Taub Center » Economics

The land of (expensive) milk and honey

Taub Center Experts — Wed, 28 Dec 2011 14:00:25 +0000

A summer of protests – high prices, low incomes, and a growing realization of what is only the tip of the socioeconomic iceberg.

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.

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.

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.

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:

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.
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.
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.

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.

Employment patterns differ between generations, and depend on gender and education

Taub Center Experts — Wed, 28 Dec 2011 13:55:57 +0000

The employment behavior of Israeli men and women born in different decades has changed from each generation to the next – with differences in education levels the key divider between groups.

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).

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.

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).

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.”

Israel’s shadow economy

Taub Center Experts — Wed, 28 Dec 2011 13:50:32 +0000

Economic activity that occurs under the tax radar has become a major weight on those who shoulder the burden. A look at Greece, Italy and Spain – among the very few developed countries with an even larger shadow economy than Israel’s – shows where such national behavior can lead.

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.

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

Eran Yashiv — Sun, 02 Oct 2011 10:45:14 +0000

The current chapter surveys macroeconomic developments in Israel in 2010. It examines the discrepancy between Israel’s good situation, as reflected in various macroeconomic indicators, and its worrying long-term economic problems. 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: Society, Economy and Policy 2010.

Public Spending in Israel over the Long Run

Dan Ben-David — Sun, 02 Oct 2011 10:30:48 +0000

One of the significant findings characterizing Israel’s civilian government expenditures (i.e. excluding defense spending and interest payments) over the past couple of decades is their fairly remarkable stability, in historical perspective as well as in comparison with other countries. 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.

A Macro Perspective of Israel’s Society and Economy

Dan Ben-David — Tue, 13 Apr 2010 10:59:31 +0000

This was not an easy year for the Western countries, including Israel. 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

Dan Ben-David — Tue, 13 Apr 2010 10:55:53 +0000

Even after deducting Israel’s very high defense spending from its total public expenditures, the remaining civilian expenditures have been higher than average OECD civilian expenditures between the mid-1980s and the mid-2000s. 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

Ayal Kimhi — Tue, 15 Dec 2009 10:40:33 +0000

Differentiating between the sensitivity of income inequality to male income and female income, we find that total income inequality is less sensitive to female income variability or the level of female income than to male income variability or the level of male income. 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.

The Fiscal and Monetary Trap of the Israeli Economy: Heading for the Second “Lost Decade”