1 Reducing the Gaps in Society: Policy Challenges in the Era of Globalization Dr. Karnit Flug June 2007 Taub Center Conference

2 Incidence of Poverty among Individuals – Various Measures ( ) *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.

3 Poverty Indices Commonly used relative index: The poverty line is defined as half the level of the median disposable income adjusted for the number of persons. Updated yearly according to the median disposable income. Absolute poverty index: The poverty line is defined as the income sufficient to consume a fixed basket of goods and services at a level determined for a base period (say 1997). The line is updated according to the Consumer Price Index. Basic needs index: The poverty line is defined as the income sufficient to consume a basket of goods determined as being basic (food, shelter, education, transport, and personal items) according to the principles of proper nutrition and the consumption of those goods in predetermined percentiles.

4 Incidence of Relative Poverty among Individuals, 1997 and 2005 a 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

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

6 Long-term processes in the labor market

7 Background to long-term trends in the labor market The 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

8 Changes in the real wage by years of schooling (annual data, ) Changes in the real wage 1 by years of schooling (annual data, ) 1) Based on 2000 prices.

9 Rate of Unemployment by Education Level (annual data, ) % SOURCE: Based on Central Bureau of Statistics Labor Force Survey.

10 Rate of Employment by Educational Level (annual data, ) % SOURCE: Based on Central Bureau of Statistics Labor Force Survey.

11 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

12 The Increase in the Number of Benefit Recipients relative to the Increase of Population and the Unemployed (100=1985)

13 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.

14 Employment Rate among Men of Working Age* in Israel and OECD Countries * **2002 Israel 1990 data refer to Source: For Israel – Central Bureau of Statistics Labor Force Survey; for OECD - OECD, Labor Force Survey 2003

15 Gini Index of Inequality in Income Distribution Gini Index of Inequality in Income Distribution ( ) Before transfer payments and direct taxes After transfer payments and direct taxes Source: National Insurance Institute

16 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)

17 The Increase in the Number of Benefit Recipients relative to the Increase of Population and the Unemployed (100=1985)

18 Rate of Employment by Educational Level (annual data, ) % SOURCE: Based on Central Bureau of Statistics Labor Force Survey.

19 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

20 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:

21 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%)

22 Thank you