As part of the Herbert M. Singer Conference Series, the Taub Center held an international conference on October 30, 2013.
The topic was “Causes and Consequences of Inequality.” Participants in this unique symposium included two of the world’s leading scholars in the field of economic inequality – Prof. David Autor of MIT and Prof. Brian Nolan of Dublin University. The speakers presented to senior policy makers in Israel and to the general public groundbreaking studies that explain the reasons for the surge in income inequality in most of the developed countries of the world and the social and economic consequences of that surge. Following their presentations was a discussion on inequality in Israel.
Among the studies and findings presented at the conference:
Trends in Wage Inequality in Israel: a new study presented for the first time at the Taub Center conference (click to download presentation)
A study conducted by Taub Center researchers Ayal Kimhi and Kyrill Shraberman examined the development of wage gaps in Israel between 1997 and 2011. The researchers found that whereas the return on education grew over that period, a phenomenon likely to lead to a rise in wage inequality, in effect wage gaps diminished somewhat and the relative situation of low-wage earners improved. Kimhi and Shraberman also examined the distribution by occupations and found that the return on education in low-wage occupations increased, whereas in higher-wage occupations it remained stable. This may explain the relative rise in the wages of low-wage workers. What these findings mean is that higher education is coming to have economic value, as it did not in the past, also for workers who are employed in fields where wages are low.
Kimhi and Shraberman also found that workers in the seventh and eighth deciles experienced a drop in wages relative to both lower-wage workers and higher-wage workers, and as a result the wage distribution in Israel has become more polarized since the wages of the “middle group” have declined relative to the wages of the other groups. The distribution of total working hours in the economy by occupations has also become more polarized, since working hours in low-wage occupations and in high-wage occupations have increased relative to total working hours in middle-wage occupations.
Causes and Consequences of Inequality in Industrialized Economies (click for presentation)
A study by Prof. David Autor of the Economics Department at MIT examined the inequality issue from an innovative perspective. According to Autor, over the last three decades income inequality has grown to huge dimensions in many of the industrialized nations, and even though the worldwide economic crisis wiped out a lot of capital in the course of the last five years, inequality again appears to be on the rise, making the topic more relevant than ever. Autor found that inequality has risen at a rapid rate in some countries, but much more slowly in others. In other words, rising inequality is not inevitable, but the outcome of social and cultural circumstances and of policy. The study examined the potential causes of rising inequality in industrialized economies, including technological changes, globalization, fiscal policy and the development of social norms, as well as the consequences of inequality for economic efficiency, social mobility, and the quality of the democratic state. In light of the findings, Autor constructed an estimation of the cost to society of inequality and showed that high inequality obstructs social mobility and is damaging to the structure of the family and investment in children. In his presentation, Autor shows a study that was conducted in 13 countries and proved that in countries with high inequality intergenerational social mobility is very low, or as Autor puts it: “In such countries someone born to very wealthy parents is likely to be very wealthy, and someone born to very poor parents is likely to be very poor – and it doesn’t have to be that way. In countries with low inequality there is much greater social mobility. We need economies that are dynamic, not economies based on dynasties.” Autor added that in an economy without social mobility there is less incentive to work, because people feel they have no chance of climbing the social ladder.
Another interesting finding presented by Autor, concerning the structure of the family, is that the more educated a man is, the greater the probability he will be married, and vice versa, the less educated a man is, the lower the probability he will be married. In reproduction, however, no connection to education was found, although the less-educated people who are unmarried establish single-parent families characterized by less time and resources invested in children, which greatly impacts inequality in terms of children’s education and their future opportunities.
Poverty and Inequality over Time – In Israel and in the OECD (click for presentation)
A study by Prof. Dan Ben-David and Haim Bleikh of the Taub Center focused on changes in the poverty and income inequality rates in Israel over recent decades and relative to other countries. Contrary to prevailing opinion, the poverty and disposable income inequality rates in Israel are very high compared to developed countries, even when the Haredi (ultra-Orthodox) and Arab Israeli populations with their relatively high poverty rates (though not especially high in terms of economic income, i.e., before welfare payments and taxes) are taken out of the calculation.
The study also found that poverty among children after welfare payments and taxes is the highest in the developed world: one-third of the children in Israel are below the poverty line.
The Taub Center researchers found also that the share of national income reaching the top percentile of the population is not particularly large in Israel, but on the other hand the gap between people in the 90th income percentile and those of median income is the widest in the West; the gap between those of median income and the 10th percentile is even larger.
The Growth in Income Inequality and Its Effects –Examples from 30 Countries over 30 Years (click for presentation)
Prof. Brian Nolan of Dublin University in Ireland conducted a study on inequality from a global perspective. At the Taub Center conference Nolan presented the findings of the cross-country study, which examined the rise in the Gini coefficient for inequality in thirty countries over three decades, and showed the political and social effects of that rise in those countries. Inequality in the OECD countries is currently very high, in fact, the highest it has been in the past fifty years. According to Nolan, the factor which most influences inequality is the market forces, including wage gaps and the structure of the family. As regards the structure of the family, Nolan came up with two findings. First, two-parent families tend to be in better economic condition than single-parent families; and, even among families with two parents, in families in better economic condition, there is a greater probability that both parents will work than in families in poor economic condition. The second influential factor on inequality, according to Nolan, is the government policy regarding the social security net. Surprisingly, Nolan’s study found no proof that high inequality has a bad effect on society – not in terms of health and inequality in healthcare, not in terms of crime, not in terms of social mobility, and not even in terms of social solidarity and trust in the public system and in society in general. Nonetheless, Nolan qualified his remarks: “Although we have seen nothing to attest that inequality negatively impacts society, we must look at the aspect of morality and justice, and inequality is unjust and in a normative society it is better not to reach high levels of inequality.”
Alongside the presentation of the studies at the Taub Center conference, a roundtable discussion was conducted led by the incoming Governor of the Bank of Israel, Dr. Karnit Flug, with the participation of Knesset Member Isaac Herzog, Prof. Ayal Kimhi, Prof. David Autor, Prof. Brian Nolan, Prof. Eran Yashiv and Prof. Haya Stier.
The roundtable participants discussed the topic of income inequality on the basis of the studies presented at the conference and their rich knowledge of the field.
Dr. Karnit Flug (click for presentation): “In recent years we have witnessed high levels of inequality, beside a rise in the flexibility of the labor market. We must ask ourselves: does the situation we are in today reflect the proper balance between labor market flexibility and the level of inequality? And are there possible policy measures that can contribute to reducing inequality without harming labor market flexibility? In this context, the negative income tax policy, whose implementation has begun in Israel in recent years, is a good example of policy that meets these two conditions.”
Dr. Flug referred to processes in recent years that have aggravated inequality in Israeli society: “There is a clear interchange between labor market flexibility and inequality in disposable income, and the process which has occurred in recent years, of reduction in transfer payments on one hand, and a reduction in direct taxes on the other hand, has contributed on one hand to enhancing flexibility in the labor market, and on the other hand to rising inequality in disposable income.”
Knesset Member Yitzhak (Buji) Herzog said: “I am grateful to the Taub Center for placing such important issues, such as poverty among the elderly, on the agenda. The government copes only with problems from day to day and long-term planning is lacking, as is dealing with the core issues. My concern is for the working poor – a large percentage of those living below the poverty line work, and are still poor, and in the State of Israel a situation has arisen almost of modern slavery.”
The Taub Center for Social Policy Research in Israel, headed by Prof. Dan Ben-David, is an independent and nonpartisan institution for socioeconomic research located in Jerusalem. The Center provides to leading decision makers in Israel and to the general public an overview of the social and economic fields. The Center’s professional staff and interdisciplinary teams – which include prominent scholars from academe and the leading experts in their policy fields – conduct studies and propose policy recommendations on the key social and economic issues which confront the State of Israel.
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