low participation rates.  Expansion in higher education was a key component of growth in the past, but estimates show that the contribution of human capital to growth is gradually decreasing alongside a slowdown in the rise of educational attainment.

Capital stock per hour worked was on the rise in recent years, yet came to a standstill in 2014-2015.  Increased investment in the Israeli economy is essential so that it can enjoy stable growth from competitive advantages based on technological advancements, rather than on the low cost of labor.  However, these developments are interrelated, and the steep rise in the supply of low wage workers detracts from the incentive to invest in capital and advanced technologies.

In the short term, economic growth depends on the global environment. The slowdown in international trade in recent years weakened demand in tradable industries, weighing down overall growth.  The sharp rise in labor market participation rates in recent years has supported economic growth thus far, but signs indicate that this channel is nearly exhausted and, without any changes in existing conditions, the probability of a further slowdown increases.  Long-term growth is possible even under these conditions, but it depends on active policies and the implementation of reforms that will support such growth.


 

Public Welfare Expenditure

John Gal and Shavit Madhala-Brik

This chapter surveys developments in government welfare services over the past fifteen years. Israeli public spending on welfare services – spending that funds a variety of benefits and social services (alongside healthcare and education) – constituted one-fifth of Israeli governmental expenditure in 2015, and amounted to 94 billion shekels. Social insurance programs, most of which are operated by the National Insurance Institute, account for 80% of the total expenditure. Over the past year, expenditure on social security programs increased, and additional changes in this area are expected for 2017. Some other welfare spheres also witnessed moderate spending increases in 2015, most notably expenditures on negative income tax, day care centers, and employment programs.

Social welfare spending declined by 30% in the early 2000s, and then stabilized at relatively low levels relative to GDP and to total government expenditure. Among the components of social welfare spending, there was a major—80% —drop in Ministry of Construction and Housing expenditure between 2000 and 2015. However, during that period the Ministry of Labor and Social Welfare expenditure per service-recipient-household and as a share of total government expenditure increased, as did Ministry of Economy expenditures on daycare centers and home daycare (mishpachtonim).

Overall, Israel’s welfare expenditure level remains low, relative both to other welfare states and to the needs of the target populations.

This chapter also analyzes implementation of the Elalouf Committee (War Against Poverty) recommendations. The findings indicate that, during the first two years after the Committee submitted its report, half of the recommendations were implemented in part or in full. During 2015 and 2016, the anti-poverty budget additions to all Israeli government ministries amounted to 434 million shekels and 1.9 billion shekels, respectively, in comparison to the 7.4 billion shekels per year that the Committee recommended. It is doubtful whether this addition, only a quarter of the recommended sum, will bring about the substantial reduction in Israeli poverty rates, which was the Elalouf Committee’s overarching goal.

Welfare expenditure data, as surveyed in this chapter, point to stability and moderate growth in government spending in the various welfare spheres. Most of the growth reflects demographic changes, while a small portion stems from legislative developments (due to the social justice protests and the Elalouf Committee recommendations) and changing demand for services (exemplified by the declining number of new immigrants).

 

 

Poverty and Inequality in Israel: Trends and Decompositions

Haim Bleikh

This study examines the trends in inequality and poverty rates between 2002 and 2014. Most of the analyses relate to the working age population, whose contribution to income inequality and to long-term changes in it is the greatest, as well as to the elderly population. The method used in this analysis is an estimation of the share of the three central population groups – Haredim (ultra-Orthodox Jews), Arab Israelis and non-Haredi Jews – in changes in the poverty and inequality indices over time.

Among the working age population, market income inequality (inequality in income from employment, occupational pensions and capital, before the deduction of compulsory payments) decreased consistently over the period examined, but the decline was only reflected in disposable income (income plus transfer payments, after the deduction of direct taxes) in recent years. The decline coincided with the adoption of two key policy measures after 2003: pension cuts and a reduction in direct taxes. Because of these policy changes, there was a change in the composition of household income (income from work increased, while government support decreased).

The findings show that the overall poverty level in Israel has not changed between 2002 and 2014. However, the composition of the poor population has changed substantially. In 2002, the share of poor Haredi and Arab Israeli households out of all poor households stood at 44%; in 2014, they comprised 54% of poor households. This represents an increase that exceeds the rise in this group’s share in the overall population of working age households.

The chapter also presents findings relating to the population over age 60. Over the years, there has been a decline in the inequality and poverty indices in market income among the elderly population. Large discrepancies were found in the income levels between different groups in this age segment, particularly between long-time Jewish residents and new immigrants and Arab Israelis. Most of the gap can be explained by differences in income from occupational pensions and work between each group, even though there was an increase in pension eligibility among new immigrants. In addition to differences in income, there are large disparities in home ownership between the groups: high rates of home ownership among long-time residents and Arab Israelis, compared with low rates among new immigrants.


 

The Outsourcing of Welfare Services: Trends and Changes

Shavit Madhala-Brik and John Gal

The privatization of social welfare services is a process that has been on-going since the 1980s. This chapter sheds light on the phenomenon and concentrates on the privatization process as it relates to an array of services of the Ministry of Labor and Social Affairs. At the center of the analysis stand two questions: (1) What are the activity patterns of for-profit and nonprofit agencies working in this field? (2) Can we identify trends in market concentration in welfare service provision?

The study’s findings indicate that the extent of services that are outsourced by the Ministry has grown over the years: from 70% of the Ministry’s total expenditure in 2000 to about 80% in 2015. The majority of service providers to this ministry are veterans in the field, and they garner about 96% of the total payments for outsourced services. The findings relating to concentration levels indicate that competition among service providers in the field of personal social services is limited. The majority of the 50 largest providers, whose share among all of the outsourced service providers is about 2%, have provided services for many years and they garner about 46% of the total expenditures for outsourced services.

It is evident that there is no particular preference for nonprofit agencies in this process, and that in the eyes of policy makers there is no essential difference between for-profit and nonprofit agencies. The analysis of providers showed that most of them are for-profit providers. Nonetheless, the distribution of payments between the two kinds of providers indicates that about half of the payments went to nonprofits. In the years that were examined, there was a rise in the number of nonprofits working with the Ministry, and a simultaneous drop in the number of for-profit providers.

While competition among service providers is limited, the concentration indexes tested for the various departments indicate that competition does exist and is actually increasing with time. The research and results of the analysis raise the question of the importance of competition in the social service markets. On the one hand, the existence of competition between service providers is one of the justifications for privatization. On the other hand, in the series of interviews conducted for the study, it emerged that providers are selected mainly on the basis of their experience and expertise in providing the services. Thus, in a domain of services where there is a satisfactory provider, competition is of little importance. Moreover, it is argued that, in the social services, it is important to maintain continuity of care by a single service provider instead of encouraging turnover. This is meant to prevent upheavals due to staff changes, for instance, that could harm service recipients, especially when it comes to institutional settings.


 

Twelve years of the National Task Force for the Advancement of Education in Israel (the Dovrat Committee): What has changed?

Nachum Blass

Twelve years have passed since the National Task Force for the Advancement of Education in Israel (the Dovrat Committee) submitted its recommendations to the government. In that time, the education system has gone through unprecedented change: the teacher’s unions have signed new agreements that changed their employment conditions and improved their salaries; the Ministry of Education’s budget has grown in absolute terms as well as in terms of budget per pupil; the National Authority for Measurement and Evaluation (RAMA) was established to monitor student achievements and the Israel Institute for School Leadership (“Avnei Rosha”) was established for enhanced training of school principals; and after a lengthy teachers’ strike, there has been slow movement toward reducing classroom size.

Not all of the committee’s recommendations were implemented – some were rejected or not carried out – yet , Blass found similarities and sometimes almost correspondence between the recommendations and real developments, albeit with a lag of several years. This does not necessarily indicate a direct and immediate causal relationship between the two.

Among the Dovrat Committee’s main recommendations related to teachers’ working conditions and training were: a substantial wage hike, a 36-40 hour work week, changes in the teacher promotion track, and improvement of the teacher training process. In actuality, real wages of teachers in Israel increased between 2005 and 2013 – by 26% for primary school teachers, 19% for middle school teachers, and 10% for high school teachers. Jewish primary school teachers increased their average work time from 75% of a full-time position to 78% while for Arab Israeli teachers it increased from 80% to 85%. Applications to teacher training institutions have increased in recent years, most notably among those applying for academic tracks, with an 81% rise in graduates as compared to 2009.

Between 2000 and 2016, the nominal Ministry of Education budget grew at an unprecedented rate of 142%, and the real budget by 86%. The number of pupils per full-time teacher position dropped from 13.8 in 2007 to 12.7 in 2014 – a 9 percent drop. Taking into account the growth in the number of teachers and average teaching hours, it is clear that the number of hours per pupil also rose – evidence of the increase of educational spending directly for pupils.

These changes have been reflected in improved pupil achievement on Meitzav exams and in Israel’s ranking in international exams, as well as higher satisfaction rates among teachers with their salaries and their status. In turn, there has been a rise in professionals seeking retraining in the field of education.

 

 

A Healthy Food Basket in Israel

Janetta Azarieva, Ben Ariyan, Rivka Goldschmit, Avidor Ginsberg, Ron Milman, and Dov Chernichovsky

Access to a healthy food basket, which guarantees adequate nutrition, is essential for optimal physical, mental, cognitive and social functioning and is a fundamental right in a modern society, similar to access to education and health services. This chapter lays the foundation for defining such a basket, and analyzes its significance in terms of household budgets. This basket is built to ensure adequate nutrition at as low a cost as possible, taking into account dietary patterns in Israel. The basket includes all the major food groups: grains, vegetables, dairy protein, animal protein, legumes and fats.

On average, the required spending to purchase a healthy food basket decreases as household income increases, as in Israel, there is a negative correlation between household size and household income. In other words, in the top decile the average required spending to purchase a healthy food basket is the lowest, because the number of household members in this decile is the lowest, at 2.46. In contrast, in the lowest decile, the average number of household members is the highest. Based on the recommended number of servings per day, the average monthly cost of a healthy food basket is NIS 844 for an adult and NIS 737 for a child (in 2015 prices). Currently the composition of households in the different income levels means that the cost of a healthy food basket for a family in the top decile is NIS 2,040 per month and for a family in the lowest decile, about NIS 3,450.

A comparison of actual spending on food shows that in the upper income quintiles (quintiles 4 & 5), actual spending is higher than what would be required to fund a healthy food basket, or lower by only a few percentage points (quintile 3). In contrast, in the lowest two quintiles (and particularly in the lowest quintile), the actual spending is 22% lower than the recommended amount. It is difficult to identify if the gap in spending arises from a preference for cheaper (and often less healthy) food and different priorities or if the spending gap is a result of economic hardship.


 

Why is men’s life expectancy so high in Israel?

Alex Weinreb

This chapter examines the factors responsible for the high life expectancy of Israeli men, with Israel ranked among the top five countries in the world in this area. World Health Organization figures show that, in 2013, life expectancy for Israeli men was 80.2 years – this places Israel at the top of world rankings alongside Sweden, just after San Marino and very close to Iceland, Switzerland, Australia, and Japan.

An analysis based on a sample of 170 countries shows that levels of wealth, education, and inequality in a country, as well as its demographic and health characteristics, are not sufficient to explain the highly-ranked life expectancy of Israeli men, which is about 7 years higher than predicted by the model.

The second model, which tests geographical characteristics and religiosity in the country, explains about 3 years of the high life expectancy. The third model takes into account mandatory military service in different countries (according to data from 1990). This model produced a number of findings: (1) In countries that had mandatory military service in 1990, life expectancy was 1.5 years higher in 2013 than in countries without mandatory service. (2) The length of military service matters. In the case of Israel, a variable representing the interaction between military spending as a percent of GDP and length of military service explained 3.6 years of life expectancy. These data support the hypothesis that military service can improve the physical fitness of men, and therefore reduces their chances of death from diseases associated with low levels of physical activity.

Mandatory military service is not a cure all, and there are many causes of death that even extensive and intense physical fitness programs will not prevent against. Some of these include diseases for which Israel ranks very poorly, such as sepsis and kidney disease. Treatment for these diseases requires regular investment in health. In addition, one cannot expect that military service will naturally eliminate the unwanted health effects of poor diet or lack of exercise, especially during childhood.

Growth in the Israeli Economy

The growth in GDP per capita in Israel fell in recent years, and this chapter attempts to examine if this figure indicates a decline in the long-term potential growth of the economy.

Of the components underlying GDP growth in recent years, the increase due to employment rates was the largest, and accounted for about half of all growth in the past five years.  This increase was largely due to the rise in labor market participation among women and population groups who generally have low participation rates.  Expansion in higher education was a key component of growth in the past, but estimates show that the contribution of human capital to growth is gradually decreasing alongside a slowdown in the rise of educational attainment.

Capital stock per hour worked was on the rise in recent years, yet came to a standstill in 2014-2015.  Increased investment in the Israeli economy is essential so that it can enjoy stable growth from competitive advantages based on technological advancements, rather than on the low cost of labor.  However, these developments are interrelated, and the steep rise in the supply of low wage workers detracts from the incentive to invest in capital and advanced technologies.

In the short term, economic growth depends on the global environment. The slowdown in international trade in recent years weakened demand in tradable industries, weighing down overall growth.  The sharp rise in labor market participation rates in recent years has supported economic growth thus far, but signs indicate that this channel is nearly exhausted and, without any changes in existing conditions, the probability of a further slowdown increases.  Long-term growth is possible even under these conditions, but it depends on active policies and the implementation of reforms that will support such growth.

This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2016edited by Prof. Avi Weiss. 

How much bang for your buck? The stagnation of real wages in Israel

How much bang for your buck? The stagnation of real wages in Israel

 

Generally, real wage increases are tied to increases in productivity (defined as the output of goods and services per hour of labor) – as productivity goes up, so do wages. In theory, this should give workers more money to spend, enabling them to buy more goods and services as consumers. However, there has been a surprising phenomenon in Israel over the past fifteen years. While labor productivity per worker rose by 15% between 2001 and 2015, real wages in the business sector remained relatively similar from the beginning to the end of this period. In a recent Taub Center study, Researcher Gilad Brand finds that the weakening of the link between productivity and wages was caused by the rapid increase in consumer prices relative to the market value of the final goods and services produced in Israel’s economy.

Among the reasons commonly given for the stagnation in wages is that the fruits of economic growth, fueled by increased productivity, do not trickle down to most workers because their bargaining power has weakened. Brand refutes this claim and shows that workers’ “share of the pie”– the portion of Israel’s GDP going to workers – has in fact remained relatively stable over the past few decades. What then can explain the weakening correlation between productivity and wages in Israel?

In his study, Brand examines the differences between the basket of goods workers produce and the basket of goods they consume. The important distinction here is that what workers produce is directly correlated with productivity, whereas their real wages are impacted both by what they produce and the cost of what they consume. Even if workers’ nominal wages increase, this only leads to an increase in real wages if the rise in nominal wages was higher than the rise in consumer prices. Over the past decade, inflation for the basket of goods that workers produce has increased by roughly 1.5% per year. In contrast, inflation for the basket of goods that workers consume has increased by about 2% per year. After a few years, this has accumulated to a substantial gap between the two.

 

Product per Israeli worker and real wages

The growing gap between production and consumer prices since the mid-2000’s is rooted in the appreciation of goods that are typically bought by households in higher quantities, but represent a smaller share of what is produced; namely food and housing.

In recent years, the share of household expenditure on food has been about 16%; yet, on the production side, the food and agriculture industry together constitute only 4% of what the country produces. Similarly, 25% of households spending goes to housing, yet the construction industry’s contribution to production makes up no more than 7% of Israel’s GDP.

Thus, for a typical Israeli household, food and housing make up 41% of household expenditure. Both of these items became noticeably more expensive in the mid 2000’s as there was a spike in food prices beginning in 2006and housing prices began to rise in 2009 (and have continued to rise since). The increase in housing and food prices alone contributed about 70% to the increase in the price level of the basket of consumer goods (CPI) over the past decade.

Contribution to the CPI by main consumer categories in Israel

Brand concludes that productivity and wages in Israel are still very strongly correlated. However, the benefit from the rise in productivity in the past decade was offset by rising food and housing prices for Israeli consumers. Therefore, workers’ standard of living has not increased during this period.

Because the gap between production and consumer prices was largely triggered by housing prices, there is a notable difference between Israelis who owned homes prior to 2009 and those who rented. For those who owned homes prior to 2009, real wages have indeed increased more or less with the increase in productivity. However, real wages for those who were not yet homeowners in 2009 have experienced very slow growth. This trend has an impact on consumption, as well. The Bank of Israel found that those who rent apartments, in line with the stagnation in their wages, have decreased their consumption since housing prices spiked. In contrast, those who own apartments have actually increased their consumption.

Interestingly, this division exists across generational lines, as well. Older generations, who were more likely to have owned a home prior to 2009, are better-off and have seen more of an increase in their real wages. Younger generations, on the other hand, who are not homeowners and are subject to rising rental costs, have experienced relative stagnation in their wages.

Since the publication of this study in September of 2016, new data shows that the picture has flipped in the past two years. In earlier years, consumer prices were increasing faster than prices of produced goods and services, leading to a gap between the two. However, since the last quarter of 2014, the reverse phenomenon has occurred, thereby closing the gap between the two price indices. This turn of events is not due to a reversed trend in housing prices which, in fact, have continued to rise.

While there may be additional reasons, Brand believes that the gap has closed in part because oil and commodity prices have offset the rising housing costs. Both oil prices and commodity prices have dropped substantially in the past two years, and these have a stronger impact on consumer prices than on Israel’s GDP.

In conclusion, the gap between the prices of the basket of goods Israeli workers produce and the basket of goods they consume grew due to the fact that goods that Israelis primarily consume – particularly, housing and food – became much more expensive. However, recent developments show that this trend has reversed in the past two years, closing the gap between consumer and production prices. This has resulted in a cumulative increase of about 7% in real wages over the past two years, after a long period of very slow wage growth.

 

 

The relationship between labor productivity and wages in the Israeli market place

A new study by the Taub Center for Social Policy Studies in Israel explains why, at the end of 2015, real wages in the business sector were similar to those in 2001, whereas during the same period, labor productivity per worker rose by 15%. The research shows that the weakening of the link between productivity and wages was caused by the rapid increase in consumer prices relative to the price of produced goods, following years of similar growth.

Click here to read the full study on the relationship between labor productivity and wages in the Israeli market place in Hebrew. 

The freedom of labor mobility: Israel’s dual labor market

The celebration of Passover, a holiday that commemorates the duality of slavery and freedom, provides an opportunity to discuss another type of duality present in Israeli society today—Israel’s polarized labor market. In their study published in the 2015 State of the Nation Report, researchers Gilad Brand and Eitan Regev find that the business sector can be classified into two groups that differ greatly from one another. At one end of Israel’s economy are the high-tech and other advanced industries, with high and quickly rising labor productivity (labor productivity is defined as the ratio of total GDP to total work hours and is considered a useful tool for assessing a country’s economic growth and standard of living). At the other end are industries that primarily sell to the domestic market, such as most of the commerce and services sectors, and are characterized by low productivity and minimal growth.

Figure 1 English take 2

Labor market polarization is a phenomenon that has developed over the past two decades. Before the early 1990s, Israel’s manufacturing and commerce and services industries had nearly identical rates of productivity growth. Yet after this point, as the Israeli economy was opened to global trade, the sectors diverged dramatically. Productivity in manufacturing shot up, while productivity in commerce and services experienced a slight decline. Not only is the rift large, but wages have also become polarized in tandem with productivity, contributing to growing income inequality in Israel.

What is responsible for the polarization in Israel’s labor market and what is preventing the convergence of productivity in these two sectors? Brand and Regev find the main cause to be related to the major trade liberalization reform that took place in the Israeli market during the early nineties.

It is well-known in economic literature that productivity tends to rise in industries exposed to international trade. This can explain the rise in productivity in Israel’s manufacturing industries, which are export-oriented, following trade liberalization. It is also not particularly surprising that commerce and services industries, which are locally oriented and less likely to be traded in international markets, did not see the same kind of productivity growth that occurred in manufacturing. But why did the productivity in Israel’s commerce and services industries decline in the mid-1990s?

Brand and Regev find that the decline in productivity in commerce and services is explained by a transfer of low skilled workers from traditional manufacturing industries to occupations in commerce and services. Since the early 1990s, employment in traditional manufacturing industries, such as textiles, has declined whereas there was an increase in work-hours in commerce and services. This trend is especially visible in the second figure, where we look at the employment distribution of workers with limited education: for those with a high school education or less, labor participation in low-tech manufacturing industries decreased from 16% to 9% between 1995 and 2011, while employment in commerce and services increased from 38% to 48% over the same period. An influx in supply of low paid, low skilled workers incentivizes companies to rely on cheap labor rather than investing in new technologies that would increase efficiency. As such, the use of more workers per unit of output slows down productivity.

Figure 2 English

At the other end of the spectrum, opening Israel’s economy to international trade in the early 1990s has made higher skilled workers better off than they were a few decades ago by creating more opportunities in high productivity industries. Among those with a college degree, labor participation in finance, communication, and high-tech has increased since 1995. Therefore, while those with lower education and skills are moving into industries with low productivity (where their presence actually contributes to a decline in productivity), those with higher education and skills are moving into industries with higher productivity, thus increasing the productivity gap.

Figure 3 English

The problem is that high-tech and other growth-oriented industries consist of a relatively small share of the workforce. The majority of workers in the business sector, about 70%, are employed in commerce and services. This means that much of the Israeli labor force is employed in industries where productivity—as well as salaries—remains relatively low.

In addition to the polarization of high- and low-skilled workers, worker mobility has declined since the 1990s, stabilizing somewhat over the past decade. Even though there is an excess of low-skilled workers in commerce and services and a shortage of skilled workers in manufacturing, employees are unable to move from industry to industry because they lack the necessary skills.

Brand and Regev suggest that Israel can bridge the gap between these polarized sectors by diversifying the Israeli export base and creating vocational training programs. Diversifying exports would apply pressure on wages in industries with low productivity and encourage firms in these industries to streamline their processes, ultimately leading to a narrowing of gaps within the Israeli labor market. Creating vocational training programs would also narrow the gaps by increasing occupational mobility between sectors.  Increasing the supply of vocational training programs can provide an opportunity for those currently employed in low-paying jobs in commerce and services to acquire the skills necessary for integration into high productivity industries, which are in need of skilled workers and offer relatively high salaries. Also, programs like these should lead to a more efficient allocation of manpower between the manufacturing and commerce and services industries. Applying these measures would encourage more rapid and balanced economic growth in Israel and a less divided labor market.

Food for thought: rising prices in Israel’s food industry

Over the past decade, substantial and interesting changes have taken place in Israel’s food market. Food prices increased rapidly between 2005 and 2014. This phenomenon is relatively unique to the Israeli economy (in contrast to the rise in housing prices, for example, which was shared by other developed countries). The rapid rise in food prices during this period was accompanied by an increase in profit margins in the food industry. In only four years, the food industry’s return on capital, an indication of its profit margins, increased by 12 percentage points. This phenomenon was not witnessed in other manufacturing industries, as the graph shows below. The rise in food prices combined with the increase in profit margins indicates a change in the industry’s competitive structure, and there is indeed evidence to this effect.

 

Feb News 1

 

One could attribute this phenomenon to a price mark-up in the industry – a simple explanation for why both prices and profits would rise. This explanation, however, is insufficient and does not address the fundamental flaws in Israel’s food market. Taub Center researcher Gilad Brand found that there were major market changes during this time period that ultimately led to less competition. The large grocery chain Club Market collapsed and was subsequently purchased by the grocery chain Supersol in 2006. Indeed, the Committee to Examine Competitiveness in the Food and Consumer Goods Market pointed to this buyout as a key contributor to a drop in competitiveness and resulting rise in prices. Additionally, the Tnuva dairy company was bought out by the private equity firm Apax in 2008, leading to more aggressive corporate policies of maximizing profits. Finally, in 2006 the Ministry of Health toughened its procedures for parallel imports of food items, which reduced competition via trade and thus decreased incentives for the food industry to offer competitive prices. This is examined further below.

 
An international comparison of food prices also supports the assertion that Israel’s food market became more expensive due to a decline in competition. In his study, Brand compared the change in food prices in Israel to that of other developed countries. His findings indicate that Israel’s food prices have risen exceptionally compared to other developed countries – for example, between 2005 and 2013, the rise in food prices in Israel was higher than the rise in food prices in other developed countries by up to 20 percent. This is another indication that within Israel, there was a decrease in competition during this same time period.

 

One would expect the opening of a price gap between Israel and other countries to create opportunities for importers which would introduce foreign competition, and ultimately equalize the price gap over time. Israel, however, has no free trade policy when it comes to the food industry. As the second figure shows, Israel’s import rate out of total consumption in the food industry remains the lowest among Israel’s major commodities. Brand attributes this to high customs protections and tariffs, the proliferation of maximum quotas in the sectors of food products and agriculture, and the introduction of testing standards in the industry. A change in government policy in this regard would introduce new competition to the market and lead to lower prices.

 

Feb News 2

 

Consumer needs are not met by these economic conditions in the food market. Israel’s food industry is centralized, and a small number of large local companies supply most of the food sold in Israel. To make matters worse, food products with high consumption rates, such as grains, meat, fresh fruit and dairy products have very low import rates. Likewise, foods with low consumption rates, such as sugar products and fish have high import rates, as the third chart shows below. As such, the majority of Israel’s food basket depends predominantly on local manufacturers in Israel with very little competition from abroad.

 

Feb News 3

 

The changes in market structure that took place a decade ago, as well as the barriers to imports point to the major reasons food prices in Israel are so high: lack of competition. A look at other industries is informative. In the early 1990s, a plan to gradually introduce imports was implemented in the Israeli economy. This led to a significant rise in imports among certain consumer items. As such, shoes, clothes, furniture, and household goods actually dropped significantly in price. The import rate of food items, however, remains quite low, and this issue is exacerbated by changes in the local market structure which also played a role in decreasing competition. As such, this study, along with previous Taub Center studies on the subject, indicates the importance of continuing to expose the economy to imports as a means of increasing competition, reducing prices, and improving consumer welfare in Israel.

The Cost of Living in Israel: An International Comparison and Historical Perspective

Recently, there has been a lively public discussion surrounding the cost of living in Israel, and it is frequently claimed that the prices of consumer products are higher in Israel than abroad. Studies find partial evidence that compared to other developed countries, the price level of private consumption in Israel is relatively high considering that income per capita in Israel is relatively low. The findings in such international comparisons, however, are obfuscated by the influence of fluctuations in currency exchange rates, an issue not addressed properly in earlier studies. In this chapter, this issue is examined by conducting an international comparison of price rates over 25 years. This long-term comparison serves as a test to assess whether the high price level observed in recent years is temporary and can be explained by, for instance, the appreciation of the shekel in 2008, or whether it is a long-term process associated with structural facets of the economy. The study finds that fluctuations in the nominal exchange rate cannot account for the high price levels found in earlier studies and that high prices are a long-term phenomenon which are likely related to structural factors in the local market.

In addition, the chapter examines the price changes in the various consumption categories, focusing on the food industry where there was a rapid rise in prices concurrent with an increase in profits during the second half of the last decade. These findings indicate the importance of continuing to expose the economy to imported goods as a means of increasing competition, reducing prices and improving consumer welfare in Israel.

This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2015, Dov Chernichovsky and Avi Weiss (editors).

The Dual Labor Market: Trends in Productivity, Wages and Human Capital in the Economy

The Israeli economy is characterized by a severe duality. At one end are the advanced high-tech industries, with high and quickly rising labor productivity. At the other end are industries characterized by low-productivity and minimal growth. This chapter examines the characteristics of this polarization in the labor market, which began in the second half of the previous century. The chapter examines why the success of the high-tech sector has not led to an improvement and streamlining in the rest of the economy, and shows that, over the years, the two sectors have further diverged in terms of worker traits, college wage premiums and labor productivity. At the same time as employment mobility between sectors declined, the relationship between the wages in the high-productivity and low-productivity sectors also diminished. The chapter raises the possibility that by diversifying the Israeli export market, it may be possible to apply pressure on wages in industries with low-productivity and to encourage them to streamline their processes, ultimately leading to a narrowing of gaps within the Israeli labor market. The authors also recommend encouraging research and development in low-technology industries and creating avenues for vocational training that will enable better employment mobility between the various sectors.

This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2015, Dov Chernichovsky and Avi Weiss (editors).

Causes of the Widening Productivity Gaps Between Israel and the OECD: A Multiyear Industry-Level Comparison

This chapter presents a novel detailed multiyear industry-level comparison of labor productivity growth in Israel and in 12 OECD countries (henceforth OECD12), and reveals the causes for the widening of productivity gaps from 1995 to 2009. The comparison shows that five large industries are responsible for 81 percent of the total widening of the productivity gap. These industries provide products and services mainly to the local market and are mostly dependent on the local business environment. A comparison of industry-level productivity growth rates in Israel and in the OECD12 over time reveals that the most significant factor affecting the ability of the different industries to reduce productivity gaps with the OECD12 is the degree of the industry’s exposure to competitive imports. Differences in the average number of work hours per worker can explain at most half of the gap in productivity per work hour, and cannot explain the widening of this gap over the last two decades. Nor can differences in industry composition explain the widening of the gap; in fact, they narrow it, mainly due to the fact that the relative share of the high-tech and finance sectors in Israel is larger than the average in the OECD12. The study findings point to the non-tradable service industries as the main contributors to the widening of the productivity gap relative to the OECD. This is perhaps indicative of defects and obstacles to competition in the local business environment such as excessive centralization and structural and regulatory barriers.

This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2015, Dov Chernichovsky and Avi Weiss (editors).

The Change in the Household Tax Burden Between 2003 and 2011

This chapter assesses the change in the tax burden on households across the various income deciles during the period between 2003, the fiscal policy “watershed” year, and 2011. In both 2003 and 2011, the direct tax burden, defined as the ratio of tax imposed on income to gross income, increases along with income. By contrast, the indirect tax burden, defined as the ratio of tax imposed on consumption to net income, declines along with income. Moreover, in the two years examined, the total tax burden, defined as the ratio of tax paid to gross household income, declines between the bottom decile and the second decile, remains almost unchanged up to Decile 7, and then rises. In 2011, the total tax burden on households in all income deciles was lower than in 2003, but the decline was uneven. The tax burden declined more substantially at the extremes of the income distribution, i.e., in the lowest and highest deciles – meaning that it became more uniform between households. In absolute terms, households in the lower deciles (Deciles 1 to 5) benefited from a tax burden reduction of NIS 130 to NIS 430 per month, while households in Deciles 8 to 10 had a reduction of NIS 800 to NIS 2,500 per month. The fact that direct taxes became less progressive between 2003 and 2011 and served to maintain, and in fact widen, net income disparities between households.

This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2015, Dov Chernichovsky and Avi Weiss (editors).

Reforming Consumer Insolvency Policy in Israel

The sanctions imposed are severe, and the opportunities for debtors to extricate themselves from debt and to proceed with their lives are limited. In light of this, the study presents a recommendation for comprehensive reform in the credit market that will be an improvement for both debtors and the credit market.

AVAILABLE IN HEBREW ONLY – ENGLISH VERSION COMING SOON

Made in Israel: Characteristics of the Israeli Food Market

From the cottage cheese and “Milky” chocolate pudding protests to the recent international comparisons of “Pesek Zman” chocolate bar prices, it seems that the price of food in Israel has caught the public’s attention. As such, in last year’s State of the Nation Report 2014, the Taub Center published worrisome findings on price trends in Israel as compared to the OECD. In 2005, most food items were much cheaper in Israel than in the OECD, while by 2011, the picture had reversed itself. For instance, meat and chicken, which were 8 percent cheaper, became an average of 21 percent more expensive in Israel than in the OECD; milk products, which were only 6 percent more expensive, became 51 percent more expensive.

As the analysis of Taub Center researcher Eitan Regev shows in the Picture of the Nation 2015, one of the reasons for the drastic increase in food prices is the structure of the food market in Israel. The food industry is very centralized, and this lack of competition allows manufacturers to charge high prices on many food items.

In addition to little local competition, there is also not much competition in terms of imported foods; the rate of food imports lags far behind imports in other sectors. As the first figure shows, in many of the private import sectors, the import rate increased greatly over the past two decades. For instance, imports of shoes rose from 42 percent in 1996 to 80 percent in 2011, and in the area of cosmetics, imports rose from 35 percent to 58 percent. Overall, expenditure on imported goods in 2011 stood at 70 percent – an increase of 17 percentage points from 1996. In contrast, in the food sector, the import rate was only 15 percent in 2011 – a rate that is remarkably low in relation to other sectors, and which has changed little since 1996.

Eng figure 1

Exposure to imports brings more competition to local industry and applies pressure to bring prices down and raise efficiency. Likewise, low import rates are likely to allow prices to remain high. The second figure shows the importance of imports in setting prices in various sectors. In sectors where the import rates are high, like furnishings and home goods, prices dropped substantially. The index of food prices, on the other hand, rose during the same period by 53 percent – much more than the rise in the Consumer Price Index which stood at 32 percent.

Eng figure 2

According to Regev, there are many reasons why the import share in the food sector has remained low, beginning with the requirements of kashrut and health regulations as well as protective tariffs that are intended to protect local industry. As the third figure shows, though, there is no uniformity among import rates in the various food categories. In the main category for food expenditure (meat, milk products, and bread and grains) import rates are very low. In contrast, in those categories where the general expenditure is lower (like fish, sugar and alcoholic beverages), import rates are higher. The significance of this is that in the smaller areas of the food industry, imports are more substantial, while in those areas with greater demand, there is almost no importing taking place. This hints at the possible pressure placed on policy makers by larger interest groups.

Eng figure 3

Low import rates also seemed to serve an important role in the rapid increase in prices. In light of this, Regev notes that opening the food market is an important step whose time has come which will considerably cheapen expenditure on food, a central component to the high cost of living in Israel. One possibility in this direction is to lower protective tariffs paid by importers; first steps in this area are, in fact, taking place (like opening the market to imported hard cheeses). Nevertheless, to lower food prices significantly, bureaucracy and regulation of imports will have to change even if this step arouses the opposition of powerful interest groups in the marketplace.

 

 

A monthly struggle to make ends meet

Low wages coupled with the high cost of consumer goods and housing – basically, the challenge of making ends meet – have been a great concern for a large number of Israelis in recent years.  Taub Center researcher Eitan Regev explored the economic situation of households in recent research published in the State of the Nation Report 2014.   Regev undertook a comprehensive analysis of household income and spending, and explored differences among population groups (Muslims, Haredim (ultra-Orthodox Jews), Druze, Christians, and non-Haredi Jews) as well as between income quintiles.   His research highlights some unique findings with regard to income and savings among the Haredim, and points to the overall challenges that the vast majority of Israelis face in making ends meet.

While the public discourse commonly relies on a comparison of income versus consumption, the focus of Regev’s study was slightly different – namely exploring the relationship between a household’s total income and its total expenditures, which include, but are not limited to, consumption.  In other words, the study asked: are Israeli households spending within their means or are they in deficit?

The first figure compares monetary household income and expenditures by population groups.  Household income comes from a range of sources, including cash income from wages, capital, benefits from both government and non-government sources, and pension funds.  In addition, household income includes the average monthly value of income from the redemption of tax-free savings funds (kranot hishtalmut) – which is received as a one-time lump sum, generally after six years.  Household expenditures consist of spending on consumption; taxes (income tax, social security, health tax); personal capital invested in a home or a car and down payments made on these; expenditures on financial savings including monthly mortgage payments and payments to pension, provident, and tax-free savings funds; and transfers to other households (alimony, child support, gifts, etc.).

Ends Meet figure 1 Eng

This analysis reveals the substantial gap between total household income and total expenditures among Israeli households, showing that, on average, all population groups in Israel consistently find themselves with a deficit at the end of the month, with their income unable to cover their expenses.  Israeli Christians have the smallest gap between the two, with a deficit of NIS 671 per month.  They are followed by non-Haredi Jews at NIS 864.  Israeli Muslims and Druze fall somewhere in the middle, with monthly expenditures exceeding monthly incomes by about NIS 2,000.  Haredim have the greatest deficit by a wide margin, with expenditures that are, on average, NIS 3,209 higher than their income on a monthly basis.  This gap is equivalent to almost one-third of the monthly income of Haredi households.

A major reason for the large gap between the income and expenditures of Haredim is due to the heavy spending on home purchases by this population.  The second figure shows that while similar rates of Haredi and non-Haredi Jews purchase homes to live in, Haredim are much more likely to purchase homes for use by others or for investment purposes.  In the decade between 2003 and 2012, 0.63 percent of non-Haredi Jewish households purchased a home for use by others or as an investment in a given year.  That figure was more than doubled, at 1.34 percent, for Haredi households.  Haredi households, on average, spend NIS 1,182 per month on housing that is not for their residence, in comparison to only NIS 425 among non-Haredi Jews.

Ends Meet figure 2 Eng

The difference in home purchase patterns stems from the fact that, in comparison to other Israeli households, it is more common for Haredim to purchase residential real estate for investment purposes and for Haredi parents to purchase a home for their children prior to their marriages.  In recent years, real estate investment seems to be increasingly viewed by the Haredim as an investment vehicle that can be used as a source of income while allowing for Torah study.  A key question remains regarding the income sources that support real estate purchases among the Haredim.  Interviews and data presented in Regev’s chapter suggest that Haredi benefit societies (charitable organizations known as gemilut chasadim) play an active role in this regard.  It is likely that these benefit societies provide loans to Haredi families – disguised as donations – which are often funded from foreign sources via money laundering schemes.

While home purchases are indeed a savings avenue that can offer financial rewards in the long term, down payments and monthly mortgages often lead Israeli families to be in the red.  As housing prices rise, Israeli families are increasingly taking on larger levels of debt. Dr. Noam Gruber in the State of the Nation Report 2014 shows that there has been a real increase of about NIS 70 billion in mortgage debt, and the share of mortgage debt out of all household debt has increased from 67 percent to 70 percent in the last five years.

Soaring housing prices and increased indebtedness due to housing are key factors causing Israeli families to struggle to make ends meet.  Young couples frequently rely on assistance from parents in order to purchase a home and avoid an overdraft in their bank account.  In cases where such help is unavailable, home ownership often becomes unattainable.  Regev’s research shows that, on average, Israeli households across population groups and in all but the top income quintile are unable to make ends meet.  A pattern of negative savings is likely unsustainable, and leads to questions about the ability of Israeli families to succeed economically in the long term.

A roof over one’s head: the housing market in Israel

The high cost of housing and various proposals to address this challenge have captured significant attention among the Israeli public and policymakers in recent months.  Toward the end of February, an official government report was released addressing this very subject, sparking renewed interest and debate.  Taub Center Senior Researcher Dr. Noam Gruber explored the failures and potential solutions for solving the housing crisis via an in-depth study published in the State of the Nation Report, 2014.

As shown in the first figure, the period between 2000 and early 2008 was characterized by stable, even declining real housing prices.  Following a sharp decline in interest rates in 2008, however, the trend in housing prices began to change and prices have increased rapidly since then.  Between their low in April 2007 and July 2013, housing prices increased by 84 percent nominally or by 53 percent in real terms (i.e., after accounting for inflation).  Rental prices followed similar trends, although they have increased less quickly than housing prices.

housing figure 1 eng

As seen in the second figure, the share of Israeli households owning more than one apartment nearly quadrupled in recent years, increasing from 2.1 percent in 2006 to 8.1 percent in 2012.  Examining this trend by income level reveals that higher-income households are largely responsible for this increase; the share of households in the top quintile who own two or more apartments increased by 16 percentage points – from 6 percent in 2006 to 22 percent in 2012. Investor entry into the residential real estate market is due to low interest rates on the one hand and the relatively low taxes levied on rental income on the other. As a result, the residential real estate market has become too expensive for younger households, who are being pushed into the rental market. Gruber recommends that rental income be taxed in a similar manner to other income sources, which would reduce demand for residential real estate as an investment vehicle.

housing figure 2 eng

Surveys of construction companies point to lack of available land for construction and building permit delays as the two main barriers leading to rigid housing supply, which in turn drive increases in housing prices.  The third figure shows the length of various procedural stages required to obtain a residential construction permit in Israel.  Overall, the process takes an average of 13 years, with actual construction accounting for only two of those years and the rest devoted to bureaucratic procedures.  The stages that are particularly long are obtaining district committee approval (an average of 5 years) and obtaining local committee approval (an average of 3 years).  In contrast, the time required to obtain a building permit in most European Union countries is only 8-12 weeks.  The two lengthy steps in the process of obtaining district committee approval include fulfilling application conditions and fulfilling licensing conditions. The delays here often stem from stakeholder opposition to building plans and insufficient infrastructure in place to support the proposed construction.

housing figure 3 eng

As noted, insufficient release of land for construction by the state and a very centralized planning process hinder the expansion of housing supply.  To address these issues, Gruber recommends that the state relinquish control of land to local authorities – which may facilitate more rapid construction – and only retain those areas that are important for environmental protection or needed for construction of national infrastructure in the future.  To speed up the permit process, local authorities, rather than the central government, should assume control of all aspects of land development.  These include the power to approve development projects and the responsibility for establishing necessary infrastructure – as well as receipt of the resulting income stream.  If these aspects were concentrated at the local level, it would remove the current conflict of interest (and the resulting project delay) between the developer, who wants to build, and the local authority, which incurs significant costs due to infrastructure development but receives little benefit from the construction. In addition, in order to promote urban development, Gruber recommends allowing, by law, the sale of condominium buildings via a supermajority decision – a common practice in various places worldwide – as an alternative to the current vacate-and-build or National Outline Plan 38 programs.

Gruber’s research addresses the very real concerns among Israelis with regard to housing prices in recent years.  Today, young and lower-income Israeli families are forced to choose between taking on larger mortgages or paying increasing rents and further delaying their hopes of home ownership.  According to Gruber, both demand and supply-side policy solutions are available and should be implemented thoughtfully to ensure protection of environmental resources, sufficient infrastructure development and overall quality construction and affordable housing options for the Israeli public.

Making Ends Meet – Household Income, Expenditures and Savings in Israel

A large part of this chapter is devoted to the way the purchase of apartments is financed among the Haredi population in the face of its limited resources. The data indicate that the average Haredi household has a structural deficit of over NIS 3,000 a month between its income and expenditures (about a quarter of its expenditures), which is partially financed via extensive loans – thus generating a constant increase in Haredi households’ indebtedness to banks and other lenders (such as benefit society funds). Haredi households’ monthly mortgage payments rose by 72 percent in real terms over the last decade, and the share of Haredim with mortgages and the extent of their investment in real estate rose substantially, as well. It appears that a large part of the financing for these investments has its origin in unreported capital from foreign sources, and the proliferation of such investments might have a non-negligible effect on the demand for apartments (and apartments for investment, in particular) and their prices. An examination of the balance of income and expenditures in all sectors reveals a disturbing picture: the average household is unable to buy an apartment without assistance, usually from their parents’ savings which are constantly dwindling.

This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2014, Dan Ben-David (editor).

The Shadow Economy in Israel

It is estimated that halving the size of the shadow economy would increase state revenues by 3-4 percent of GDP, about NIS 30-40 billion. With this additional income, the government would be able to increase public spending, reduce the tax burden and lower the national debt. The primary factors encouraging the shadow economy include a high marginal tax rate, cumbersome bureaucracy, insufficient enforcement, and flawed reporting norms. In order to reduce the size of the phenomenon, it is necessary to focus on three main areas: (1) improving the enforcement process: it is recommended that goals be set for the Israel Tax Authority both in terms of enforcement and in terms of improved service and more streamlined reporting, and that norms of transparency be applied with regard to meeting these goals; (2) changing the collection method: to make it more difficult for citizens to evade taxes, it is recommended that tax filing be made mandatory, that the system move to taxation on the basis of households (rather than individuals) and that it recognize expenses, and that information technology is leveraged to facilitate automated reporting and regulation; and (3) reducing the tax burden: it is recommended that tax rates be lowered for small businesses that use electronic means of reporting income in order to reduce incentives to conceal income.

This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2014, Dan Ben-David (editor).

The Israeli Housing Market

The rising prices are due both to increased demand – driven mainly by low interest rates and preferential tax treatment – and to rigid supply, rooted in bureaucratic complications of the construction process, an inherent conflict of interest at the local level, and a high prevalence of condominium apartment living in Israel, which poses an obstacle to urban renewal. In the short term, in order to reduce demand, it is recommended that rental income be taxed in a manner similar to capital market income. In the long term, in order to foster greater housing-supply flexibility and reduce the housing market’s high volatility, it is suggested that construction-related planning, approval and supervisory processes be simplified and decentralized, that income from development and the responsibility for laying the infrastructure necessary for that development be transferred to local authorities, and that the sale of apartment buildings based on tenant supermajority be authorized as an alternative to National Outline Plan 38 (known in Hebrew as TAMA 38) and vacate-and-build (known as pinui-binui) programs. It would also be desirable – so long as there is no negative impact on the environment or on the construction of future national infrastructure – to transfer the property rights to a large share of the country’s available land to local authorities and private entities.

This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2014, Dan Ben-David (editor).

The Middle Class in Israel

The controversy over the question whether “Riki Cohen from Hadera” – to whom Finance Minister Yair Lapid referred on his Facebook page – belongs to the middle class has made it necessary to redefine the boundaries of the three classes in Israeli society. Many saw the social protest movement of summer 2011 as attesting to the unification of the middle class in Israel, but the question remains: What is the middle class, and how ought it to be defined? Is the keyword here “class,” i.e., individuals who share a similar social status, or is the reference to those in the middle of the income distribution, namely the only attribute that unites the individuals belonging to it is income level? The difficulty in identifying and precisely defining the middle class may explain the fact that this article does not focus on any particular definition, but examines the development of the middle class in Israel over the past decade, with reference to a variety of aspects and employing a selection of measuring tools.

Israel’s Economy: A Macro Perspective

Data for 2012 and early 2013 point to a reasonable level of growth in GDP, a stable unemployment rate, and a continued increase in investment; all the while inflation remains low.  Israeli macroeconomic activity continued to be in the shadow of the global slowdown.  The government deficit grew, in particular due to a decline in tax revenues.

An analysis of fiscal policy over time indicates that while Israel is not, at present, deviating from its behavior of the past 20 years, it could potentially find itself treading a dangerous fiscal path.  At the same time, it is difficult to see how the Israeli government will attain the one-percent-of-GDP deficit target that has long been on the agenda of policy makers.  This chapter calls attention to several problematic aspects of the government  budget management and presents ideas for reform.

This paper appears in the Center’s annual publication – State of the Nation Report – Society, Economy and Policy 2013.

Poverty and Inequality Over Time: In Israel and in the OECD

Contrary to conventional wisdom, Israeli rates of poverty and inequality in disposable incomes are very high – compared with developed countries – even after excluding Haredim and Arab Israelis from the sample (though not particularly high in terms of market incomes).  Israel’s elderly population is the smallest in the West, and poverty among the elderly before welfare and taxes is among the lowest while after the social welfare net is spread, poverty rates in Israel are the highest in the developed world.  Poverty among children after welfare and taxes is also the highest in the developed world.  The share of national income received by the top 1 percentile is not particularly high in Israel, but the gap between individuals at the 90th income percentile and individuals with median incomes is the highest in the West – with the gap between individuals with median incomes and those at the 10th percentile even higher in Israel.  A systemic plan to deal with the underlying problems and their symptoms is outlined here.

This paper appears in the Center’s annual publication – State of the Nation Report – Society, Economy and Policy 2013.

Israel’s Treatment of Insolvent Debtors

A study on Israel’s treatment of insolvent debtors by Dr. Asher Meir, a Research Fellow at the Taub Center for Social Policy Studies in Israel and Senior Lecturer in economics at the Jerusalem College of Technology, presents new findings on the functioning of the consumer credit market in Israel.

It turns out that a large number of Israelis face formal collection actions for falling behind on their debts.  The Taub Center study found that one out of seven Israeli adults – about 15 percent of the adult population of Israel – has an open collection file at the Enforcement and Collection Authority.  The 2012 report of the Authority puts the number of people with open files at around 755,000.  While some cases are resolved promptly, many drag on for years.  Dr. Meir found that about half of the collection files remain open four years after they are opened.

Not only do large numbers of Israelis face collection actions, the severity of these actions is quite unusual on an international basis.  Many debtors – currently over 70,000 – are formally recognized as being of “limited means,” meaning that the collection registrar acknowledges that in their current circumstances they have no realistic chance of ever paying back their debts in full and are required to make reduced monthly payments that match their current ability to pay.   Yet even when these debtors adhere scrupulously to the payment schedule, thus fulfilling all the conditions demanded by law, they generally face intrusive sanctions. These include limitations on use of bank accounts and credit cards, which in the modern economy create a degree of economic exclusion.  Another widespread sanction is prohibition on leaving the country.  This is in sharp contrast to Europe and North America, where restrictions of this nature apply only to debts relating to child support.  The sanctions are not only difficult, compared with other developed countries, but also prolonged; debtors often face these constraints for years and even decades.

Another relatively harsh and unusual sanction found in Israeli law is imprisonment.  If the collection registrar is convinced that a debtor is able to pay but is evading his creditors, Israeli law allows him to be put in jail for short periods of time.  This sanction was temporarily limited to child support and alimony for two years starting in May 2011, and is now being extended for an additional year, but the underlying law has not been amended and will be implemented again by default if left unchanged.  On an international basis, this is a very exceptional punishment. Most countries in Europe, and most states of the United States, never imprison citizens for non-payment of routine debts.  Outside experts who have studied this topic, including Israeli NGOs, find that many debtors deemed evasive are really just impoverished.  Many are compelled by the threat of jail to borrow money from relatives or on the black market, while others are unable to raise the money and must spend time in jail.  Furthermore, the threat is felt to some extent by every debtor since creditors are able to claim that the ability to pay exists and thus compel the debtor to defend himself, or herself, against imprisonment.

A severe punishment like imprisonment can be justified only if the benefits are clear and extensive.  Yet Dr. Meir found no evidence that imprisonment of debtors improves the efficiency of the credit market and even claims that it is liable to harm this market.  He explains: “Besides the suffering accompanying these steps, sanctions and the threat of imprisonment result in a drag on credit demand and thus on the total level of demand in the economy.”

Evidence of the ineffectiveness of Israel’s debtors’ prison policy comes from the market reaction to two far-reaching leniencies introduced into this policy: the imposition of means tests in 1993 and the policy’s temporary cessation in 2011.  The study shows that neither step was accompanied by any noticeable negative effect on the credit market, such as reduced availability of credit or even reduced rates of collection.  The first figure shows that in recent years, the extent of household loans other than mortgages has continuously grown even as the threat of imprisonment has continuously declined.

E Debtors Fig 1

Another area included in the study is bankruptcy policy.  According to Israeli law, one objective of the bankruptcy procedure is to provide a fresh start for people who find themselves unable to pay back their household debt.  But the Taub Center study found that in practice the bankruptcy process is onerous, prolonged, and uncertain.  Dr. Meir found that out of over 50,000 Israelis officially recognized in 2007 as of limited means, only a few hundred were able to obtain such a fresh start by 2012.  Many bankruptcy filings are rejected, and those that are accepted take many years.  A figure uncovered for the first time by Dr. Meir is that among the bankruptcy filings, only a minority are for personal debts.  In a random sample from 2007, the majority of filings, about 55 percent, were for business debts (generally for small and medium-sized businesses).

A common justification for Israel’s unusually harsh strictures on debtors is that these measures are necessary because Israelis are unusually irresponsible with credit.  Dr. Meir’s study addresses this claim and refutes it.  He finds that Israeli households hold an extremely low level of debt on an international basis.  For example, the second figure shows that the ratio of household debt to disposable income in Israel is lower than any country in the G7 and is less than half the average level for these countries.  Various measures of payment problems were also compared and found well within the range of other developed Western countries.

E Debtors Fig 2

While Israel resorts to intrusive and exceptional measures to protect lenders, it fails to make use of a widespread and effective measure: credit scoring.  Allowing lenders access to a borrower’s credit history through a credit score would enable better access to the credit market for most Israelis, while those few problem borrowers with a poor credit record would obtain some protection from over-indebtedness.  Yet the current Credit Information Service Law has not enabled such a service to develop effectively.  The Taub Center study discovered that only about a million credit reports were provided in 2012, a tiny fraction of the rate of usage in the United States.  According to Dr. Meir, an additional benefit of credit scoring would be improved competition.  The current situation gives the bank a monopoly on the payment information of their customers, which increases rather than reduces concentration in the market for loans.

Dr. Meir concludes that the sanctions faced by Israelis who are unable to pay their debts are not only harsh – they are not effective.  He states that far-reaching sanctions on debtors who are in compliance with their legal obligations should be eliminated, and the temporary ban on imprisonment should be made permanent.  The criteria for obtaining a fresh start should be made transparent.  In Dr. Meir’s opinion, the heightened transparency will enable those who are entitled to a fresh start to obtain it without the stress and uncertainty accompanying the current procedure.  Protection of creditors is important, says Dr. Meir, but it would be advanced more effectively and more compassionately by stimulating the development of credit reporting.

Jailing Debtors

In contrast, the harm to consumers is great and there is evidence that imprisoning debtors and the various negative sanctions against them depress demand for credit.  In the opinion of Dr. Meir, complete abolition of the policy of imprisonment for normal debts is likely to improve the functioning of the credit market for consumers in Israel.

 

Privatization of Social Services in Israel

Prof. Reuben Gronau, a Policy Fellow in the Taub Center’s Economic Policy Program and an economist at the Hebrew University, has produced a new study of this phenomenon published in the Taub Center’s State of the Nation Report 2011-2012.  On the conceptual level, Gronau explains why public administration in this sector is justified.  Competition alone leads to efficient provision when customers are well equipped to identify and choose the best providers.  But consumers of social services are often unable to assess the quality of the services they receive, and are unable to select a service provider of their choice.  These consumers tend to be vulnerable, to lack their own resources, and to be infrequent purchasers of a service whose quality is difficult to evaluate.  The government is in a good position to provide the necessary oversight.

Additionally, social services provide an overall social benefit which extends far beyond the services’ direct and immediate benefit to individual consumers.  For example, a service that promotes healthy, educated and well-functioning individuals has positive ramifications for those living around them, as well.  Gronau adds that the public funding of social services reflects the public’s preference for equality.

As for Israeli privatization in practice, the study finds that the current public discussion is grounded on a weak basis research foundation stating that the intensity of the dispute over “privatization” of social services is disproportionate to the extent of information.  There are not even economy-wide figures that can provide an indication of the extent of the phenomenon.

During the past decade, there has not been any significant change in government transfers to local authorities, non-profits and the business sector, or in the relative contribution of public bodies involved in the provision of services.  Likewise, the numbers do not suggest a trend of replacing internal activities with the purchase of services – something that would indicate a transition from public operation to outsourcing.  Finally, employment data do not indicate a decline in the number of social service employees as a share of the total number of jobs in the Israeli economy; on the contrary, their share has increased.

However, Gronau does find some worrisome indications regarding the quality of privately provided social services.  Two developments are particularly telling.

First, wages of private sector employees in the social services sector are substantially lower than those of public sector workers.  The first figure shows wages for workers from different sectors for the three main areas of social services: health and welfare, education, and community services. The red bar shows wages for public sector workers; the other bars show wages for workers in the same field from public non-profits, private companies, private non-profits and other providers. In each case, it is evident that public sector salaries are much higher – approximately 50 percent higher than the median alternative provider.  While salaries are not a direct measure of quality, Gronau thinks that in the service sector there are sound reasons to believe that higher salaries translate into higher quality of service.  Higher salaries should enable the public sector to draw better qualified workers in the first place, and to provide them with more motivation and higher morale once they are at work.

private1E-fig-3

A second development is that the fraction of social services financed directly by households has risen dramatically.  The second graph shows the growth in household-financed social services between 1997 and 2009.  Gronau finds that total expenditure on social services in Israel has actually grown more slowly than the economy as a whole over the past fifteen years, but the part funded by households has grown far more quickly than overall economic growth.  This corroborates findings of other Taub Center studies showing that there is an ongoing tendency in Israel for placing an increasing share of the cost of social services directly on the user, thus reducing the extent of social insurance enjoyed by Israelis.  The declining scope of public provision compels an increasing number of people to seek private sector alternatives.  It is also possible that increased private outlays testify to a declining quality of services, particularly health services, provided by the government.  If so, indigent clients – who lack a private option – are obtaining lower quality services.

private2

The study attributes critical importance to the overall approach to privatization.  Improved efficiency can express itself in either a smaller expenditure for the same level of service, or an improved level of service for the same expenditure.  The prevailing mindset in Israel has been the former, but particularly in light of the already reduced government funding, the latter approach is the one that Gronau recommends.  In particular, he suggests that consumer contributions to the funding of services can have a positive impact.  Such increased consumer funding would enhance consumers’ bargaining power regarding service quality and offer providers competitive incentives.  However, in order to avoid reductions in quality, greater consumer contributions need to be accompanied by commensurate increases in government funding.  Gronau believes that improving the quality of government-provided social services would curb the emergence of private organizations (such as private hospitals and colleges) which, in his opinion, threaten the public system.

Gronau concludes that privatization of social services can be beneficial, but that capitalizing on these benefits requires serious quality control on the part of the government, quality control at a level that is currently lacking.

 

 

Gridlock on the Roads and in Israel’s Priorities

Whether the focus is productivity, income inequality, housing, or a host of other serious challenges facing Israel, one common underlying theme is the very problematic condition of Israel’s basic physical and human capital infrastructures.  In the Taub Center’s new State of the Nation Report 2011-2012, Taub Center Executive Director, Prof. Dan Ben-David, highlights some of the particular problems of Israel’s transportation infrastructure.

Economic growth is vitally dependent on the transportation system to move workers and goods throughout the country.  Yet Israel’s current infrastructure is clearly inadequate to meet the needs of future growth.

The first graph provides a glimpse of the seriousness of the situation, showing the striking contrast between heavy congestion on the roads and the paucity of vehicles per capita.  The bar on the left shows that Israel’s roads are already far more congested than those in other Western countries – over two and a half times the OECD average, while only one OECD country, South Korea, has more crowded roads.  It follows that even given the current number of vehicles in Israel, development of the country’s road infrastructure will require massive investment to bring it to developed world levels.  The bar on the right shows that Israel also has an unusually low number of vehicles per capita.  As living standards rise in Israel, it can be expected that the demand for automobiles will increase as well, making the existing infrastructure even more inadequate in the coming years.

E fig 5

In fact, the situation is even worse than that portrayed in the figure, due to the relative lack of rail infrastructure in Israel.  Since rail transport is much more developed in most of the other OECD countries, there are more alternatives to cars and trucks in those countries.  The scarcity of rail alternatives in Israel means that as economic development approaches OECD levels, it is not unreasonable to assume that Israelis will rely even more heavily on their automobiles than is common in other Western countries with rail alternatives.  Recent history supports this supposition.  Ben-David shows that from 1990 to 2008, the increase in the number of vehicles in Israel is far greater than in other comparable countries – and Israel is still playing catch-up.

Since some OECD countries are quite large, with huge expanses of land requiring extensive road and rail coverage, it is hard to compare them to Israel.  The second figure compares Israel to a more relevant benchmark group of Western European countries:  the small developed countries of the OECD. This graph shows that each of these countries has at least twice as much road coverage as a fraction of total area; three and a half times as many kilometers traveled by rail per person; and, at least four times as much use of freight railway.

E fig 6

 

In recent years, Israeli governments have finally begun a concerted effort to rectify this problem.  However, as Ben-David shows in the State of the Nation Report 2011-2012, even with the much larger infusion of resources into the country’s transportation infrastructure – a very large part of it from private sources – the national expenditure (i.e., public and private together) is still not at levels that are sufficient to close the existing gaps.  On average, Israeli investment in roads has fallen below the OECD average in recent years while the investment in rail has been only slightly higher than that in the OECD.  Since most of the road and rail infrastructure in the OECD has already been built, this means that most of their expenditure goes toward maintenance rather than first-time construction.  Therefore, the recent level of Israeli investment in these important transportation infrastructures is insufficient to close the gaps that currently exist.

Given the vital importance of transportation for economic development, the current inadequate state and insufficient investment in Israel’s transportation infrastructure is shaping up to be a major bottleneck for Israel’s continued economic growth.

The Economic Background of the Social Protest of Summer 2011

 The centrality of this group in the protests may be explained by trends in their socioeconomic position. Analysis of the period between 1995 and 2010 shows that in the five years prior to the summer of 2011, the income of the typical working family headed by a young Israeli-born Jew, relative to all Israeli households, declined to unprecedented levels.  The main cause was wage erosion among young adults.  This decline also occurred among those with higher education, and their chances of attaining an income in the highest quintile fell substantially, especially among women.  Among young Arabs and ultra-Orthodox Jews, both individual wages and household income – already very low in earlier years – declined even further.  Of all the population groups, only Russian-speaking immigrants improved their relative income position.  Overall in the period studied, there was a decline in the value of those advantages that previously assisted young families in Israel to attain a middle-class standard of living: higher education, two working partners, residence in the Tel-Aviv area, and being an Israeli-born Jew.  At the same time, the rising cost of housing has made income erosion a bigger problem.  The proportion of young adults living in their parents’ homes increased, and the share of young home-owning families fell.

This paper appears in the Center’s annual publication State of the Nation Report – Society, Economy and Policy 2011-2012.

The Privatization of Social Services in Israel: Considerations and Concerns

 This chapter examines whether the statistical data supports this concern. The picture of the scope of social services that have been transferred is unclear: in the past decade there has been no significant change in the transfers from the government to the local authorities, the non-profits and the business sector, or in the relative contribution of public bodies involved in the provision of services. The numbers do not point to a trend of replacing internal activities with purchasing of services – something that would indicate a sharp transition from self-operation to outsourcing. Finally, employment data do not indicate a decline in the number of social service employees as a share of the total number of jobs in the Israeli economy (on the contrary, their share has increased). On the other hand, household contribution to the funding of services (especially health services) has increased, affecting equality. Israel’s government must make improvement in service quality an overarching objective of its policy. Consumers of social services are often unable to assess the quality of the services they receive, and are unable to select a service provider of their choice. Thus, the key to privatization of social services is the existence of appropriate quality control. Where this is not possible, services ought to remain government-run. Too often privatization fails to improve the quality of services and also distorts resource allocations.

This paper appears in the Center’s annual publication State of the Nation Report – Society, Economy and Policy 2011-2012.

The Start-Up Nation’s Threat from Within

Three main vantage points are brought together in this chapter: (1) Israel’s relatively good economic performance in recent years – at least, in comparison with other Western countries that have still not emerged from the recession; (2) motivations for the wave of social protests that erupted in Israel in the summer of 2011, and; (3) the big picture, which is the primary one, incorporating the first two vantage points with additional issues, and framing them within long-run and international contexts.  This third vantage point focuses on the very problematic trajectories that Israel has been on for decades and the state of some of the country’s primary infrastructures – human capital and transportation – that underlie these trajectories.  Space limitations do not make it possible to provide a full exposition of all three vantage points here.  However, the conventional socioeconomic discussion in Israel often makes it difficult to see the forest for the trees.  Hence, the emphasis here is on a perspective from a vantage point far above, so that it will be possible to see, to understand, and to internalize the magnitude and the implications of the entire picture.

This paper appears in the Center’s annual publication – State of the Nation Report – Society, Economy and Policy 2011-2012.

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The Impact of the Expected Tax Rate Changes on the Middle Class

In light of the current budget situation, the Israeli government decided to raise the VAT by 1 percent as of September 2012, and to impose higher income tax rates and National Insurance payments on higher-earning Israelis starting in 2013.  In doing so, the government has gone even further than the Trajtenberg Committee, whose tax recommendations it only partly adopted in late 2011.  Although the recent decisions affect all strata of the population, Israel’s middle class will feel their impact the least.  Nevertheless, it is reasonable to expect additional tax increases and/or budget cuts that will reverse this conclusion.

This paper appears in the Center’s annual publication State of the Nation Report – Society, Economy and Policy 2011-2012.

Running on Empty

In the beginning of September, Israel’s government-regulated gasoline prices spiked up to 8.25 shekels a liter (roughly $8.00 per gallon of gasoline).  The government blamed spiraling crude oil prices.  A new study by Prof. Dan Ben-David, Executive Director of the Taub Center, which appears in the Taub Center’s upcoming State of the Nation Report 2011-2012, finds this claim misleading at best.

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Employment Patterns Differ Between Generations, and Depend on Gender and Education

A major source of concern regarding the Israeli economy is that the rate of employment among Israeli males has declined markedly over the last three decades, and is considerably lower than in OECD countries. The female employment rate, on the other hand, has been rising continuously and is now higher than the OECD average (see first figure).

Eng employment fig 3

At the recent Sderot Conference for Society, Taub Center Deputy Director Professor Ayal Kimhi presented new evidence on the labor market changes underlying these trends. One finding was that the changes are mainly due to changes between generations, rather than changes within them. Kimhi’s study shows that the employment rates of each new generation of males are lower than those of the previous generation. By contrast, each new generation of females tends to have higher employment rates than the previous generation, as shown in the figure.

Eng employment fig 1

Another finding demonstrates the relationship between employment and education. Since men and women have much different labor force characteristics, the education gap has different effects on men and women. Nevertheless, within each group the impact of education is pronounced.

It turns out that the decline in Israel’s male employment rate over the past decades was primarily among relatively older men with low education. For example, among men born in the 1940’s, there is no observable relationship between employment rates and schooling until their late 30’s. Starting at around age 40, employment rates of men with 12 or less years of schooling decline continuously, while employment rates of men with more than 12 years of schooling start declining only at age 50 (figure).

Eng employment fig 2

By contrast, Kimhi finds that the rise in the female employment rate is almost entirely attributable to the increased acquisition of higher education; the employment rate of women with over 12 years of schooling is nearly double that of women with up to 12 years of schooling. Employment rates among women with 12 or less years of schooling increase until age 43, then remain stable until they begin to decline at age 48. On the other hand, women with more than 12 years of schooling exhibit continuously rising employment rates through age 49 and only then does the decline begin. Thus, as Kimhi explains, the substantial rise in employment rates in Israel is almost entirely attributable to the rise in female higher education whereas among men, employment rates tend to decline among younger generations in general and among the less educated men in particular.

Kimhi emphasizes that education is the key to reducing employment gaps among population groups in Israel. “The country should give top priority to providing pupils and students, who constitute the labor force of the future, skills relevant to the modern labor market. The issue isn’t merely years of schooling. Equally important is the content of the curriculum – which should fit the demands of the modern labor market – the quality of teaching and its effectiveness, and a supportive school environment. As we see from the achievements of its pupils, Israel is still way off the mark in this regard.”

The Land of (Expensive) Milk and Honey

One of the final straws leading to the major summer protests in Israel was the high price of cottage cheese.  A comparison conducted by Nir Eilam, a Taub Center researcher, using OECD data from 2005 indicates that dairy products (specifically, milk, cheese and eggs) in Israel were 6 percent more expensive than the average prices in the OECD (first figure).  By 2008, this gap grew to 44 percent.  The prices of food and non-alcoholic beverages, which in 2005 were 16 percent cheaper than the OECD average, grew in the span of merely three years to 16 percent above the OECD average.  Agricultural commodities remained less expensive in Israel, although the gap narrowed from 40 percent below the OECD in 2005 to 13 percent below in 2008.

Eng prices fig 1

Taub Center researchers found that prices in Israel were not higher in all areas. It turns out, though, that even in areas where prices were relatively low in 2005 – including education, health care, communication, and fruits and vegetables – prices had risen considerably by 2008; in some cases, prices that had been lower than in the OECD in 2005 exceeded prices in the OECD by 2008.

Two of the largest household expenditures are on cars and housing. In 2005, motor vehicles cost 46 percent more in Israel than in the OECD. This price differential grew to 70 percent by 2008. According to Prof. Dan Ben-David, Executive Director of the Taub Center, the lack of free competition in importing cars to Israel allows a small number of importers to raise prices on vehicles disproportionately to the markup in Western countries.

Housing in Israel is quite expensive as well. As a rule of thumb, it is generally considered very difficult to purchase an apartment if its cost is greater than five years of income. Data from the Demographia International Housing Affordability study divides median house prices by annual median household incomes (see figure) and shows that in the U.S. only 2.9 years of income are needed on average to buy a home. In Canada and Ireland this rises to 3.7 years, in England to 5.1, in New Zealand to 5.7, and to 6.8 in Australia. In Israel, it takes more years of work than in each of these countries, with an average of 7.7 years of work needed to buy an apartment.
Eng prices fig 2
In fact, Israelis need to put in more years of work for a home than residents of 32 of the 33 English metropolitan areas (see third figure). Even in London, “only” 7.1 years of work are needed to purchase a home. Housing in Israel is more expensive than in any metropolitan area in Ireland and New Zealand, and it costs more than in 174 of the 175 metropolitan areas in the United States. Even housing in New York City requires fewer years of work than housing in Israel.

Eng prices fig 3

According to Professor Ben-David, a policy response focusing primarily on the symptoms is not the way to reduce housing prices. It is necessary to focus on the roots of the problem, and he proposes a number of policy directions:

  1. Reform in the Israel Land Administration. The State owns more than 90 percent of the land in Israel and the housing market is greatly affected by government behavior. A comprehensive reform of the Israel Land Administration is required so that it will cease to operate as a monopoly maximizing profits at the expense of the general public.
  2. Developing the periphery and making it accessibile. The low level of educational achievement in periphery areas and the lack of rapid, available and inexpensive access to workplaces in major cities prevent many young families from moving to towns where larger homes are available at lower prices. While comprehensive education reform is necessary countrywide, its importance is particularly critical in the periphery. In a country with only half as many cars per capita as the Western average, and roads that are more than twice as congested, the time has come to substantially increase the investment in transportation infrastructure, and to catch up after decades of lagging behind. Despite some increases in this regard, Israel’s national investments in transportation infrastructure have risen to average OECD levels (as a share of GDP), but that is far from sufficient if the country intends to close the very large infrastructure gap that has opened up over the years.
  3. Dormitories for students. Each of Israel’s four major cities is home to at least one university, with 18,000-29,000 students in each. The time has come to build sufficient housing on the existing campus areas – by building dormitory buildings vertically instead of horizontally – in order to significantly reduce student demand for what have become exorbitantly priced apartments in these cities. As a result, the investment demand for housing will decline and thousands of apartments will become available for young families who are unable to afford current prices. As a bonus, the students will live within walking distance of campuses, will be able to spend more time at their studies and will substantially reduce the congestion on the already-crowded roads.

One common factor contributing to the higher prices in Israel, be they in homes, consumer goods, or other areas, is a very cumbersome government bureaucracy. For example, Ben-David uses World Bank data and shows that the number of days required to open a business in Israel is higher than in 32 of the 33 OECD countries (fourth figure). Whereas in Australia it takes two days to start a business, in Canada five days, in the U.S. six days, and in France seven days, in Israel 34 days are required – nearly three times the OECD average. Instead of resources being devoted to lowering costs and hence prices, a substantial amount of time and money is lost in what should be a routine process of starting a business.

Eng prices fig 4

The summer protests in Israel did indeed touch a very basic nerve, even though they were based primarily on symptoms, or the “tip of the iceberg.”  The iceberg itself, which is the primary focus of much of the Taub Center’s research, reflects standards of living that since the 1970s have been steadily falling farther and farther behind the West (the current major recession is an exception to these long-run trends) and rates of poverty and income inequality that are much higher today than they were in the 1970s and 1980s and considerably higher than in most OECD countries.

The combination of relatively high prices and low incomes in Israel – compared to the industrialized West – is taking its toll in a number of ways.  One reflection of this during the past summer was the strike by the country’s physicians, whose cutting-edge training and abilities put them on a par with the best in the West, while their incomes lag well behind. In protest, many of the younger doctors quit en masse and the courts intervened to prevent their resignations for fear of the severely negative impact that this would have on healthcare in general and on emergency care in particular.  This issue has just been resolved in a manner that may have major reverberations on labor negotiations in the future.

In the academic realm, resignations have been substituted by a major brain drain from the country, one that is extremely severe in some fields that offer substantially higher compensation abroad.  Here, too, major inroads have recently been made to try and reverse the process.  Unfortunately, this is primarily symptomatic treatment for a major underlying problem.

Prof. Ben David summarizes that a situation combining state-of-the-art training with compensation that is increasingly not reflective of such ability is not a viable steady-state process.  When living costs are also rising disproportionately in relation to the West, it is not surprising that 400,000 Israelis in a country with less than eight million people took to the streets on one summer night in protest.  He adds that a combination of long-term planning focusing on a substantial improvement in the country’s human capital and physical capital is needed to deal with the primary underlying problems faced by Israel.  This needs to be complemented by a comprehensive policy emphasizing the common good versus that of narrow interest groups, one that is accompanied by appropriate regulation to deal with market failures.

Israel’s Shadow Economy

The severe economic problems experienced by a number of European countries emanating from the recent global recession have illuminated problems that are shared with Israel – even though Israel has thus far weathered the recession much better than most countries.  Large underground economies in Greece and Italy seriously limit the ability of these countries to garner urgently needed domestic resources for dealing with their predicaments, and do not provide much of an incentive for the citizens of other European Union partner countries to grant financial support drawn from the taxes that they pay. Israel, a country that is not immune to volatility, must learn from their example the extent to which a large underground economy restricts a country’s ability to respond effectively to an emergency situation.  This article is an excerpt from the chapter, “Public Spending in Israel – A Big Picture Perspective,” written by Dan Ben-David, Executive Director of the Taub Center and a Tel-Aviv University economist that appears in the recently published State of the Nation Report by the Taub Center.

The extremely high rates of non-employment in Israel reflect not only problematic work habits by a large and growing segment of the population, but also what would appear to be – from an anecdotal perspective – quite extensive levels of tax evasion. The severity of non-compliance with the country’s laws is very difficult to gauge, but its pervasiveness in some sectors of the population and business sectors is also difficult to ignore.

The anecdotal evidence receives empirical support from research as well. A recent World Bank study by Schneider, Buehn and Montenegro (2010) provides a glimpse into the size of Israel’s shadow economy and how it compares with other countries.  They rank 151 countries according to a rough estimate of the size of their shadow economies, based on multiple indicators including currency demand and the rate of official labor force participation. The figure looks at how Israel compares to 25 OECD countries.

Eng shadow economy fig 1

While the apparent problems of Greece and Italy eclipse Israel’s as far as shadow economies are concerned, Israel, nonetheless, has some substantial economic activity that is hidden from the eye of the tax authorities. According to Schneider, Buehn and Montenegro, the size of Israel’s shadow economy reached 23 percent of its GDP in 2007. This is considerably greater than Germany (16.7 percent), the United Kingdom (13.2 percent), Japan (12.1 percent), and the United States (9.0 percent). This large a share implies an enormous amount of economic activity that is taking place outside of the formal public eye – a sum of 187 billion shekels in 2010 alone. Such an extensive shadow economy skews the shouldering of the public burden in a substantial manner, leading to high tax burdens on some portions of the population while other segments of the population who work – while formally appearing not to do so – not only do not bear their share, they actually artificially inflate the burden by receiving welfare assistance and subsidies while they appear to be much poorer than they are.

A Macro Perspective – 2010

Current data indicate respectable growth in terms of GDP and employment, relatively low unemployment, current account surpluses, and reasonable inflation. The long-term problems include relatively low investment, lagging physical infrastructure, and numerous labor market problems, which negatively affect the quality of human capital and labor productivity in Israel.

The chapter concludes with a discussion of the considerable problems that stand in the way of attempts to modify Israel’s fiscal policy in order to resolve these problems.

This appears as a chapter in the Center’s annual publication State of the Nation Report 2010.

Fiscal Discipline Alongside Distorted Allocations Culminating in a Summer of Growing Unrest

In the early 1980’s, Israel’s government was one of the most profligate in the developed world, with public expenditure exceeding 70 percent of national income. The aftermath of the peace treaty with Egypt and the stabilization plan of the mid-1980s led to rapid improvement, but in 1990 Israel’s spending as a share of income reached 55 percent, a share that was higher than in 22 of 23 developed OECD countries (only Sweden spent more). By the year 2000, Israel’s public expenditures fell to 51.5 percent of GDP, still greater than in all but four of the 23 countries.  But as the Taub Center’s Executive Director, Professor Dan Ben-David, shows in the State of the Nation Report 2010, Israel had emerged by 2010 as one of the OECD’s thriftiest governments, with a 45 percent spending to GDP ratio that was lower than that of 16 of the 23 OECD countries.

The primary, and best-known, source of the spending decline has been reductions in defense expenditures as a fraction of GDP, from 12.6 percent in 1990 to 6.9 percent of GDP in 2009. Another four percentage points have been saved by the reduced interest payments on the smaller national debt. It seems, though, that there is little awareness of Israel’s noteworthy record in controlling civilian expenditures (that is, public spending minus defense expenditures and interest payments).

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In light of the very volatile events (wars, hyperinflation, massive immigration, political assassination, etc.) that Israel experienced over the past several decades, the relative stability of its civilian public spending – compared to what took place in the West over the same period – might come as a surprise (top panel of the figure). The share of civilian expenditures to GDP in Israel was the same in 2005 as it was in 1990.  In contrast, civilian expenditures (as a share of GDP) in the OECD countries exhibited some major fluctuations. These ranged from increases of 37, 23 and 21 percent in Portugal, Japan and Belgium to spending cuts of 21, 20 and 14 percent in Norway, New Zealand and the Netherlands, respectively.

The past five years have been characterized by a major global recession that affected many countries quite severely. Subsequently, civilian public expenditure rose in all but one of the 23 OECD countries, with an average increase of 12 percent between 2005 and 2010 (bottom panel of the figure). Having experienced its major recession at the beginning of the last decade rather than at its end like most other countries, Israel reduced its civilian expenditures by six percent, standing out – together with Switzerland – as the only countries that cut their spending share in 2005-2010. As a result, Israel’s civilian public expenditures in 2010 were below those in 21 of the 23 OECD countries.

With such low amounts of public funds available for civilian needs, Israel needs to make very judicious use of its resources. There is relatively less available from the overall pot in Israel for special interests and sectoral demands. In a region that is undergoing considerable unrest since the beginning of 2011 – and in light of its history of experiencing several  critical events each decade – Israel needs to preserve the precious few degrees of freedom that it has available in its budget and spend them wisely.

On the one hand, the ability to control spending in such a fluctuating environment, and to do so more rigorously than many other countries that have undergone much less traumatic periods, is a credit to the State of Israel. On the other hand, such fiscal responsibility also mandates a considerably more judicious use of the public’s money. In this realm, the country’s successive governments have been less than successful. This has also been the case with regard to government income, which is raised in a skewed and disproportional manner (as discussed in the companion piece in this Bulletin by Yarom Ariav).

Welfare payments per person have been increasing steadily for over four decades by multiples of the increases in the country’s income per capita. This is unsustainable in the long-run. It has occurred while a very large and growing share of Israel’s population has not been receiving the necessary tools and conditions for working in a modern economy. As a result, the share of families that would have lived under the poverty line today (had they not received assistance) is roughly one-third – compared to “just” one-quarter in 1979.  The resulting personal inability to cope in a global workplace also translates into an increasing national difficulty to assimilate and develop new ideas. Therefore, while Israel has justifiably been referred to as the “Start-Up Nation”, this attribute applies to an ever-shrinking share of Israeli society.

Instead of utilizing the limited resources at its disposal in a manner that could initiate a positive and permanent change in the country’s long-run socioeconomic trajectories, government after government have let an education system – once considered by many to be one of the best internationally – to sink to the depths of the developed world, with all of the growth, poverty and subsequent welfare implications that this has.

As Ben-David points out, many individuals who could work are receiving substantial amounts of government assistance while a large number of elderly and infirm are forced to live in abject poverty. The only systemic education reform passed by the government, a half-decade ago, was abandoned. The healthcare system, still one of the best in the world, is providing increasingly unequal care as the share of public expenditures has steadily fallen since the nationwide reform in the mid-1990s.

Fiscal responsibility is not just about controlling overall spending in unique circumstances. It also requires major, and often politically difficult, decisions regarding allocation. These are called national priorities – and Israel has a considerable distance to go in this realm.

The rising wave of public protests in Israel during this summer of 2011 reflect increasing unrest with the degree of distortion in Israel’s public expenditures that favor special interest groups with tremendous political clout – at the expense of the general public interest in the realms of education, health and housing.

Public Spending in Israel over the Long Run

While Israel has undergone some fairly seismic events government after government has managed to maintain considerable stability in civilian spending.  Israel’s uniqueness stands out especially over the past five years where the ratios of expenditures to GDP have fallen slightly while they have risen in most of the West.  But fiscal responsibility of this kind requires very judicious use of the available budgets and in this realm Israel has been far less successful.  It has one of the worst education systems in the industrialized world and it provides welfare assistance and subsidies on a scale that enables one of the highest rates of male non-participation in the labor force.

This appears as a chapter in the Center’s annual publication State of the Nation Report – Society, Economy and Policy 2010.

Income Inequality in Israel

Wage gaps in Israel are higher than in any other developed country and are particularly evident where worker educational levels differ. Over the past decade the average Israeli worker’s educational level has risen greatly while at the same time, demand for educated workers has grown even faster, leading to the continued widening of wage gaps.

Policies aimed at narrowing socioeconomic disparities in Israel should, in the short term, promote employment and provide income support to low-wage earners. In order to succeed in the long term, though, policies should upgrade the skills of the future generations of workers, and minimize the skill gaps. For this to happen, it is not enough to increase the number of years of schooling, the percentage of those eligible for matriculation certificates, or the percentage of those with academic degrees. It is also necessary to upgrade the curricula and the level of training provided by educational institutions.

This appears as a chapter in the Center’s annual publication State of the Nation Report – Society, Economy and Policy 2010.

Too many cooks spoil the tax broth

The tax system has a pivotal role in the functioning of any economy. The first job of a well-designed tax system is to provide revenue for the services provided by the government effectively and fairly. Taxes also have a powerful influence on citizens’ behavior – for example, encouraging work or idleness, thrift, or irresponsible spending. They can redistribute income more fairly and also affect the macro-economy. Collecting more taxes in boom times and leaving more money in citizens’ hands in downturns helps to stabilize the economy. It follows that the proper functioning of the entire economy depends on a stable and well-designed system of taxes.

Yarom Ariav, the recent Director General of the Israeli Finance Ministry, concludes that the country’s current structure of tax administration constitutes a troubling obstacle to maintaining a consistent and stable tax system. In the Taub Center’s new State of the Nation Report, Ariav points to a recent series of problematic policy reversals reflecting Israel’s inability to implement such a tax regime: While direct taxes have been reduced, indirect taxes have been increased; the value added tax rate is constantly being changed; the gasoline tax was raised and almost immediately the increase was cancelled; a plan to end the VAT exemption on fruits and vegetables was suddenly revoked; there have been frequent changes in the taxation of real estate with no real policy in evidence; tax exemptions for foreign investors were followed by an announced intention to reverse the exemption; and so on.

Ariav explains that the problem originates with the ill-advised merger of two quite distinct taxation functions: policy and collection. Before 2004, there were two distinct collection bodies in the Ministry of Finance: the Income Tax Department and the Duties and VAT Department. Above these collection departments was an administrative unit, the State Income Administration. While the subordinate bodies implemented the tax policies, the supervising administrative unit devoted itself to strategic considerations such as  the design and harmonization of tax policies. In 2004, the two  departments were merged into the Tax Authority.

There may have been a certain rationale for merging the two collection departments, but practically speaking this has not yielded any meaningful savings thus far. At the same time, the merger was perceived as making the State Income Administration superfluous.  While the Income Administration ceased being the locus for organized strategic thinking about tax policy, no other body within the Finance Ministry filled the strategic policy making void that was created. The result is that now there are a plethora of different officials within the ministry working in virtual isolation from one another — and often at cross purposes — to craft Israel’s taxation policy. The Tax Authority is charged with collecting taxes, not designing them; the Budget Department is focused on overseeing expenditure, not income; and so on.

Ariav calls for the immediate restoration of the former status and function of the State Income Administration, stating that both logic and history make this the right office for examining and coordinating tax policy from a system-wide perspective, thus providing Israel with a tax regime that will promote growth, stability and fairness.

Living on Borrowed Time?

Israel’s macro economic performance in recent years has been enviable: above-average growth, below-average unemployment, a trade surplus, moderate inflation, and a shrinking public sector debt as a fraction of output. As Professor Eran Yashiv, Chair of the Taub Center’s Economic Policy Program shows in the new State of the Nation Report 2010, Israel weathered the 2007 to 2009 financial crisis better than most developed economies, with a downturn that was both smaller and shorter than that of the US and most of Western Europe.

While the current economic picture compares favorably to what other Western countries are experiencing, there is also reason for concern. In contrast to the current economic indicators, Yashiv shows that indicators foreshadowing future economic performance paint a more worrisome picture. Israel’s economic future requires investment in physicalcapital such as equipment, buildings, and public infrastructures, and it requires cultivating human capital including general work skills and habits as well as a high degree of training and specialization in the lines of work demanded by a highly specialized 21st century global economy. Though both kinds of investment are critical for its future, Israel has been lagging.

Private savings provide the main source for investment spending, but in recent years savings have declined from 24 percent of GDP to about 18 percent. Not surprisingly, investment is declining; as shown in the first figure.  Though levels of gross domestic investment in Israel have tended to fluctuate between 20 and 30 percent, they fell to an all-time low of just over 15 percent in 2010 – which is lower than the 20-24 percent of output that is common in comparably well-developed countries.

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Alongside the shortfall of private investment, Israel is also experiencing a shortfall of public investment. The capital stock of the government sector has been growing recently at just over one percent, below that of any OECD country, where the average is over three percent.

Finally, Israel lags in investment in human capital. Large numbers of Israelis, particularly Israeli men, do not participate at all in the work force. The second figure shows that even after a 1.2 percent increase in labor force participation among prime working age Israeli men, and a 2.6 percent decrease in the comparable figure for men in the OECD, Israel’s employment rate is still five percentage points below the OECD average.

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Among those who are in the work force, a very large number are in low-skilled, low-paying dead-end jobs. Yashiv refers to a “dual job market:” one sector of the labor force has job security, which also translates into on-the-job training and skill development; another sector has low skills, low pay, low levels of employment stability, and, concomitantly, a low degree of skill development alongside their already low level of skills. Five to six percent of Israeli employees are employed by manpower companies (outsourcing or temporary agencies) where even if the worker happens to work for the same nominal employer for a long period of time, he or she is, in fact, changing jobs all the time as locations and tasks are changed by the contractor.

Yashiv suggests a linkage between the lags in physical and human capital investments. The lack of skilled labor leads to a perpetuation of outdated production technologies that favor low-skilled, low-paid workers over more modern, capital intensive approaches that require more investment and more skilled workers with higher productivity. In other words, the labor force deficiencies reinforce those of the production sector and vice versa.  This economic problem is creating an acute social problem of economic stratification between two Israels: one that is benefiting from modernization and globalization, and one that is being left behind.

So, while competent management of monetary and fiscal policy has been keeping the Israeli economy in relatively good macro economic shape, compared to other OECD countries, Israel faces some major long run problems in the labor market and with regards to physical capital. These problems reduce the potential for economic growth and for standards of living that characterize developed economies, a process that may leave Israel farther and farther behind. In addition, these problems tend to aggravate inequality, which in turn reduces social welfare, engenders friction, and further perpetuates the long-term problems of the economy. The current system of government in Israel does not generate optimism for the possibility of adopting policy steps that will effectively deal with the dysfunctional aspects of Israel’s labor market.

Fewer Workers Who Work More – With a Lower Standard of Living

As Taub Center Executive Director Professor Dan Ben-David shows in the Taub Center’s State of the Nation Report 2009, Israel’s living standards are not only lower than those of the G7 countries (the seven leading economies of the world), they have also been rising at a slower rate over the past decades, leaving Israel farther and farther behind the leading countries.

What are some of the primary factors distinguishing between living standards in Israel and in other developed countries?  A graph published in 2003 by Ben-David and updated here compares Israel with 24 OECD countries in 2009.  When it comes to standards of living – the common measure for these is GDP per capita – 21 of these 24 OECD countries have higher standards of living. (This measure is shown as the horizontal axis of the graph.)

The share of Israelis who are employed is below all but four of the other OECD countries (see red triangles graph).  On the other hand, Israelis who work tend to put in more hours of work each week than do workers in all but two of the other countries, regardless of whether those countries are wealthier or poorer than Israel (the blue squares on the graph).

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The primary factor determining standards of living in a country is productivity.  One measure of productivity is labor productivity (defined as GDP per hour worked).  The strong link between productivity and standards of living that exists across countries – and is visually evident in the figure (by the green circles) – is not a coincidence.  The more productive a worker is, the more he or she can be compensated and the higher the standard of living.  This is a major reason why productivity is lower in the three OECD countries with lower living standards than Israel’s and why it is increasingly higher in the wealthier OECD countries.

This figure shows an interesting relationship that appears to hold across modern Western economies: in countries in which a greater share of the population is employed, and each person – on average – is more productive, then employed individuals tend to work fewer hours during the week and the country’s average living standards is nonetheless higher.

Lagging productivity

Israel’s productivity picture is one of a steadily increasing gap that has developed between itself and the G7 countries (the second figure).  The relatively slower productivity growth since the 1970s has translated into relatively slower economic growth, with Israel’s standard of living falling farther and farther behind the G7 countries.

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The irony is, as Dan Ben-David shows in the Taub Center’s State of the Nation Report, that Israel invests extensively in research and development and, in certain areas, its creativity and innovation surpass those of the West’s leading economies.   But while some sectors of Israel’s economy are cutting edge, the overall human capital and physical infrastructures have not kept pace.

Increasingly congested roads (see January 2011 Bulletin) lead to higher transport costs and consequently lower productivity. Low levels of education and insufficient skills among large and growing segments of Israeli society reduce their ability to produce – and incomes tend to reflect this.

As a result, even when there are some areas in which the Israeli economy can successfully compete on a global scale, the heavy weight of the unskilled population enters the calculations of the national average. It turns out that the more advanced sectors of Israel’s economy are unable, on their own, to raise the country’s average standard of living to the highest Western levels. On the contrary. The large unskilled population pulls the national growth path downwards, so it is no coincidence that Israel’s long-run economic growth path has been lower and flatter than those of the advanced Western economies.

Low employment

The employment picture in Israel is a problematic one, particularly for men.  Though Israeli unemployment rates are below the OECD average, they only measure the share of individuals who cannot find employment out of those looking for work.  However, there is a very large segment of the Israeli population that is not even looking for work. Thus, the more relevant measure is non-employment – which includes the unemployed, those who are not participating in the labor force and those not looking for work.

As highlighted in the June 2010 issue of the Bulletin, the share of non-employed Israelis out of the prime-working age (35-54 year old) male population is more than half as much more than it is in the West: 19 percent were not employed in Israel in 2008, versus 12 percent non-employment in the OECD.  Two groups stand out in particular in this regard, Arab Israeli and haredi (or ultra-Orthodox) men.  In 2008, 27 percent of prime working age Arab Israeli men were not employed (double the share in 1979) while 65 percent of haredi men of the same age were not employed (over three times the share of non-employed haredi men in 1979).

It is important to note that even among non-haredi Jewish men, who are still the large majority in Israel, the share of non-employed (15 percent) is one-quarter more than the OECD average of 12 percent.  Three decades ago, in 1979, the share of non-employment among non-haredi Jewish Israeli men was the same as the OECD average. This means that there has been a deterioration in relative male employment rates across the board in Israel.  The marked increase in male non-employment has coincided with a multi-decade decline in the employment of less-educated and unskilled Israelis and steady multi-decade increases in welfare benefits per capita.  The result is that relatively fewer shoulders bear the weight of Israel’s economy and must work more hours to do so.

While the Israelis who work do so for more hours a week than is common in the West, the trend among Israeli men is towards fewer weekly work hours today than a decade ago (third figure).  In his study that will appear in the upcomingState of the Nation Report, Ayal Kimhi finds that non-haredi Jewish men, who represent the largest group of males in Israel, worked an average of 49.3 hours a week in 1998. By 2009, this fell by more than three percent, to 47.6 hours.  Weekly work hours among Arab Israeli men were below those of the non-haredi Jewish men in 1998 and in 2009, falling by one percent over this period, from 45.8 hours a week in 1998 to 45.3 hours in 2009.

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Haredim and the labor force

The employment situation among haredi men is considerably different than for the other population groups.  Not only are their rates of employment very low, the Kimhi study shows those who work do so for considerably fewer hours per week than the other groups, seven percent less than Arab Israelis and 14 percent below non-haredi Jews in 1998.  In addition, the drop in haredi hours of work per week, of five hours – a 12 percent fall – was sharpest among all groups.  As a result, even among those relatively few haredi men who are employed, they worked fewer hours a week in the past than the other groups, and they reduced their weekly work load by far more over the past decade.

Hence, not only has there been a widening gap in employment rates between haredim and other men, this relative deterioration in employment is also evident in a large and increasing gap in hours worked.  As a result of the diverging work norms among haredim and others, it is not surprising that an increasing share of haredi families are falling below the poverty line.

The issue of haredim and work is becoming increasingly problematical as their share in the population rapidly increases.  Ultra-Orthodox children represent one-fifth of all primary school pupils today, with an increase in enrollment of 51 percent over the past decade alone – compared to a decline of three percent during this same decade in the State non-religious schools (whose share fell to just 39 percent of the total in 2008).  As this major segment of the population rapidly increases, their ability and willingness to be engaged in a modern competitive society has become a major issue that needs to be reckoned with by Israeli society and its leadership.

When this is coupled with the fact that the haredim refuse to allow their children to study core curriculum subjects at levels that could facilitate their integration into a modern and competitive economy, the implications for future labor productivity growth that would enable higher compensation are not encouraging.  The combined result of problematic employment habits and poor education is that there are increasing pressures for raising overall government assistance to these families, with all of the attendant tax and welfare implications that this has for the rest of Israeli society.

In light of the fact that the haredi population is increasing at a faster pace than all other segments of Israel’s population, what happens to this group is beginning to have wider repercussions on the average standards of living for Israeli society as a whole.

Natural Gas Has Led to a Natural Debate

Until only a few months ago, it had been a virtual axiom that Israel was a mineral-poor country whose only natural resource was its brainpower. Not surprisingly, public policy and policy research in this area were as little developed as the mineral resources themselves. This perception has had to change rapidly as the past year brought confirmation of massive natural gas reserves in the offshore Tamar and Leviathan natural gas and oil fields – very timely findings in light of the interruption of gas flows from Egypt following the recent overthrow of the government.

Israeli policy makers have had to rapidly build a policy that will both make a fair division of benefits between the public and current investors and establish a sound policy foundation for generations to come.  The government appointed a public commission, headed by Hebrew University economist Prof. Eytan Sheshinski, an expert in public finance, and including economists, jurists, and mining experts, to recommend an appropriate taxation regime. The Commission recently completed its work and submitted its report to the government, which endorsed its recommendations and passed them along for approval by the Knesset.

The current taxation formula has been in force since the 1950s, and has applied in practice mainly to the tiny Heletz oil field in the Negev and the comparatively small Mari B gas wells off the coast of Ashkelon. It involves two main levies: ordinary corporate income tax (which would be due the government even if the mineral resources were privately owned), and a royalty of 12.5 percent of the well-head value (which for natural gas is less than the actual sale price) of production. Furthermore, the corporate income tax included a special “depletion deduction” which allowed a tax deduction for the depletion of the mineral inventory.

The Sheshinski Commission proposal would eliminate the depletion deduction, which exists in no other country, and is unjustified insofar as the inventory belongs to the sovereign nation, not to the developer. In addition, it imposes a “super profit tax” common in many mineral-rich countries. Such a levy applies only to revenues which exceed a certain multiple of the cumulative costs of the developer, including upfront investments such as prospecting costs.  The proposal recommends that this tax should kick in at a rate of 20 percent once revenues exceed a multiple (called an “R-factor”) of 1.5 times costs, gradually increasing to 50 percent of revenues that exceed 2.3 times costs.

The proposed imposition of these new levies on wells that are already licensed and nearing production led to considerable public debate in Israel.  Some claim that the Commission’s recommendations are tantamount to retroactive taxation, while others assert that imposing a new tax is no different than any other tax change – such as altering the corporate tax rate – and has no bearing on any sovereign obligations.  The Commission solicited an official legal opinion which affirmed the complete legality of the recommendations insofar as they do not apply to any revenues previously received nor alter the terms of the license.

However, the Commission did recommend a more lenient tax regime for the wells nearing production. For wells which begin production before 2014, the levies will apply only at a 50 percentage point higher multiple, beginning at two times costs (instead of 1.5) and reaching the maximum only at 2.8 times costs (instead of 2.3). This reduction is both to take into account the investors’ initial expectations and also to encourage rapid development of the wells.

The Commission expects these levies to give the country substantial revenues from the gas. The new tax is in addition to the original 12.5 percent royalty tax and in addition to income taxes – not to mention the sales tax that will be collected when the gas is sold to consumers. Beyond the revenue issue, the gas finds raise a host of other policy questions that will have to be considered in the coming years:

  1. What is the best use to make of these new revenues? Perhaps Israel should avoid wasteful short-term expenditures by following the example of Norway, which deposits oil revenues in a special sovereign “Petroleum Fund” designated for specific future needs, rather than for ongoing government expenses. A number of proposals in this spirit have been proposed and should be thoroughly evaluated.
  2. What are the macroeconomic consequences? A salutary macroeconomic effect is that large amounts of domestic energy, particularly natural gas which is not easily exported, could buffer Israel’s economy from global economic volatility. A problematic consequence is that extensive mineral exports will raise the value of the shekel, which will harm other exporting businesses (a syndrome sometimes known as the “Dutch Disease”). A fund like Norway’s Petroleum Fund could blunt this effect if it invests the tax revenues abroad, thus limiting the impact on the shekel.
  3. Energy resources can have strategic as well as economic importance. They could provide Israel a large measure of energy independence  – an outcome that is not lost in light of recent interruptions of gas flows from Egypt.

Foreign Workers Displacing Less Educated Israelis

The number of foreign workers in Israel has risen from a negligible number two decades ago to today’s situation where foreign workers are estimated to fill over ten percent of the jobs in the Israeli business sector.

The policy of allowing – and even encouraging – foreign workers to work in Israel has been a controversial one, even from a strictly economic viewpoint. Opponents of the policy claim that these workers displace local workers, and thus benefit the employers at the expense of Israel’s most vulnerable population – its unskilled laborers. Proponents insist that foreign workers are mainly employed in sectors where Israelis are not willing to work.  Hence, goes their argument, the foreigners are sustaining vital local business sectors without harming anyone.

Taub Center Executive Director Dan Ben David took a closer at this issue in his article on the labor market in the Taub Center’s State of the Nation Report 2009. He found evidence of a link between changes in the share of non-Israeli workers in the business sector and changes in the share of relatively uneducated Arab Israeli men who are not employed (see figure).

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The non-Israeli workers include both foreign workers, whose numbers were small until the early 1990’s, as well as Palestinian Arab workers. The non-employment rate in the figure refers to prime-working-aged Arab Israeli men with no more than 10 years of education. The curves track each other with relative consistency. The sharp increase in the share of foreign workers in the business sector during the latter half of the 1990s was immediately followed by a large rise in the rate of non-employment among relatively uneducated Arab Israeli men; the subsequent decline in the share of non-Israeli workers was followed by a more gradual decline in the share of non-employment among the Arab Israeli men.

The need to import foreign workers varies from country to country. The issue of local workers being crowded out of the labor market is less of a problem in countries with a shortage of unskilled labor. In Israel, where for decades a relatively large share of its working age population has lacked the primary skills and education to work in a modern economy, the large influx of foreign workers with remuneration levels below the mandatory minimum wage paid to Israeli workers leads to downward pressure on the wages of unskilled Israelis and to increased difficulties in their employment.

Labor Productivity in Israel

The country is one of the developed world’s leaders in innovation, a central component in the productivity growth that drives economic growth.  However, its productivity is among the lowest in the developed world, and has been falling further and further behind other leading countries since the 1970s.  This chapter focuses on some of common factors underlying Israel’s low productivity and provides a sector by sector comparison of productivity, capital formation, and wages across countries.

This paper appears in the Center’s annual publication State of the Nation Report: Society, Economy and Policy 2013.

Public Expenditures: A look at Israel’s National Priorities

Why are Israel’s rates of poverty and disparity so high and what caused them to rise over the past several decades? How did it happen that, despite population groups within Israel that innovate at the frontiers of human knowledge, the country’s steady state rates of productivity and economic growth consistently lag behind those of the G7 countries leading the Western world? Has Israel’s defense budget been so large that civilian public expenditures were simply insufficient for coping over the years with the country’s primary social and economic problems in the realms of education, employment, health and welfare?  The chapter on public expenditures in the Taub Center’s recent State of the Nation: Society, Economy and Policy 2009 report focuses on these questions.  Some of the highlights from this chapter are brought forth here.

In seven of the eleven years between the 1973 Yom Kippur War and the peak inflation rate of 445 percent in 1984, Israel’s public expenditure exceeded 70 percent of the country’s Gross Domestic Product (GDP). After implementation of the Economic Stabilization Program, the country’s public expenditure fell to an average of 53.4 percent during the two decades spanning the years 1985-2004, which is still relatively high compared to other Western countries.  The prevailing conventional wisdom in Israel has been that although total expenditures are higher in Israel, the civilian portion of public expenditures is lower than the Western average because of the much higher defense expenditures in Israel.

Figure 1 compares Israel’s public spending to that of the OECD countries. The average Israeli expenditure of 53.4 percent of GDP over the years 1985-2004 was indeed higher than the OECD’s 41.3 percent of GDP during that same time period. Also, Israel’s average defense spending, 10.4 percent, was substantially higher than the OECD’s 2.8 percent. However, after subtracting defense spending from overall expenditures in both Israel and the OECD, Israel’s civilian expenditure (43.0 percent of GDP) was still 4.6 GDP percentage points higher than the OECD’s (38.4 percent of GDP).

To illustrate how much Israel’s civilian expenditure exceeded the OECD’s over these two decades, it is possible to estimate the cumulative value of Israel’s surplus civilian expenditure compared to that of the OECD by multiplying Israel’s output by the difference between civilian expenditure in Israel and in the OECD during each of the years. When tallied up, Israel’s surplus civilian expenditure relative to the OECD average for the 1985-2004 period equaled NIS 363.9 billion in 2008 prices. This amount is half of Israel’s entire 2008 GDP of NIS 725.1 billion. In other words, Israel’s long-run trends of low growth and high poverty and income inequality relative to the OECD in recent decades did not result from lower civilian expenditures than the OECD, but from different priorities in the utilization of the civilian budgets.

The high level of public expenditures, which were not completely funded by taxes and other revenues, resulted in annual budget deficits. The financing of these deficits has meant that Israel had to borrow and subsequently return not only the principal on the loans, but has also had to pay the interest on them. Interest payments represent a “fine” of sorts that is placed on Israel’s inability or reluctance to live within its means. Debt is justified when the loan is used for building infrastructure that would also benefit the next generation – which makes it reasonable to expect that the next generation should also participate in paying for it.

But when it comes to infrastructure projects over this period, Israel lagged far behind the OECD countries. For instance, in the area of transportation infrastructure, traffic congestion in Israel reached three times the OECD average, though the country only had half the number of vehicles per capita as the OECD (Ben-David, 2003a). The act of borrowing to pay for expenditures that do not pertain to infrastructure investments means rolling over to the next generation bills for expenditures that the future generation will not benefit from.

The fact that Israel’s annual interest payments as a share of GDP are more than twice the OECD average is a serious enough problem. When this is combined with the fact that Israel’s physical infrastructure has been seriously neglected over these two decades, the problem becomes even more acute. Israel’s interest payments reached NIS 33.3 billion in 2008 (Figure 2), more than the Education Ministry’s overall budget that year, which reached NIS 28.6 billion. In fact, interest payments – the “fine” Israel paid in 2008 for its inability to live within its financial means – were more than double the budget of all the elementary and secondary education in Israel and nearly double the Health Ministry’s entire budget. This is one practical implication of rolling the debt over to the next generation.

However, even after subtracting from public expenditure not only the defense spending but also interest payments, Israel’s civilian public expenditure over the two decades (35.6 percent of GDP) was almost identical to that of the OECD (35.4 percent of GDP). This relative equality in civilian spending between Israel and the OECD seriously undermines the prevailing conventional wisdom that Israel’s civilian expenditure was too low to allow an in-depth treatment that might have alleviated the country’s high (in comparison to the OECD) rates of poverty and income inequality and relatively low rates of economic growth.

It is interesting to compare Israel’s public expenditure not only to other countries but also to other time periods in its own history. Figure 3 presents a comparison of recent years with the past, while continuing to exclude defense spending and interest payments. In the 1960s, during the years preceding the Six Day War and in the shadow of existential national security threats, Israel absorbed massive waves of immigration, built roads, towns, schools and research universities – projects that we know today as key infrastructures for generating economic growth.

During this period, Israel was characterized by substantially higher economic growth than all other countries with similar income levels while income disparities within Israel were very low compared to most Western countries. The infrastructure investments in the 1960s were made when Israel’s civilian expenditures (excluding defense and interest expenses) were 20.6 percent of GDP, slightly more than half the country’s average public expenditures over the years 1985-2004 (also excluding defense and interest expenses).

Israel’s public expenditures, excluding defense spending and interest expenses, grew considerably between the Six Day War and the Yom Kippur War. The ratio of expenditures to GDP rose by almost one half, from 20.6 percent of GDP before the Six Day War to 29.5 percent of GDP in the years 1968-1972. After the Yom Kippur War in 1973 and until the record inflation year in 1984 and the Economic Stabilization Program, public expenditures (net of defense and interest payments), rose by an additional 10 percent of GDP, reaching 39.9 percent of GDP in the years 1973-1984.

The substantial increase in civilian public expenditures reflected a major change in Israel’s national priorities.  Although the overall total was higher than it had been in the past, the era of large investments in basic infrastructures for the development of a modern economy came to an end, making way for new priorities that reflected much less of a national perspective and considerably more sectoral, local and/or personal considerations. Consequently, the rate of economic growth declined significantly.

In recent years, including the budget years 2009 and 2010, Israel’s public expenditures, after exclusion of defense and interest expenditures, have been lower than the OECD average.  This reduced level of available funds requires that the money be spent wisely.  It also requires a serious examination of how the burden of its financing is distributed among Israel’s population together with a substantial improvement in the enforcement of the country’s tax laws.

In a world that is witnessing increased competition between countries, when Israel’s rates of poverty and income inequality are high and its long run economic growth path is lower and flatter than those of leading Western countries, national priorities in budget allocation play a crucial role. The time has come for dealing with the question of whether the government budget should focus primarily on providing core treatment of central social and economic issues from a national perspective – such as building and strengthening human and physical infrastructures – or whether the focus should be on sectoral, local and/or personal interests. In a country that already has to bear a substantially heavier defense burden than is typical in the West, there is an even greater need for responsibility and caution when deciding how to spend what remains of the budget.  Expenditures should be determined on the basis of national interests, with an emphasis on providing the tools and conditions that will enable as many people as possible to successfully contend in a modern economy while stressing a more selective social security network that maximizes the available assistance to those who truly need it most.

A Macro Perspective of the Economy and Society in Israel

This chapter surveys macroeconomic developments in Israel during 2011 and discusses the difference between cyclical/temporary problems and structural problems. It also takes an in-depth look at possible solutions to the economy’s structural problems.  The social protest movement of the summer of 2011 and the Trajtenberg Committee Report placed these problems – which are expected to remain dominant in the foreseeable future – high on the public agenda. The data for 2011 indicate rapid GDP growth, a decline in unemployment to very low levels, and a significant increase in investment; they also point to a reasonable level of inflation.  Forecasts for 2012 point to a major slowdown in the wake of global developments.  The chapter discusses a possible fiscal policy for distinguishing between temporary and structural problems, and suggests (in accordance with the “Proposal by the Heads of the Taub Center – A New Public Agenda for Israel,” Eran Yashiv (ed.) 2011) a number of policy solutions designed to address the structural problems.

This appears as a chapter in the Center’s annual State of the Nation Report 2011-2012.

A Macro Perspective of Israel’s Society and Economy

However, Israel entered the recession in a relatively good economic state and appears to also be coming out of the crisis relatively quickly. Israel is returning to long-term paths that have characterized the country for decades, paths that are not sustainable in the long run. Rapid demographic processes are at work within Israel, reflected in a steadily growing part of Israeli society that is not equipped with either the tools or the conditions to cope successfully in a modern economy. This chapter highlights the Israeli anomaly in terms of prospects and risks and proposes a strategic plan for systemic reform that can produce a turnaround.

This paper appears in the Center’s annual publication State of the Nation Report – Society, Economy and Policy 2009.

Public Expenditures – A Look at Israel’s National Priorities

But the relatively higher civilian expenditures did not prevent rates of poverty and income inequality from rising higher than is common in most Western countries. Where did the money go? In contrast to the common practice, this chapter shows Israel’s budgetary allocations by areas of expenditure rather than by government ministries. This makes it possible to see Israel’s actual national priorities rather than its declared ones.

This paper appears in the Center’s annual publication State of the Nation Report – Society, Economy and Policy 2009.

Male Income, Female Income, and Household Income Inequality in Israel: A Decomposition Analysis

Decomposing inequality by income determinants, we find that uniform increases in education reduce income inequality, with increases in female education having a larger effect than increases in male education. In addition, an increase in the fraction of ethnic minorities in the population has a positive effect on inequality, but this operates mostly through female income. All this suggests that female income is the most adequate target for inequality-reducing policy, and that within-household gender equality is good for reducing income inequality among Israeli households.

Government Expenditure on Social Services – 2008

The last three years were characterized by impressive economic expansion, following on the heels of a slowdown during the period 2001-2003, one to which the Israeli government itself contributed by implementing a severely restrictive fiscal policy that curbed public consumption.  This curtailment of public consumption had ramifications for various sectors of the economy.  During the following years, from mid-2003 on, there was a significant upturn as reflected in several economic indicators.  Amongst other things, there was an awakening in the labor market:  in 2002 the number of those employed grew at an annual average rate of 0.9 percent, and since then the rate rose to 3.2 percent.  At the same time the unemployment rate declined by 3.4 percentage points and 2008 is expected to end with an average unemployment rate of 6.3 percent.  Employment rates for the 25-64 age group have been trending upward since 2003, reaching 70 percent in 2007.  Wages have also been rising steadily in real terms since 2003, in both the private and public sectors.

This brisk economic activity led to a rise in tax revenues and to a consequent reduction in the deficit from a high of 5.3 percent in 2003 to one percent in 2006 and to a balanced budget in 2007, with a decline in public debt as a percentage of GDP.  Unfortunately, this improved economic situation did not bring about a social improvement.  The chapters of this year’s Report point to deficiencies in various areas of social concern and highlight the state budget’s failure to adapt to changing social needs.  The report proposes various options for improving matters on the social plane while also encouraging economic growth − with due consideration for time constraints and the difficulties posed by the global and local crises.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 2008Yaakov Kop (editor).

 

 

Government Expenditure on Social Services – 2007

It is precisely for this reason that the distress of specific population groups who have not benefited from the trickle down effect of this economic growth stands out all the more. The experience of recent years shows that pro-growth macroeconomic measures take a long time to benefit society’s weaker groups and that even then the achievements are incomplete and inadequate. Therefore, to cope effectively with socioeconomic problems, the government should also employ a range of direct and focused measures.

Policymaking and the selection of methods of promoting the welfare of weaker population groups have been flawed for various reasons including difficulties in identifying and measuring costs and benefits and, particularly, in comparing cost-benefit ratios among different kinds of public social expenditure. The purpose of this review is to enhance the discussion of the government’s socioeconomic policies by improving its factual base. It describes developments over time and evaluates the main trends in government social expenditure. It also tries to assess, to the extent possible, the efficiency of resource allocation.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 2007.

 

 

Government Expenditure on Social Services – 2006

Under these new conditions, the problems of coping with Israel’s socio-economic issues became even more complicated and difficult.

The challenge of crafting the desired policy for the improvement of the welfare of weak population groups suffers, among other things, from difficulties in identifying, measuring and, particularly, in comparing cost-benefit ratios among different public social outlays. The goal of this survey is to contribute to the debate over the government’s socio-economic policy by improving its factual base. It describes long-term developments in a way that is consistent with previous surveys, gauges the main trends in government expenditure on social services, and attempts — to the extent possible — to assess the effectiveness of the expenditure.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 2006, Yaakov Kop (editor).

The Share of Public Expenditure in GDP in View of the Need to Increase Defense Spending

However, the planned changes in the 2007 budget, following these principles had no effect on the focal point of the policy: reducing the share of general government in the economy. The intention was to hold the increase in public expenditure to a rate slower than expected growth in business sector and household private consumption, estimated at more than 4 percent per year. Concurrently to this decrease, the share of government expenditure, the tax cuts that had been approved as part of the tax reform that began in 2003 were supposed to continue. The reform was intended to reduce tax revenue in 2010 by NIS 13 billion relative to the level that would have prevailed had its implementation been suspended in 2007.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 2006Yaakov Kop (editor).

Government Expenditure for Social Services – 2005

Thus, the dilemmas of socioeconomic policy remain unresolved: is a pro-growth macroeconomic policy enough to enhance the well being of weak population groups? And if the general improvement does not trickle down enough, or does so at an unsatisfactory pace, how should the government intervene? Should Israel revert to its traditional policy of spending more on social services and transfer payments, or should it take a different approach, more focused and less universal, including significant changes in expenditure targets?

Ideological outlooks influence attitudes toward these questions. Even people who share similar worldviews, however, may disagree due to practical difficulties that originate, among other things, in limitations in identifying and measuring costs and benefits and, primarily—in comparing the cost-benefit ratios of different public social outlays. The review that follows strives to establish a factual basis for discussion of a desirable government socioeconomic policy. Apart from describing developments and noting main long-term trends, the analysis also makes a partial assessment of the efficacy of the expenditures.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 2005, Yaakov Kop (editor).

Government Expenditure for Social Services – 2004

In recent years, relatively large changes were made in the size and composition of the budget in the course of the budget year. This makes it difficult for government ministries to implement their working plans efficiently and may result in underutilization of resources and confusion regarding priorities.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 2004, Yaakov Kop (editor).

Government Expenditure for Social Services – 2003

It should be borne in mind, however, that the budget in its final version is the result of political and governmental struggles over the apportioning of the national resource pie. The extent and composition of Israel’s social expenditure reflect the outcome of a process in which many players take part: the government, its ministers, the Knesset, the media, public entities, and academia. The budget as the Knesset ultimately approves it is the “bottom line” of decisions and outcomes.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 2003, Yaakov Kop (editor).

Government Expenditure for Social Services – 2001-2002

Thus, the global economic situation, the state of the domestic economy, and the security situation may combine to force a rollback in the social services. Cuts in the state budget – including social service budgets – are sometimes unavoidable. This is the case when the damage caused to the economy by an increase in the budget deficit exceeds the damage caused by a reduction in social spending. Such an evaluation is linked, of course, to value judgments, but it is also a question of the size of the deficit, and the general economic circumstances and expectations. If the size of the deficit and its trend threatens economic stability, budget cuts may become unavoidable.  It is, however, important that the government exercise extreme caution when facing difficult dilemmas of this sort. The budget deficit problem should be regarded as a temporary development caused by an economic slowdown that will be followed by an upturn. As soon as the economic outlook will show significant indications of this expected recovery, the basic structure of government expenditure should return to its pre-cutback track.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 2001-2002, Yaakov Kop (editor).

Proposal for an Alternative Economic Policy

The monetary policy has actually strengthened the shekel against the dollar artificially, thereby slowing export growth and increasing the volume of imports. For most of this time and in most respects, the Bank of Israel has applied monetary policy and the Finance Ministry has invoked fiscal policy without coordinating their actions and without consensus.

The alternative economic policy proposed here is designed to extricate the economy from its lethargy, reignite growth, and boost employment on the basis of vigorous growth of exports, by revising the underlying strategy of the country’s fiscal and monetary policies. This section of the book also discusses needed reforms in taxation, the capital market, major economic infrastructure projects, and defense spending, which carries a major macroeconomic impact. The resumption of growth should be accompanied by a reduction in income-distribution inequality and the attainment of additional social goals.

The plan is based on the view that the current policies, if allowed to continue, will not lead to the desired turning point in the next few years. According to historical experience, the Israeli economy was lifted out of downturns by a combination of policy measures and exogenous shocks (the Six-Day War, mass immigration in the 1990s, etc.). As 1999 drew to a close, economic activity began to recover to some extent, but not energetically enough to induce the economy to utilize all of its production and growth potential.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1999-2000, Yaakov Kop (editor).

Government Expenditure for Social Services – 1999-2000

Our definition of government social services includes government ministries’ activities in social spheres as well as in-cash benefits paid by the National Insurance Institute, one of the most important components of the government social-service system. The largest spheres of social-service activity are education and health, along with National Insurance Allowances, foremost old-age pensions and child benefits. Areas of secondary magnitude in financial terms are immigrant integration, housing, employment, and personal social services. Although this report focuses mainly on analyzing government expenditure for social services, as a preface we briefly review the economic background amidst which the state budget is determined.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1999-2000, Yaakov Kop (editor).

Social Expenditure and Its Composition – 1998-99

Much of this spending is devoted to the social services – education, health, personal social services, housing, and immigrant integration. In addition to these functions, there are the benefits paid to individuals and families by the National Insurance Institute, partly funded from the State budget. The aggregate of these two large categories constitutes the central-government social budget of the State of Israel.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1998-99, Yaakov Kop (editor).

Economic Downturn, Growth, and the State Budget – 1998-99

The effects of the decrease in immigration from the former Soviet Union, the restraint, and high real interest rates were compounded by the slowdown in world trade, prompted by the crises in southern Asia, Russia, and South America. The protracted slump warrants the application of a counter-cyclical policy by means of a more expansionary state budget and a less contractionary monetary policy, which would help the business sector break out of the slump and attain a growth rate commensurate with the increase in the labor force and productivity in the years to come. In view of the instability in the world financial system and the rising susceptibility of the Israeli economy to exogenous shocks, however, expansionary measures in general, and budgetary policy in particular, should be applied in moderation, subject to multi-annual targets for public expenditure, derived from the optimum long-term growth potential of the economy.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1998-99, Yaakov Kop (editor).

Summary of Findings and Policy Alternatives – 1998-99

The most conspicuous phenomenon in the field are a suspension of economic growth, rising unemployment, and decreased investments and exports. The downturn interrupted the process of social progress experienced by Israel during the first half of the decade and led to a retreat in several areas.

Against this background, the relative importance of macroeconomic policy within the overall domain of social-policy issues has increased; today it has a major impact on the advancement of all social issues.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1998-99, Yaakov Kop (editor).

Bequething of Economic Assets – Home Ownership

It is part of a more extensive study based on a comprehensive survey, in which 1,600 people were chosen randomly and interviewed in matters of family income, family economic resources, and intergenerational debts between parents and children. This analysis focuses on the effect of parents’ economic resources and financial assistance on home ownership and home equity (a major component of economic resources) among the recipients’ generation.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1996, and is available upon request.

Government Expenditure on Social Services 1994-1995

This report analyzes actual government outlays for social services in 1994 and the budget for 1995. The findings are analyzed in the context of development in the 1980s and 1990s.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1994-1995, and is available upon request.

Israel Towards the Twenty First Century – Social Report

The overarching examples of change looked at here in education, health, and income maintenance point to the emergence of new patterns in the operating environment of the social services. Systematic inspection of each of these social systems shows that in order to continue nurturing the Israeli welfare state, it will be necessary to reexamine the objectives, the goals, and the means for attaining them.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1994-1995, and is available upon request.

Government Social Expenditure 1992-1993

The various sections in this review examine developments in the Israeli economy in the early 1990s with emphasis on 1992 and the level of planned government outlays for social services as presented in the 1993 State Budget proposal. It also looks at social expenditure trends in the State Budget, and the composition of this expenditure as well as its main components of income maintenance, education and health services.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1992-1993, and is available upon request.

Basic Commodity Subsidies and Income Distribution

Subsidization of basic foodstuffs and public transport is an important element in the phalanx of systems meant to narrow income distribution disparities in Israel. Thus the cutback in subsidies aggravates inequality in the distribution of incomes.

This study reviews the development of the subsidy system and suggests alternatives to basic commodity subsidies.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1988-1989, and is available upon request.

The Cost and Allocation of Social Services, and Priorities in Social Policy

Recurrent breakdowns in the running of the health and education systems, coupled with persistent claims – voiced by many politicians – that the economic stabilization plan has hurt the economically weak more than anyone else have created the impression the the resources allocated to the social services are being substantially reduced.

Analytical discussion of the subject involves a number of the short-term as well as the long-term trends of the system as a whole and of its major constituents – income maintenance and the provision of services.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1986-1987, and is available upon request.

National Expenditure for Social Services

Even relatively small sums have become the subject of difficult negotiations. It is therefore worthwhile to review national expenditures on social services in Israel from a historical perspective and compare Israel’s situation with that of other countries.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1986-1987, and is available upon request.

Government Expenditure – Structure, Target Population, and Forecast of Needs

There is no doubt, however, that deliberations on the annual budget ought to be guided by multi-year considerations and anticipated long-term feasibility. Thus, predictable requirements should be examined for the next quinquennium. For certain purposes, even a more distant period, the nineties, should be considered. The findings presented here, therefore, are important not so much for their absolute values as for the trends and patterns of change they suggest for the medium and long term.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1986-1987, and is available upon request.

Lessons from the Analysis of Social Expenditure

Most of this report is addressed to government activity in these fields, because of our special interest in government social policy as expressed by its pattern of resource allocation. Furthermore, the government’s financial role in social affairs is most often decisive – and, frequently, all-inclusive.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1986-1987, and is available upon request.

Social Service Expenditure in 1986/87: Where Do We Go From Here?

One of the most troubling findings in the study of Israel’s social situation today may be the perceptible slack in planning and implementing deliberate measures in order to prepare our social services for the future. Reinforcing such activities may help social policy makers reach more rational decisions given the choices that are still available and may even help place Israelis’ expectations of and aspirations for a better future on firmer ground.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1986-1987, and is available upon request.

Social Services in Israel 1986-87

It draws on selected studies undertaken by the Center’s researchers, as well as deliberations with other policy experts from academia, government and Knesset, the private and not-for-profit sectors, and the trade unions. This summary also reflects the Center’s special interest in the links between economic and social policies.  Unlike earlier summaries, this one presents not only a macro-analysis of social spending for the human services and their target groups but also presents a future scenario based on the demographics of Israel’s population. It suggests that the consequences of Israel’s demographic situation must be carefully taken into account as the social policies of the nineties are in the making.

This publication is available upon request.

Israel’s Social Services 1985-86

It points to the current need for finding ways of trimming and containing public expenditure for human services by a partial transfer of the burden of funding more directly to all citizens with the current introduction of stronger redistributive measures and efficiency. Alternative and politically acceptable policies may not lead to dramatic reductions in the resources now used by Israel’s human services. However, some options can release material and non-material resources for what is now done inadequately and still must be done.

This publication is available upon request.

Fiscal Policy

It has become a major factor in the planning of wage and price policy, as well as what is known in israel as “absorbing money from the public,” during the new economic policy implementation period. Among the major policy measures measures involving taxation, direct taxes have been raised somewhat and indirect taxes slightly lowered.

This paper appears as a chapter in the Center’s annual publication, Changing Social Policy: Israel 1985-1986, and is available upon request.

Government Expenditure on Social Services – 1985

The centerpiece of economic policy at the time was the first so-called “package deal,” an accord between the government, the Histadrut and representatives of employers and manufacturers. The first such agreement took effect in late 1984 and lasted until early February, 1985. It aimed to defeat inflation by artificial means, reducing it to a level at which its underlying factors might be treated, and sought simultaneously to trim the balance of payments deficit.

This paper appears as a chapter in the Center’s annual publication, Changing Social Policy: Israel 1985-1986, and is available upon request.

 

Tax Expenditure

Such a “budget: would provide the public with detailed and systematic information as to the amount of tax relief granted to certain population groups or defined economic activities. Tax expenditure, an important instrument used by the government in its activity in the economy, is neither documented in any medium nor budgeted in any way.  The present study relates to the major tax laws, including income tax, VAT, employer’s tax, customs and indirect taxes.

This paper appears as a chapter in the Center’s annual publication, Changing Social Policy: Israel 1985-1986, and is available upon request.

Distribution of Family Income and Taxes

This study summarizes the first stage of research and surveys the current situation and examines income and tax distribution from a perspective of the family as an integral unit. All income received by the family has accordingly been totaled as well as all taxes paid by it.

This paper appears as a chapter in the Center’s annual publication, Changing Social Policy: Israel 1985-1986, and is available upon request.

Government Outlays on Social Services – 1984

To understand what happened in 1983 and 1984, however, requires a larger canvas. Consequently, we are presenting the data for these years and the analysis in relation to expenditures during 1981 and 1982. The wider horizon enables us to identify trends in the allocation to the various social services.

This paper appears as a chapter in the Center’s annual publication, Israel’s Outlays for Human Services 1984, and is available upon request.