The increased flexibility in the local labor market, generally considered a positive phenomenon, is linked to high inequality, incoming Bank of Israel Gov. Karnit Flug said on Wednesday.

“There’s some trade-off between labor market flexibility and disposable income inequality,” Flug said at a panel discussion in Jerusalem at the Taub Center for Social Policy Studies in Israel’s conference on inequality. The challenge, she said, was finding policies that could decrease inequality without clogging up the labor market, such as the “negative income tax” that encourages low-wage earners to work.

While investment in education was a good option for the long run, argued Prof. David Autor of the Massachusetts Institute of Technology, in the short term, tax policy was the most immediate tool available to reduce inequality.

“You can have relatively high marginal tax rates without affecting growth,” he said. “The Republican Party in the United States will tell you otherwise, but high taxes do not have an effect on entrepreneurship.”

The same was true for modest minimum wage laws, he added.

Autor argued that part of the reason for increasing inequality was the rise of technology and international competition. In the US, he said, technology and international competition have eliminated many middle income jobs (e.g. assembly line, manufacturing), leaving people to either advance to more skilled jobs, take more menial jobs (e.g. services that cannot be exported, such as cleaning), or drop out of the workforce altogether.

Movement from the middle to the top and bottom of the job ladder results in higher inequality.

In a new working study, Taub Center researcher Ayal Kimhi confirmed that a similar trend was taking place in Israel.

“Between 1997 and 2011 polarization of occupations has increased, with labor shifting from middle-wage occupations towards low-wage and highwage occupations,” he found.

Dan Ben-David, the center’s executive director, sought to overturn the common view that Israel’s inequality was a result of poverty among its Arab and ultra-Orthodox populations.

The poverty rate is calculated by seeing how many people earn less than half the median income. Those who claim that poverty drops without Arab and ultra-Orthodox groups fail to recalculate the poverty line if they were excluded, he said. Looking at the median among non-haredi Jews, he found that poverty remained stubbornly high.

Similar checks that excluding the country’s extreme cases confirmed inequality as well.

“We have a major problem here as far as income inequality and poverty are concerned,” Ben-David said.

He, too, argued that the way Israel redistributed its income was inefficient. While the levels of pre-tax inequality and poverty were less extreme relative to other OECD countries, other governments proved more adept at reducing that inequality with their tax and transfer policies.

Whereas countries at the top of the spectrum such as Finland managed to reduce their poverty rates by 86.3 percent through redistribution, Israel managed to only cut it by 28.2%.

Poverty among Israel’s elderly before transfers was among the lowest of all the countries in the study (Canada’s was 0.1 percentage point lower), but the highest after.

Whereas the Czech Republic eliminated 98.9% of its poverty among seniors, Israel reduced its own rate by less than 60%.

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