Bank of Israel governor says number of working poor on the rise

Though labor participation and employment levels are at record highs, the overall poverty level has remained stable at around 20%.

January 6, 2014 20:19
2 minute read.
Karnit Flug at her swearing in ceremony, November 13, 2013

Karnit Flug, swearing in ceremony 370. (photo credit: GPO- Amos Ben Gershom)

The number of working poor is on the rise, Bank of Israel Governor Karnit Flug told the Knesset Finance Committee on Monday, though overall poverty rates are stable.

“Poverty among families with one wage-earner, and even with two, presents us with a large challenge to raise the training and skills of those joining the labor force,” she said, in her first appearance before the committee as governor.

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Though labor participation and employment levels are at record highs, the overall poverty level has remained stable – at around 20 percent.

Poverty levels among non-working families are now near 71% and rising, as they are among one-income households (25.9%) and two-income households (4.6%).

However, the increase in the number of working households, where the poverty rate remains far lower than average, counter-balanced the increased poverty levels among the non-working households.

The news may be a thorn in the side of Finance Minister Yair Lapid, who emphasized moving from a “culture of allowances to a culture of work” as the means of reducing poverty.

In his budget he slashed welfare subsidies, garnering criticism that his policies would push greater numbers into poverty.

The numbers, which represent post-tax/welfare incomes, seem to vindicate elements of both arguments.

Lapid’s had no comment on the subject.

Flug argued for increasing “negative income tax” (known in some places as earned income tax credit), which subsidizes the working poor as an incentive to stay in the labor market.

She also noted that the growth in employment in the past two years has come primarily from the public sector, meaning that future budget cuts, needed to meet deficit goals, could raise the unemployment rate.

Another issue that could affect the employment market is the continuing strength of the shekel.

Flug said that while hightech exports were not very sensitive to price changes, low-tech exports were.

Even though low and medium- tech manufacturing accounts for just a fifth of Israel’s manufacturing exports, they accounts for 60% of manufacturing jobs, making them vulnerable to fluctuations in the shekel’s value.

Labor MK Erel Margalit said that BoI had failed to prevent the shekel strengthening, painting a dour picture of its effects on the job market.

“If the exchange rate in 2014 remains at the current level, the Israeli economy will face a large wave of lay-offs,” he said. “We require a change in policy, perhaps a dramatic one.”

Flug responded that the Bank’s policy of buying foreign currency and lowering its interest rates were intended to moderate the shekel’s rise, but could not battle economic fundamentals.

“The Bank of Israel’s policy in this area is intended to make the adjustment period easier, and even to prevent excessive harm in the commercial sector as a result of the exchange rate overshooting,” she said.

Turning to the larger economic picture, Flug projected that Israel’s economic growth for 2014 would come in at around 3.3%. She predicted that a higher proportion would come from “real” economic activity than would from gas profits, whose contribution would fall from 9% growth to 4%.

Offering medium-term projections, Flug burst another of Lapid’s bubbles.

Both he and Prime Minister Binyamin Netanyahu have said their goal for Israeli growth rates at a hefty 5%.

According to Flug’s projections, however, “a view forward gives us good reasons to assume that average growth in the last decade was higher than what is expected in the coming one.”

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