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:

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.

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.

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.”

]]> http://taubcenter.org.il/index.php/publications/discussion-papers/economic/employment-patterns-differ-between-generations-and-depend-on-gender-and-education/feed/lang/en/ 0 http://taubcenter.org.il/index.php/publications/discussion-papers/economic/shadow-economy/lang/en/ http://taubcenter.org.il/index.php/publications/discussion-papers/economic/shadow-economy/lang/en/#comments Wed, 28 Dec 2011 13:50:32 +0000 Taub Center Experts http://taubcenter.org.il/?p=7918&lang=en 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.

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 physical capital 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 21^st 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.

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.

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.

]]> http://taubcenter.org.il/index.php/publications/e-bulletin/living-on-borrowed-time/feed/lang/en/ 0 http://taubcenter.org.il/index.php/publications/e-bulletin/too-many-cooks-spoil-the-tax-broth/lang/en/ http://taubcenter.org.il/index.php/publications/e-bulletin/too-many-cooks-spoil-the-tax-broth/lang/en/#comments Tue, 06 Sep 2011 05:45:41 +0000 admin http://taubcenter.org.il/?p=6395&lang=en Recent reform of tax administration leaves a planning vacuum.]]> Recent reform of tax administration leaves a planning vacuum.

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.

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).

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.

]]> http://taubcenter.org.il/index.php/publications/e-bulletin/fiscal-discipline-alongside-distorted-allocations-culminating-in-a-summer-of-growing-unrest/feed/lang/en/ 0 http://taubcenter.org.il/index.php/publications/e-bulletin/read-the-complete-september-2011-bulletin/lang/en/ http://taubcenter.org.il/index.php/publications/e-bulletin/read-the-complete-september-2011-bulletin/lang/en/#comments Tue, 06 Sep 2011 04:30:23 +0000 Taub Center Experts http://taubcenter.org.il/?p=6726&lang=en http://taubcenter.org.il/index.php/publications/e-bulletin/read-the-complete-september-2011-bulletin/feed/lang/en/ 0 http://taubcenter.org.il/index.php/publications/e-bulletin/fewer-workers/lang/en/ http://taubcenter.org.il/index.php/publications/e-bulletin/fewer-workers/lang/en/#comments Tue, 31 May 2011 14:07:09 +0000 admin http://taubcenter.org.il/?p=6122&lang=he In Israel, a lesser share of people work than is common in the West.  Those who are employed work more hours a week than do workers in most other OECD countries while the country’s average standard of living is lower than in the majority of OECD countries.]]> In Israel, a lesser share of people work than is common in the West.  Those who are employed work more hours a week than do workers in most other OECD countries while the country’s average standard of living is lower than in the majority of OECD countries.

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).

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.

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 upcoming State 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.

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.

]]> http://taubcenter.org.il/index.php/publications/e-bulletin/fewer-workers/feed/lang/en/ 0 http://taubcenter.org.il/index.php/publications/e-bulletin/working-poor/lang/en/ http://taubcenter.org.il/index.php/publications/e-bulletin/working-poor/lang/en/#comments Tue, 31 May 2011 14:06:05 +0000 admin http://taubcenter.org.il/?p=6135&lang=he Israel has experienced a marked increase in the share of poor families headed by an employed person.  The rise in the working poor has been to a large extent concentrated among Arab Israelis. The high rate of working poor among Arab Israelis reflects a challenging combination of disadvantages.]]> Israel has experienced a marked increase in the share of poor families headed by an employed person.  The rise in the working poor has been to a large extent concentrated among Arab Israelis. The high rate of working poor among Arab Israelis reflects a challenging combination of disadvantages.

A phenomenon that has become increasingly common in the developed world and in Israel, in particular, is that of the working poor. Today in Israel, in the majority of poor households headed by a person of working age, that person is employed. Professor Haya Stier, Chair of the Taub Center’s Social Welfare Policy Program, undertook an in-depth study of this phenomenon. The study will appear in its entirety in the upcoming State of the Nation Report 2010.

Poverty in Israel is defined by having a household income of less than half the national median household income, adjusted for family size. It is easy to see that families without any earners are very vulnerable to poverty, unless they have significant sources of income other than from work. Government assistance programs are not generally designed to keep recipients out of poverty but rather to guarantee a very basic level of subsistence or to supplement families with low income from work.  But families with wage earners can also find themselves below the poverty line. This will happen if earnings are low, or if there are many household members.

In terms of net incomes – that is, after taxes and welfare payments – Israel has a very high poverty rate, among the highest in the developed world, and poverty rates have risen considerably since the beginning of the decade. The proportion of poor families headed by an employed person (among those headed by a person between the ages of 25 and 64) has also risen considerably, so that overall, the number of working poor has seen a particularly sharp rise. The first figure shows the total portion of poor households headed by a person at work. In Israel today, the majority of poor families in this age group fall into this category.

One reason for this trend is the deliberate government policy of encouraging poor people to work rather than to live off of public assistance. The objective of this policy was to help people escape poverty, but so far one effect has been to move many families from the idle poor to the working poor, without much change in their standard of living. It is likely that the inducements to work involved too much “stick” (reduction of benefits) and too little “carrot” (improving the compensation from the return to work) and as a result, the program may have saved money for the Treasury but has not made a major impact on poverty levels.

Using disaggregated data, Stier discovered that the rise in the working poor has been to a large extent concentrated among Arab Israelis. The second figure shows that among Jewish Israelis, the proportion of working poor is considerably lower, and virtually unchanged. But among Arab Israelis, the share of poor rose since 1995 from about 20 percent to about 40 percent.

Among the reasons Stier finds for the high rate of working poor among Arabs are:

1. Low labor force participation rates for women. In those Arab households where the woman is employed, poverty rates are actually quite low. Thus, the gap in working poor between Jewish and Arab Israelis is due in large measure to the low proportion of two-earner couples among Arab Israelis.
2. Deterioration in earnings. Arab men are concentrated in low-skill jobs which have faced sharply lower demand in recent years, and in addition have faced competition from cheaper foreign workers who, in many cases, are employed in virtually identical jobs. (See the March 2011 Bulletin which presents findings that foreign workers have been displacing Arab men.)
3. Demographic differences. As a whole, the Arab population is younger and a larger proportion of household heads in this community are younger. Forty-two percent of Arab household heads are under 35 years old and thus before their peak earning years, compared to only thirty three percent of Jewish household heads. Furthermore, the Arab families have more children on average, and for a given household income, households with more children are poorer.
4. Loss of child allowances. Since Arab households with a working head of household tend to have more children than comparable Jewish households, the marked decline in child allowances in recent years has had a disproportionate impact on Arab Israeli working poor.

The complete findings of Professor Stier also include a detailed study of poverty in families with a working single-parent. Her study will be published in full in the Taub Center State of the Nation Report 2010.

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