Poverty, inequality mar strong Israeli economy, OECD report finds

Poverty rates are second only to Mexico's among the OECD's 34 member states, and only a handful rank higher in measures of inequality.

JANUARY 31, 2016 16:45

Updated: FEBRUARY 1, 2016 10:22

OECD Secretary General Angel Gurría presents the fourth OECD Economic Survey of Israel to Prime Minister Benjamin Netanyahu‏ (photo credit: KOBI GIDEON/GPO) — OECD Secretary General Angel Gurría presents the fourth OECD Economic Survey of Israel to Prime Minister Benjamin Netanyahu‏

(photo credit: KOBI GIDEON/GPO)

Israel’s economy has fundamental strengths, as well as high levels of poverty and inequality, according to the latest Organization for Economic Co-operation and Development reports on Israel, released Sunday.

While Israel ranks poorly compared to OECD averages in areas such as poverty, housing and air quality, it places among the best in terms of life satisfaction, health status and educational attainment.

Yet, while Israelis are trustful, the perceived corruption level is high, which the report said is a “cause for concern.”

“With GDP growth averaging nearly 4 percent since 2003, Israel is consistently one of the strongest performers in the OECD,” said the organization’s secretary general, Angel Gurría, who was in Jerusalem to formally present the fourth OECD Economic Survey of Israel and the Assessing and Measuring of Well-Being in Israel report.

Israel, which is celebrating its fifth year as an OECD member, has a strong hi-tech sector, world-class universities, and economic opportunity in its natural gas reserves, has grown consistently for 13 years.

“But, while these advantages have allowed Israel to close the gap in average living standards with the most advanced OECD economies, a number of challenges lie ahead to ensure that growth is sustainable and inclusive,” Gurría said.

In 2013, Israel had the second highest rate of poverty, second to Mexico. Furthermore, Israel ranked fifth after Chile, Mexico, Turkey and the US in income inequality as measured by the Gini coefficient – a measure of statistical dispersion intended to represent the income distribution of a nation’s residents and the most commonly used measure of inequality.

According to the report, Israel has one of the lowest shares of satisfaction with the availability of “good, affordable housing.” In 2014, just 36% of Israelis were satisfied with the availability of housing – the third lowest rate after Slovenia and Poland in the OECD and well below the OECD average of 52%.

The report found that in recent years there has been an “increasing perception amongst many Israelis, particularly amongst the young middle class, that living standards are stagnating or even falling.”

In 2014, 67% of Israelis reported they were satisfied with their living standards, 5 percentage points below the OECD average of 72%, placing Israel in the bottom third of OECD countries on this measure.

Despite these statistics, however, the report found that in contrast to most OECD countries, Israeli confidence in the government doubled from 22% in 2007 to 44% in 2014 – the third biggest increase among OECD countries after Germany and Iceland.

And, unlike many OECD countries, the 2008 financial crisis had relatively little impact on economic production and growth.

Israel has an employment rate of 68%, 2 percentage points higher than the OECD average, the findings indicated, while unemployment was at 6.2%, also better than the OECD average of 7.3%. The longterm unemployment rate is the fourth lowest in the OECD at only 0.6% compared to an OECD average of 2.6%.

Despite this, the report indicated that gross annual earnings of full time employees were well below the OECD average of US $28,817 in 2013, compared to $40,640 on average in the OECD.

The report, however, criticized the Histadrut labor federation- led charge to substantially increase the minimum wage.

Raising the minimum too quickly, the report said, “could reduce profitability and competitiveness, harming business investment and net exports and, therefore, could threaten employment opportunities for low-skilled workers and youths.”

The report found that the unemployment rate is relatively low due to a high share of “non-standard work” such as temporary, part time and self-employed work, which tends to be associated with low-paying jobs and low levels of job security.

Israel needs to boost its human capital, which is significantly below the OECD average, mostly due to low employment rates among Arab-Israelis and the ultra-Orthodox, the report posited.

The report also found that Israelis tend to work longer hours than in other OECD countries, with an average of 40.9 hours per week, compared with an OECD average of 38.4 hours in 2014. Israel ranked third after Turkey and Mexico in the share of workers working over 50 hours per week.

Israel ranks second among OECD countries – tied with Japan and after Canada – for the percentage of 25-64 year olds who have completed higher education – 46% compared to the OECD average of 32%.

However, educational performance measured by the Program for International Student Assessment (PISA), which assess the cognitive skills of 15 year olds in math, reading and science, is significantly lower than the OECD average, with an overall score of 474 compared to 497.

Israel had the highest rates of score dispersion in the OECD with regards to the difference in scores between the top 10% of students and the bottom 10%.

The report found Israelis are very satisfied with life, scoring 7.4 (out of a possible 10) compared to the OECD average of 6.6 in 2014.

Israel is a “highly diverse society with large differences in well-being outcomes between the Jewish and the Arab population, and also between different subgroups within each population.”

The report found that Arabs are “unambiguously disadvantaged” across all categories, experiencing higher rates of poverty and lower levels of labor force participation, educational attainment and health status.

These limitations are mutually reinforcing, the report explained as lower rates of education influence opportunities for better employment.

The high cost of housing weighs down the middle class, and “relatively high price levels due to weak competition, in particular in the food sector, impose a greater cost, in terms of living standards, to socioeconomically disadvantaged groups.”

The report recommended introducing further competition to insulated sectors by removing trade barriers and fixing price-control regulations that were “far from best practices.”

It also urged reforms to introduce competition to uncompetitive portions of the economy, such as the banking system.

Relative to other OECD countries, Israel’s income redistribution is “limited,” as are its investments on education, infrastructure and public transportation, in part because of a tightening fiscal framework.

The report noted that relative to other OECD countries, Israel’s income redistribution is “limited,” as are its investments on education, infrastructure and public transport, in part because of a tightening fiscal framework. It criticized the cap limiting expenditure growth, and recommended doing away with inefficient tax policies, such as the VAT exemption on fruits and vegetables.

By raising the relatively low tax rates, the report said, Israel could spend more on some of those priorities. It also said a better policy would be a gradual rise alongside increases in Earned Income Tax Credit, known in Israel as negative income tax.

In Sunday’s cabinet meeting, Prime Minister Benjamin Netanyahu noted the shortcomings and strengths cited in the report, but took issue with the assertion that tax rates are too low.

“I believe that part of our growth has resulted from lower taxation and lower tax rates.

And I think our tax rates are not too low. I think they’re not low enough and to the extent that we can lower them further, we will. This is the one point of disagreement I have with you,” Netanyahu told Gurría.

Finance Minister Moshe Kahlon said the government was already getting ahead of many of the issues cited in the report, such as increasing allotments for the elderly, and was busy working on decreasing concentration in the banking sector, reducing housing costs and cutting red tape.

His assurances did not assuage the opposition, however.

“The OECD report is a resounding and shameful failure for Israel’s government, and especially the one who has led it through seven, long, sad, terrible years” said Zionist Union MK Erel Margalit.

Histadrut chairman Avi Nissenkorn also blasted the government, saying reducing equality was not even on its agenda.

“How many more embarrassing reports and failing grades will the state need in order to make a real change?” he asked.