Trends in the Labor Market
Author: Claude Berrebi, Kyrill Shraberman and Shirley Yarin Policy Research

The labor market in Israel is moving from a traditional economy, based on manufacturing and production, to one of information technology and modern services. As a result, some occupations are at risk of automation – that is, the workers currently employed in these positions are likely to be replaced by machines or computers. To prepare for the needs of the future labor market, workers should be encouraged to move out of jobs that are at high risk of automation and into jobs in industries at lower risk.

In the past few years there has indeed been a decline in the share of workers in jobs at high risk of automation, although this decline has been less pronounced among Arab Israelis and immigrants than among the long-time resident and native-born Jewish working population.

Just as not all population groups in Israel are equally prepared to meet the needs of the future labor market, levels of education and the return on education also vary between the different population groups, affecting wage gaps.

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Women are moving from high to low risk jobs to a greater degree than men

The changes among women were greater than among men, primarily due to an increase in the share of female workers in academic professional occupations – which require high skill levels and are at low risk of automation. A decline in clerical workers also contributed given that these positions were often occupied by women. It seems that the reason for the decline is that these professions have begun the process of automation and computerization, as evidenced by bank branch closures, outsourcing of secretarial services, and computerization of office administration activities.

More Arab Israelis are working in service and sales

In the Arab Israeli sector there has been a decline in the share of skilled workers in production and manufacturing (considered at high-risk of automation) and a relatively strong rise in their share in sales and service, occupations at lower risk. There was only a small increase in the share of Arab Israeli workers in occupations requiring an academic education, which may be due to the relatively lower skill levels in reading comprehension and math within the Arab Israeli sector (as evidenced by the OECD PIACC Survey – Programme for the International Assessment of Adult Competencies).

Many immigrants are employed as unskilled workers and are therefore at high-risk of being replaced by automation

Among men ages 45-54 who immigrated to Israel in the early 1990s, there was an exceptional rise in the share of those employed as unskilled workers, in industries like cleaning and security. This indicates that adult male immigrants have had a particularly difficult time integrating into Israel’s modern labor market.

However, a different story emerges with female immigrants. The share of female immigrants employed as unskilled workers has increased as well, yet faster changes in the mix of occupations among women indicates that their chances of improving their situation and moving from high-risk low-pay employment to more lucrative lower risk occupations over time are likely greater than men’s chances.

The two major problems facing immigrant workers are a lack of language skills and having academic education that does not match the local Israeli labor market.

Wage gaps are widening, largely due to changes in returns to education

Another notable trend in Israel’s labor market is that level of education has a greater impact on wages than it did in the past. This study considers changes over time in returns to education – that is, to what degree does a year of formal education improve hourly average wages.

The general trend in Israel since 2003 has been a rise in returns to education. This increase encourages workers to attain more education, thus improving the quality and skill level of the labor force. However, it also contributes to increasing wage gaps between workers with high and low levels of education. The hourly wage difference between those with 18 years of education (equivalent to a second degree) and those with 12 (equivalent to a high school diploma or matriculation certificate) was about 35% among men and about 40% among women in 2014 – an increase relative to 2003.

There was also a rise in returns to education among immigrant men, although the gaps remained lower than among the general male population. This may be due in part to differences in the distribution of occupations among immigrants and the long-time resident and native-born Jewish working population –among immigrants, the share of unskilled workers earning low wages increased at the expense of occupations with somewhat higher wages. In contrast, returns to education among immigrant women declined between 2003 and 2011 but increased substantially between 2011 and 2014. Among other things, the rise in later years was due to women who immigrated at a younger age joining the labor market, whose skills and education better match the Israeli labor market.

Wage gaps have increased overall, and are particularly notable between Arab Israelis and immigrants and the rest of the population

Wage gaps have increased, due to a polarization of sorts within the labor market: an increase in the share of earners receiving either low or high wages at the expense of those earning wages in the middle. During the years analyzed, many low-skilled workers entered the labor market. This trend is positive as it seems that these workers relied on the welfare system in the past, but are now contributing to the GDP. However, the influx of these workers still increases the share of total workers receiving relatively low wages. At the same time, there is a consistent rise in the share of workers with higher education in the labor supply, due to the entrance of more young, educated workers than in the past. This, in turn, increases the share of workers receiving relatively high wages.

An examination of the various population groups reveals inequality, as expressed in wage gaps between Jews and Arab Israelis and between Jewish immigrants and Jewish long-time residents/native-born. Over time, the wage gap between Jews and Arab Israelis was found to be quite stable while the wage gaps between immigrants and long-time residents/native-born narrowed. The latter was primarily due to improvement in the occupation mix over the past few years, especially among immigrant women.