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Apart from war, the central problem of the Israeli economy is the low rate of participation in the labor market. Israel's civil work force stands at 2.6 million people out of a total population of 6.5 million, in other words only 40 percent of the population works. The going rate in western countries is 50 percent. This statistic (together with high defense expenditure) largely accounts for the wide gap between our standard of living and that in West Europe and the United States.

There are two objective reasons for this low level of participation in the work force - our higher numbers of children and the size of the IDF. And there are also two subjective reasons: the low rate of participation of women in the labor market (among the Arab sector only 30 percent of women work) and the low level among ultra-Orthodox men; only 33 percent of them work.

The Bank of Israel recently completed a study which investigated this low rate of labor market participation. The research discounted the effects of the standing army and the number of children by covering only the major working sector aged between 25-54. It transpired that in Israel the rate of participation in this age group is 76 percent compared to 82 percent on average in Western countries, and among men the disparity is even more marked; 82 percent in Israel as opposed to 93 percent in Western nations. The research also showed that this gap has widened in the past decade.

The paper also found that the state's granting of income support benefits encouraged people not to work, particularly among the poorly educated. It was found that unemployment among those eligible for such benefits was one and a half times greater than among those not eligible for the benefits.

The change for the worse seen during the 1990s, which saw the number of those receiving income support swell to the current figure of 140,000 is due to two factors: One, the welfare state has become more "generous," granting more handouts and various benefits to those not working. Secondly, there has been a real fall in salaries for the poorly educated due to their having to compete against cheap foreign labor, and there has been a drop in wages paid for manual work.

If this is the case, then what is the solution? In his new economic plan, Finance Minister Silvan Shalom suggests tightening the criteria for receiving income support, so that only men over 21 or women over 20 are eligible. In addition, a series of benefits normally granted to those on support - reductions in housing, arnona (municipal property taxes), public transport and television licenses - are to be stopped.

The Bank's researchers note that there has been a change in welfare policies in OECD countries in recent years, redirecting their efforts to bring more of the weaker sectors of the population into the work force, instead of focusing on giving them handouts. And as government spending in Israel to bring more of such people into the labor market is relatively low compared to the OECD norm, the researchers recommend that the resources be devoted more to finding them jobs rather than paying them direct support.