Despite declining income inequality, Israeli productivity lags behind

Between 2012 and 2017, the net income of households in lowest and middle quintiles increased at an average annual rate of 4%, compared to 2.6% among highest-quintile households.

Employees of Partner, an Israeli communication firm, work at their desks at Partner's headquaters in Rosh Ha'ayin near Tel Aviv, Israel June 21, 2016. (photo credit: REUTERS/AMIR COHEN)
Employees of Partner, an Israeli communication firm, work at their desks at Partner's headquaters in Rosh Ha'ayin near Tel Aviv, Israel June 21, 2016.
(photo credit: REUTERS/AMIR COHEN)
The past decade has seen a steady decline in income inequality in Israel, as weaker socioeconomic populations enjoy a high pace of economic growth, according to a new study. Yet the economy continues to significantly trail behind other developed countries in standard of living.
According to the annual “State of the Nation” report published by the Taub Center for Social Policy Studies research institute, a steep rise in income of households in the middle and lower portions of income distribution has been identified in recent years.
Between 2012 and 2017, the net income of households in the lowest and middle quintiles increased at an average annual rate of 4%, compared to only 2.6% among highest-quintile households. The trend, primarily due to rising wages and increased employment among lower income deciles, is in sharp contrast to other developed countries, where income growth is largely concentrated in the upper socioeconomic strata.
Despite the decrease in income inequality, Israel’s labor productivity (GDP per person) has remained at just 85% of the OECD average. For more than a quarter of a century, productivity has been constant at approximately 60% of the comparable figure in the United States.
The continued gap in labor productivity is explained partly by low levels of public capital, reflected by declining investment in transportation-, education- and healthcare-related infrastructure. While IMF data from 50 years ago shows that private capital in Israel relative to GDP was approximately 50% higher than the OECD average, capital has recently fallen to about 90% of developed nations.
If the public investment-to-GDP ratio was similar to OECD countries, the report stated, GDP per employed individual would increase by about 16%, matching the OECD average.
In 2019, Israel’s GDP is expected to increase by 3.2%, or per capita growth of 1.2%, lower than in previous years. Fiscal policy has caused the country to significantly exceed its legally mandated deficit and expenditure limits and is expected to reach approximately 4% of GDP.
According to Prof. Benjamin Bental, chair of the Taub Center’s Economics Policy Program, the deficit increase and deviation from spending rules will entail budgetary adjustments.
There are, however, “indications of an opposite trend, stemming from the intention to increase defense spending to 6% of GDP,” he said. “Accordingly, there are concerns that the government’s civilian and social spending will be reduced significantly in the coming years.”
When compared with OECD countries, employment rates among Israeli men and women are close to median levels, but significant disparities are identified between sectors.
The high rate of employment (82.2%) among non-haredi Jewish women exceeds all OECD countries except for Iceland, despite a high fertility rate of 2.6 children per woman. High employment rates (74%) among haredi women, who have a very high fertility rate of approximately seven children per woman, are also recorded.
While the employment rate of non-haredi Jewish men stands at 88%, significantly above the OECD average of 83%, only 76% of Arab-Israeli men and just 51% of haredi Jewish men are employed.
“Women’s employment rates have risen in recent years, especially among mothers of young children,” said Taub Center researcher Hadas Fuchs. “The high employment rate and long work hours of non-haredi Jews, alongside their high birthrate, make it very hard for Israeli parents to balance work, family, and leisure. Israel ranks fourth from last with respect to work-life balance.”
Large numbers of children, long work hours and lengthy commuting times are cited as reasons for low levels of work-life balance satisfaction. Only 56% of female employees and 59% of male employees expressed satisfaction with their work-life balance, according to the report.
Seeking to identify how to improve labor productivity, an international comparison carried out by the Taub Center found that higher-skilled Israelis are already using their skills to a great extent and are well compensated for their work. For lower-skilled workers, however, their skill levels are “very low” relative to lower-skilled workers in other countries, and their integration into the workforce has been poor.
The disparity in hourly wages between the lowest-skilled workers in Israel and similar workers in selected OECD countries reaches 50%, compared to about 15% at the highest-skilled levels. The difference in disparity reflects the fact that Israel’s labor market compensates workers with particularly strong skills, including in the hi-tech sector, to a greater degree than other countries.
Approximately 95% of Israel’s “exceptional,” higher-skilled workers are non-haredi Jews, which constitutes under 70% of the entire population. While education levels of “exceptional” workers are not high relative to international levels, such people are employed in high-paying positions to a greater degree than similar workers in other OECD countries. For low-skilled Israeli workers, who are found to have relatively high education rates, the return on their academic education is “close to zero,” the report stated.
“This indicates the difficulty of bridging income gaps by expanding access to higher education,” said researcher Gilad Brand. “The problem probably lies in gaps that emerge at earlier stages of education, meaning that skills need to be improved at younger ages.”
The Israeli-Arab population is particularly characterized by low income returns relative to skill levels, and workers are found to be poorly remunerated in comparison to their labor market seniority. Among non-haredi Jews, each year of additional seniority is reflected by an average wage increase of 2.5% among women and 2.8% among men. For Israeli-Arabs, wage increases amount to just 0.1% among women and 1.3% among men.
“The high degree to which the potential embodied by Israel’s higher-skilled workers is realized indicates that attention should be directed toward the country’s less-skilled workers and to the Arab-Israeli population, which does not seem to be fully using its skills in the labor market,” said Brand. “Though the fact that Arab Israeli women seem to be integrating more extensively into higher education and employment is cause for cautious optimism.”