reducing the gaps in society: policy challenges in the era of globalization

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Reducing the Gaps in Society:Reducing the Gaps in Society:Policy Challenges in the Era of Policy Challenges in the Era of

GlobalizationGlobalization

Dr. Karnit FlugDr. Karnit FlugJune 2007June 2007

Taub Center Conference

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23.4%

16.1%

14.2%

12.7%

15.6%

16.6% 16.9%

23.8%24.4%

24.8%

23.2%

20.9%

24.5%

26.3%26.7%

23.7%

21.6%

17.5%

17.7%

20.0%

19.6%

18.8%18.8%

23.2%

13.0%

17.5% 17.4%

23.4%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2005/06*

By relative poverty By absolute poverty (1997) By mixed Market Basket Method (MBM)

Incidence of Poverty among Individuals – Various Measures

(1997-2005 )

*Excluding Arabs of East Jerusalem.

* The 2005/06 data are according to the decline in relative poverty including among Arabs of East Jerusalem.

SOURCE: Central Bureau of Statistics Income and Expenditure Surveys.

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Incidence of Relative Poverty among Individuals, 1997 and 2005a

38.5

22.5

13.710.2 10.9

51.5

33.9

24.2

18.7

11.7

0

10

20

30

40

50

60

0-8 9-10 11-12 13-15 16+

1997 2005

26.1

11.917.5

30.935.6

23.0

14.8

24.9

51.1

65.3

0

10

20

30

40

50

60

70

1 2-4 5-6 7-8 9+

1997 2005

12.3

39.335.9

13.9

64.1

54.2

0

10

20

30

40

50

60

70

Others Ultra-orthodox Arabs

1997 2005

a Excluding Arabs of East Jerusalem.

SOURCE: Central Bureau of Statistics Income and Expenditure Surveys.

By family sizeBy education of head of household

By number of wage earnersBy population group

60.1

20.4

2.1

77.2

33.2

3.9

0

10

20

30

40

50

60

70

80

90

0 1 2+

1997 2005

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Employment Rate and Average Wage per Employee Post by Population Group,a 2005

Men Women Men Women

Total 60.9 52.2 8,565 5,417Arabs 55.6 15.9 5,347 4,101

Ultre-orthodox2 23.4 44.2 5,476 3,791Others 65.8 60.9 9,228 5,494

Employment rate Average wage

(percents) (₪)

a Aged 65 or less.b There is a problem in identifying the ultra-orthodox in the Manpower and Incomes Surveys. They are identified here as families where the last educational establishment for at least one household member was a post-secondary school Talmudic college.SOURCE: Based on data from the Central Bureau of Statistics, Incomes and Manpower Surveys 2005.

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Long-term processes in the labor market

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Background to long-term trends in the labor marketThe integration of the Israeli economy into the global

economy, in the labor and goods markets:

• Higher employment of foreign workers;• Growth in high-tech and knowledge intensive industries,

exploiting Israel’s comparative advantage in these fields;• Increase in demand for education in all industries;• Exposure to competition in international trade which

drove down prices of labor intensive goods for the general consumer at the cost of harming employment in labor intensive industries.

Result:Continuing fall in relative demand for unskilled

workers

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Changes in the real wageChanges in the real wage1 by years of schoolingby years of schooling

(annual data, 1988-2005)(annual data, 1988-2005)

3800

4800

5800

6800

7800

8800

9800

10800

11800

12800

0-10 11--12 13-15 16+

years of schooling

1 (Based on 2000 prices.

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Rate of Unemployment by Education Level(annual data, 1995-2006)

%

2

4

6

8

10

12

14

16

18

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0-10 11-12 13-15 16+ TotalNumber of years of education

SOURCE: Based on Central Bureau of Statistics Labor Force Survey.

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Rate of Employment by Educational Level (annual data, 1995-2006)

20

30

40

50

60

70

80

25

26

27

28

29

30

31

32

33

3411-12 13-15 16+ Total 0-10 Number of years of

education

73.1

61.4

26.0

48.5

50.9

%


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Developments in Welfare Policy(from mid-1980s to 2001/2)

• Easing criteria for working age population to receive transfer payments

• Rapid growth in transfer payments that replace income from labor, particularly in

those linked to average wage (alongside reduction in subsidizing staples, and at

expense of capital)

Result for population on support:

• Rapid growth in NII benefit recipients, particularly those receiving unemployment

pay and income support

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The Increase in the Number of Benefit Recipients relative to the Increase of Population and the

Unemployed (100=1985)

100

200

300

400

500

600

700

1985 1990 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005

Population Unemployed Number of Benefit Recipients

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Result of integrating labor market and welfare policy

• Significant drop in participation rate in labor force among men with low levels of education to the lowest levels in Western economies

• Continual increase in budget burden of transfer payments that replace income from labor

• Rise in inequality in economic income, and rise in poverty rate. Transfer payments reduced the rise but did not stop it

• Drop in proportion of income from labor among poor, from 35% to 28%, and rise in proportion of allowance income from 37% to 51%, between 1988 and 2001.

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Employment Rate among Men of Working Age* in Israel and OECD Countries

91.9

83.2

75

80

85

90

95

100

Isra

elHung

ary

Poland

Turk

eyAust

ralia

Norway

Finl

and

Swed

enAust

ria**

Belgi

umUSAIre

land

EU (O

ECD)

New Z

eala

nd UKIta

lyCan

ada

Korea

OECD EU

Denm

ark

G7

Spain

Portuga

lG

erm

any

Nethe

rland

s**

Fran

ce**

Gre

ece

Slova

k Rep

ublic

Czech

Rep

ublic

Luxe

mbou

rg**

Switz

erla

ndM

exic

oJa

pan

Icel

and*

*

Employment rate 2003 Employment rate 1990

* 25-54 **2002Israel 1990 data refer to 1989.Source: For Israel – Central Bureau of Statistics Labor Force Survey; for OECD - OECD, Labor Force Survey 2003

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Gini Index of Inequality in Income DistributionGini Index of Inequality in Income Distribution (1979-2005)

0.300

0.350

0.400

0.450

0.500

0.550

ʭʩɦʩʮʥʤy ʡʲ ʤʩʮʥʬʹ ʺ ʩhɹ ʬʩhʩ ʢʣʣʮ

ʭʩɦʩʮʥʤy ʡʲ ʤʩʮʥʬʹ ʺ ʩyʧ ʠʩhʩ ʢʣʣʮ

Before transfer payments and direct taxes

After transfer payments and direct taxes

Source: National Insurance Institute

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What’s changed (since 2002)?

• Sharp cut in income support, child allowances and others

• Reduced associated benefits for income support

recipients

• Considerable tightening of conditions of eligibility for

unemployment benefit

• Reduction in number of foreign workers and some raise in

cost of their employment (the reduction was recently

halted)

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The Increase in the Number of Benefit Recipients relative to the Increase of Population and the

Unemployed (100=1985)

100

200

300

400

500

600

700

1985 1990 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005

Population Unemployed Number of Benefit Recipients

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Rate of Employment by Educational Level (annual data, 1995-2006)

20

30

40

50

60

70

80

25

26

27

28

29

30

31

32

33

3411-12 13-15 16+ Total 0-10 Number of years of

education

73.1

61.4

26.0

48.5

50.9

%


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Where should policy go now?

Reducing poverty in a competitive world requires:

• Incentives for labor for those capable of working

• Improved differentiation between those capable of work and those not

• Individual treatment tailored to those with limited involvement in labor market

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• In the long term: The key to improving labor market capabilities lies in raising education levels, concentrating on the weaker sectors of the population

• In the short term: Treating poverty needs to include the ability to

differentiate between those capable of joining the labor force and those who

aren’t, by improving employment tests and labor training

• Improvement in income tests used to base eligibility for income support by

including income in kind, and accounting for home ownership

• Treatment through allowances and services in kind for those not capable of

joining the labor market (supplementing old age allowances was corrected

in 2005)

Policy directions:

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Making the labor market more attractive to those with low levels of education can be

achieved by the following:• Negative income tax for those earning low wages• Subsidizing services that support labor (e.g. child care, transport to

work)• Continued reduction in number of foreign workers and raising the

cost of their employment • Improving supplementary education and training courses bringing in

employers to decide on training content• Improving tests and placement processes, included the Wisconsin

Plan, extending it to other sectors of the population, while reaching conclusions on its required adjustments (particularly linking company incentives to success in quality job placements)

• Level of Israel’s spending on active policy in the labor market is one third the norm in Western countries (0.25% of GDP compared to 0.75%)

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Thank you

reducing the gaps in society: policy challenges in the era of globalization

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