Study: Income Inequality Growing Faster in Israel Than in Other Developed Nations

Bank of Israel report cites lack of state involvement, heterogeneous population growth for the disparity; study also indicates growing gap between educated, uneducated.

Income inequality grew faster in Israel than in other developed countries, a Bank of Israel report indicated on Wednesday, adding that over the last 20 years, the salary gaps between educated and uneducated workers grew while salary gaps between men and women narrowed.

The report ascribed the growth of income inequality, among other reasons, to a lack of government effort to bridge the gaps, as well as the Haredi and Arab population's relative lack of workforce participation.

Band of Israel Governor Stanley Fischer presenting the annual economic report, March 28, 2012. Emil Salman

According to the report, the inequality in net income by ethnicity in Israel is drastic compared to other developed countries, and since 1995, inequality rates have continued to rise faster than the average rates of developed countries round the world.

There are many reasons behind the high levels of income inequality, and the gaps between Israeli GDP per capita and the average GDP of developed nations. One such reason is the heterogeneous nature of Israel’s population.

For example, the ultra-orthodox and Arab populations are have a very high birth rate in relation to populations in other developed nations, but also have low rates of participation in the workforce, a factor that makes for a lower GDP per capita and income inequality.

The report also found that between the years of 2007 and 2011, the lag in GDP per capita relative to the rest of the developed world was reduced from 23% to 16%. In the previous recession, between 2001 and 2003, the lag in GDP per capita relative to developed countries grew.

The current reduction trend has returned Israel to a situation similar to that of 1995. The report noted the difficulty in determining if the changes between 2007 and 2011 are permanent, or if the return to growth of developed countries worldwide will lead to new gaps.

The gaps between men and women narrowed

The report highlights that during the last twenty years, the gaps between educated and non educated workers have grown, while the salary gaps between men and women have narrowed.

The increase in salary for educated workers comes despite the increase in supply of educated workers over the last twenty years.

In the beginning of the 1990’s, around 25% of every age group continued on to higher education, and in the last few years that rate has grown to 48%, in line with rates in developed countries. Interpretation of these facts shows that the demand for educated and skilled workers outweighed the number of educated and skilled people entering the workforce, especially in industries that demand high level human capital. This trend is expressed by the relative increase in salary for engineers in the field of programming and technology.

The Bank of Israel eport highlights that the economic growth is based on industries rich in technology and dependent on high level human capital. In order for this growth to continue over the long term, there is a need to reinforce equality and social mobility. Only by doing so will Israel realize its potential for human capital.

According to the Bank of Israel, the rate of those continuing on to higher education grew quickly, and reached over 50% by the middle of the last decade, similar to the rates of students eligible for matriculation certificates.

Therefore, it seems that over the last few years the growth trend in numbers of educated workers has begun to slow down. According to the Bank of Israel, in order to create a new supply of educated workers, it is necessary to invest in reinforcement of core curriculum studies at an early age within the Arab, ultra-orthodox, and periphery populations, groups that traditionally have a low matriculation rate.

The relative low income households belonging to these populations could negatively influence children; in terms of their potential as human capital.

The Bank of Israel report indicates that economic limitations on households influence quality of early education, access to higher education, and on the realization of human capital over the long term.

Read this article in Hebrew.