Israel: Selected Issues
Author: International Monetary Fund. European Dept.
Publication Date:
16 Sep 2015
eISBN:
9781513594675
Language:
English
Keywords:
ISCR; CR; Israel; price; pay; productivity; market income; low-wage job; income inequality in Israel; poverty line; Income inequality; Wages; Disposable income
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Israel: Selected Issues

Abstract

Israel: Selected Issues

Income Inequality in Israel1

Income inequality in Israel is high. This reflects both high inequality of wage income, with a high share of both high-paying and low-paying jobs relative to other countries, as well as less redistribution through the tax and transfer system. Poverty is concentrated among the Arab-Israeli and Haredi populations, which have lower labor force participation rates, less education and larger families.

A. Characteristics of Inequality

1. Net income inequality—i.e., inequality of income after tax and transfers—in Israel is among the highest in the OECD. The income share of the top decile is 13 times the share of the bottom decile, a ratio that is exceeded only by the United States. Real disposable incomes of the top decile have increased since the 1980s, while incomes of the bottom decile have stagnated. Israel’s Gini coefficient of disposable income is among the highest in the OECD.

A02ufig1

Income share ratio

(Share of 9th decile to 1st decile)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: OECD.Notes: 3-year moving averages of income received by top decile divided by share of the first. Where data are missing a constant value is assumed.
A02ufig2

Net monthly income per person

(NIS, 2011 const.)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: IDC.

2. High inequality partly reflects high wage inequality, with high shares of both high-paying and low-paying jobs relative to other advanced economies. As of 2011, 28 percent of jobs were high pay and 22 percent of jobs were low pay, both significantly higher than the OECD average. These shares have remained high over the last decade, declining only slightly since 2002.

A02ufig3

Incidence of high and low pay, 2012

(Percent of employment)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: OECD.Notes: Low pay corresponds to less than two-thirds median earnings. High pay corresponds to greater than one-and-a-half times median earnings. Data refer to 2011 for Israel.

3. Inequality also reflects a tax and transfer system that is less redistributive than in other countries. Reforms introduced in 2003 have significantly reduced the redistributive role of the tax and transfer system (see section C). As a result, the difference between inequality pre- and post-taxes and transfers is now smaller than in most other countries: taxes and transfers reduce inequality by 25 percent in Israel, compared with an average of 35 percent in the OECD.2

4. Pre-tax and transfer inequality of market income is less pronounced than inequality of wages. This reflects a relatively low pre-tax and transfer poverty rate among pensioners. Unlike in many other countries, pensioners get a significant part from their retirement income from private pensions and retirement saving products, rather than from government transfers only.

5. High net income inequality is not just the result of low incomes among Arab-Israelis and Haredi Jews. While disposable incomes are particularly low amongst the Haredi Jews and Arab-Israelis, net income inequality levels in Israel excluding these two groups are still greater than in all advanced countries except the United States and United Kingdom.

A02ufig4

Gini index, 2011

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: OECD.Notes: Gini indices represent average between 2010 and 2012.
A02ufig5

Disposable income inequality

(Gini coefficient)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: Taub Center for Social Policy Studies, Israel.
A02ufig6

Relative poverty rates

(Percent)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: OECD.Notes: The relative poverty line is calculated as half of the median income per household after taxes and transfers. 2005 and 2011 data represent averages between 2004 and 2006, and 2010 and 2012 respectively.
A02ufig7

Relative poverty indices

(Percent)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: Bank of Israel.Notes: Relative poverty line is calculated as half of the median income per individual (equivalized).

6. Relative poverty—the proportion of households earning less than half of the median household disposable income—is the highest in the OECD. One fifth of Israeli households have an income below this poverty line.

7. Poverty is particularly high among Arab-Israelis and Haredi Jews. The relative poverty rate among Arab-Israelis and Haredi Jews was 58 percent, more than double the overall poverty rate. Higher poverty rates amongst these groups are due to lower wages, lower employment, and higher numbers of children than the rest of the population.

8. Gender differences in earnings have declined significantly over the last two decades. By 2011, the average wage income of women was 67 percent of that of men. The earnings gender gap is partly the result of fewer hours worked by women, but gender gaps persist in average hourly wages as well. Among salaried workers, inequality between men and women is highest within the highest and lowest sets of earners.

9. There are significant differences in male-female participation rates across population groups. Among Arab-Israelis, the participation rate of women is relatively low, while among the Haredi Jews the participation rate of men is low.

A02ufig8

Ratio of male to female salaries by decile

(2011 const.)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: IDC.
A02ufig9

Employment rates by population group, 2011

(Percent)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: Bank of Israel.

B. Factors Contributing to Market Income Inequality

Differences in Wages and Job Search Costs

10. High wage differentials partially reflect the dual nature of the Israeli economy, with both high-wage and low-wage jobs. Earnings in software and development, which earned the highest average monthly wages in 2013, were over three times higher than the average monthly wage across all industries. In contrast, average wages in some low-skilled industries such as home-care services were significantly below the minimum wage of NIS 4,300.3

A02ufig10

Monthly wages by sub-industry, 2013

(Average=100; top 3 and bottom 3 sub-industries)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: Central Bureau of Statistics.

11. Well-paying jobs are concentrated in the center, and much less available in the north and south. This is a particular issue for Arab-Israeli women. Arab-Israeli communities are situated in the north and south of Israel, away from large labor markets. Transportation between these communities and the center is limited, which makes commuting difficult. As women stay within their own communities rather than within economic centers, and employment opportunities in their own communities are limited, the result is a lower level of employment.

Large Differences in Education Achievement

12. There are large differences in educational achievements between non-Haredi Jews4 on the one hand and Haredi Jews and Arab-Israelis on the other.

13. These gaps are already evident at the high-school level:

  • PISA scores of Arab-Israeli students are 22 percent lower than those of non-Haredi Jews, and lower than the scores of students in developing economies including Jordan and Tunisia.5

  • In the Haredi curriculum, boys do not learn mathematics, science or English beyond an eighth grade level. 6 While this reflects the cultural preference of the Haredi community, and not government policies, it places students at a significant disadvantage relative to peers in the labor market.

14. Education gaps widen further at university level. As of 2013, Jewish students enjoyed tertiary school attendance rates that were almost twice as high as those of Arab-Israeli students. Although tertiary school attendance rates have been trending upwards for both groups since 2005, a significant gap remains persistent over time.

A02ufig11

Tertiary education attendance

(Percent of population between 18-39)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: Central Bureau of Statistics.

15. Differences in education expenditure allocation amongst various groups further contribute to disparities in education achievements. Resource allocation to Arab-Israelis is significantly lower than allocation to non-Haredi Jews,7 although some steps have been taken to remedy this with a recent public initiative to allocate education budgets asymmetrically, with a preference to weak socioeconomic schools. Additionally, overall education expenditure per student in Israel in 2011 was 18 percent lower than the OECD average.

A02ufig12

Primary education expenditure per student, 2011

(US Dollars; annual PPP equivalent)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: OECD

16. With the rapidly rising share of the Haredi and Arab-Israeli students, differences in educational performance have become macro-relevant. Between 2000 and 2010, enrolment in Haredi schools increased by 57 percent and enrolment in Arab-Israeli schools increased by 37 percent, while enrolment in state schools increased by only 0.3 percent. By 2010, the share of Haredi and Arab-Israeli students had increased to 48 percent of all Israeli students.8

C. The Distributive Role of the Tax and Transfer System

17. The Israeli government traditionally played an important redistributive role. The Income Support Law was introduced in 1982, and provided support for households headed by individuals that were unemployed or earned low wages. Transfers were determined in accordance with parameters such as the composition of the household, age of the recipient and duration of time within the support framework. Income support was coupled with reductions and exemptions from payments such as municipal rates, rent, transportation fares and medical fees.9

A02ufig13

Average annual allowance per child, 1997–2013

(NIS, 2013 prices)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Source: National Insurance Institute

18. In 2003/04, redistribution was reduced as the government made significant cuts to child benefits and income support. These cuts were motivated both by the desire to reduce public spending and the fiscal deficit, and to boost the employment rate among the growing number of parents with weak labor force attachment—including in particular the Haredi Jews.10 Other policies that made working more attractive included provision of an earned income tax credit for employees, raising the minimum wage, and subsidizing child care to encourage employment of mothers.

A02ufig14

Change in Real Disposable Income between 1999-2001 and 2009-11 by Quintile

(Percent)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A002

Sources: Bank of Israel

Israel: Poverty rates among Households with a Working-Age Head

(After taxes and transfers; in percent)

article image
Note: Relative poverty rates calculated on basis of the poverty threshold of 50%, of median incomwhile accounting for household size.Source: OECD, 2013.

19. These policies were successful in boosting employment. Employment rates have increased since 2003 across the entire population. Employment rates of Ultra-Orthodox Jews have seen the sharpest increase with male and female employment increasing by 8.6 and 11.4 percentage points respectively. The increase in employment had a significant positive impact on disposable income, especially amongst the lowest quintile of earners.

20. They also reduced inequality of market income. Market income of the bottom quintiles has increased more sharply than that of the top quintiles.

21. However, inequality after taxes and transfers increased, and relative poverty rates rose. The decline in transfers had a large negative impact especially on the lowest quintile of earners. Poverty rates of one-earner couples with children and those not working increased significantly. Poverty rates of Arab-Israelis and ultra-Orthodox Jews also increased over this period despite higher rates of employment, by 7.1 and 10 percentage points respectively.11

D. Conclusion

22. High income inequality in Israel reflects both high wage inequality and less redistribution through the government. High wage inequality is in part the counterpart of the employment miracle—Israel’s labor market has been very good in absorbing new workers, including those with fewer skills.

23. Reforms in the past decade that have boosted employment and which have contributed to higher market income of the lower quintiles, have resulted in higher inequality in disposable income—that is income after taxes and transfers. The decline in child benefits may have been particularly important in this respect—both in encouraging employment among parents of large families, and increasing poverty rates.

24. The challenge forward will be to reduce poverty, while maintaining incentives to work. Possible options the government could consider include raising the Earned Income Tax Credit.12 Boosting education and skills, and improving transportation costs could further contribute.

References

  • Bank of Israel, 2002, Annual Report 2002.

  • Bank of Israel, 2007, Annual Report 2007.

  • Bank of Israel, 2012, Annual Report 2012.

  • Bank of Israel, 2013, Annual Report 2013.

  • Baumol, William J., 1986, “Productivity Growth, Convergence and Welfare: What the Long-Run Data Show”, American Economic Review (76:5), pp. 1072–1085.

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  • Ben-David, Dan, 2011, Israel’s Educational Achievements: Updated International Comparisons, Taub Center Policy Paper Series No. 2011.12 (Jerusalem: Taub Center).

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    • Export Citation

  • Ben-David, Dan, 2012, The Start-up Nation’s Threat from Within, Taub Center Policy Paper Series No. 2012.04 (Jerusalem: Taub Center).

  • Ben-David, Dan, 2013, Labor Productivity in Israel, Taub Center Policy Paper Series No. 2013.05 (Jerusalem: Taub Center).

  • Ben-David, Dan and J. Bleikh, 2013, Poverty and Inequality over Time: In Israel and the OECD, Taub Center Policy Paper Series No. 2013.03 (Jerusalem: Taub Center).

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  • Blass, Nachum, Trends in the Development of the Education System, Taub Center Policy Paper Series No. 2014.13 (Jerusalem: Taub Center).

  • Chen, Wen-Hao, and others, 2013, Globalisation, Technological Progress and Changes in Regulations and Institutions – Which Impact on the Rise of Earnings Inequality in OECD Countries?, LIS Working Paper Series No. 597 (Luxembourg: LIS).

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  • Cohn, Elchanan and J. Addison, 1998, “The Economic Returns to Lifelong Learning in OECD Countries”, Education Economics (6:3), pp. 253–307.

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  • Ishi, Kotaro, and others, 2012, Israel: Selected Issues Paper, IMF Country Report No. 12/71 (Washington, International Monetary Fund).

  • Leamer, Edward E., “Wage Inequality from International Competition and Technological Change: Theory and Country Experience” AEA Papers and Proceedings (86:2), pp. 309–314.

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  • OECD, 2012, Economic Policy Reforms: Going for Growth 2012, OECD Publishing.

  • OECD, 2013, Review of Recent Developments and Progress in Labour Market and Social Policy in Israel.

1

Prepared by Aaron Thegeya.

3

Data are from Central Bureau of Statistics, Wages and Employment monthly statistics. Data are not corrected for number of hours worked.

4

Haredi Jews do not participate in PISA tests.

5

See Ben-David (2011), Figure 1.

6

See Ben-David (2012), p. 49. Empirical economics literature has established a strong correlation between education levels, measured in years of schooling, and earnings (see for example Cohn 1998 and Addison, 1998 for an analysis of OECD countries).

7

See Blass (2012), p. 381.

8

See Ben-David (2012), p. 49.

10

See OECD (2013), page 22.

12

Israel has an earned income tax credit, but the amounts are relatively low compared with the UK and the US. See OECD (2013).

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Cover IMF Staff Country Reports
Israel: Selected Issues
Author: International Monetary Fund. European Dept.
Volume/Issue:
Volume 2015: Issue 262
Publisher:
International Monetary Fund
ISBN:
9781513594675
ISSN:
1934-7685
Pages:
69
DOI:
https://doi.org/10.5089/9781513594675.002

Income share ratio

(Share of 9th decile to 1st decile)

Net monthly income per person

(NIS, 2011 const.)

Incidence of high and low pay, 2012

(Percent of employment)

Gini index, 2011

Disposable income inequality

(Gini coefficient)

Relative poverty rates

(Percent)

Relative poverty indices

(Percent)

Ratio of male to female salaries by decile

(2011 const.)

Employment rates by population group, 2011

(Percent)

Monthly wages by sub-industry, 2013

(Average=100; top 3 and bottom 3 sub-industries)

Tertiary education attendance

(Percent of population between 18-39)

Primary education expenditure per student, 2011

(US Dollars; annual PPP equivalent)

Average annual allowance per child, 1997–2013

(NIS, 2013 prices)

Change in Real Disposable Income between 1999-2001 and 2009-11 by Quintile

(Percent)