Ethics @ Work: The new working poor

Compared to other countries of similar level of development, Israel has a low level of workforce participation

In recent years, the Bank of Israel has been giving much more attention in its reports to the issue of poverty. A few days ago they released a section of the forthcoming annual report dealing with the working poor.
Compared to other countries of similar level of development, Israel has a low level of workforce participation, especially in the haredi and Arab sectors. Not surprisingly, this low workforce participation results in low incomes and in very high rates of measured poverty.
Besides the lost output due to underemployment, the resulting need for support payments implies a large drain on public funds. Even though the level of public support in Israel is comparatively low, it is multiplied by the large number of families.
As the report explains, starting a few years ago, large cuts in various welfare programs were made to encourage poor people to join the workforce. Workforce participation has indeed improved, yet poverty rates have remained high.
To a large extent, unemployed poor people have been replaced by employed poor people. More than 16 percent of Israeli households with at least one working spouse is poor, more than double the OECD average. The phenomenon is overwhelmingly common among Arabs.
The root of the problem is obviously that many people just do not have the earning power to support a large family at a level the statistician views as not poor. Arab families, in particular, have three characteristics that make them likely to belong to the working poor:
• Low level of education. Earning power is highly and increasingly correlated with education. But in Israel, Arabs have far fewer years of education, and the education they receive is of lower quality.
• Low level of female workforce participation. Poverty in two-earner families is extremely low. But while these families are prevalent in the non-haredi Jewish public, they are unusual in the Arab sector, where the rate of female workforce participation is about 26%, less than half of the rate among Jewish women.
• Structural obstacles. The report points out that Israeli Arabs are subject to various kinds of open and hidden discrimination; practically speaking, many good jobs are closed to them.
The first and the third are problems that need to be solved, but neither can be solved overnight. Better education and expanded opportunities for Israeli Arabs would enable both Arabs and Jews to benefit from capabilities that are currently dormant for lack of proper cultivation and lack of appropriate horizons for their expression.
It is methodologically problematic to define the second characteristic as a problem. A common convention in economic models is to define a household’s income as its potential income, what Nobel laureate Gary Becker refers to as “full income.” This income is used to obtain two things people value: market purchases, including goods and services, and leisure.
In the first case, income is expended; in the second case, it is foregone. But methodologically there is no real difference: If two people have equal earning power, but one prefers to work hard and consume much, while the second prefers to work less and enjoy the best things in life, the economist views them as being equally well-off since each is realizing his preferences, but the statistician insists on calling one “rich” and the second “poor.”
The prevalent culture of the Muslim population in Israel is such that they are not in favor of having married women work outside the home, and it is ideology, not economics, that leads policy makers to view this phenomenon as a problem that needs to be solved.
The main policy prescription made by the report is the expansion of the “negative income tax.” This idea, which was popularized by economist Milton Friedman half a century ago, involves increasing the income of low earners through a government subsidy. Without the negative income tax, families have a huge disincentive to joining the workforce since they lose their support payments.
Conversely, incentives can be maintained by reducing support payments below subsistence. But we are hardly interested in having our fellow Israelis living at a third-world standard of living.
The negative income tax is expensive because it means that governmentaid is extended even to families with meaningful incomes. But giventhat the choice is between paying people to work and paying people notto work, the report concludes that the program is worth the price.
Asher Meir is research director at the Business Ethics Centerof Jerusalem, an independent institute in the Jerusalem College ofTechnology (Machon Lev).