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Netanyahu's Failures That Could Eradicate Israel's Economic Growth

Israel has stunning employee rates but the rub is, it’s brimming with uneducated, unskilled workers who can’t improve Israeli productivity.

Meirav Arlosoroff
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Netanyahu during the weekly cabinet meeting, February 5, 2016.
Netanyahu has overseen an economic miracle - or has he?Credit: Emil Salman
Meirav Arlosoroff

Benjamin Netanyahu might well not be with us come the next elections. If he is, though, he might want to recruit Prof. Dan Ben-David for his campaign. Ben-David, one of Israel’s most prominent economics researchers and head of the Shoresh Institution for Socioeconomic Research, has crowned Netanyahu – though without naming him specifically – as the man who revolutionized the Israeli economy, making it one of the most prosperous among the developed nations.

“The Socioeconomic Effects of Education Quality versus Quantity,” a paper Ben-David published through Shoresh, describes the miracle of the Israeli labor market since the economic crisis of 2002-2003, which is when Netanyahu was named finance minister and began to work miracles. The miracles resulted from savagely cutting the national budget, especially to national insurance (social security), in order to stabilize the Israeli economy.

Some of the social security allowances weren’t cut – they were savaged. The minimum income allowance was cut by 25% (and is still 22% below its 2002 level). Unemployment benefits were lowered by 50% (and today are still 24% below its 2002 level). Child allowances were halved and continued to drop, and are today 29% below the 2002 level.

The dramatic cuts to social security were, in Ben-David’s opinion, “Israel’s biggest natural experiment in the 2000s.”

The state (which means Netanyahu as finance minister) designed and drove a policy that pushed weak communities to stop living off handouts and, absent alternatives, get a job. Thus from 2002, the Israeli labor market expanded greatly, with hordes of new workers adding to the market.

The result is that the rate of employment in Israel rose from about 71% to 80%, closing the gap we’d had with the developed nations. The new workers were largely unskilled. Employment among university and college grads rose nicely but modestly, from 87% before 2002 to 95% today; among the weaker groups with only high-school education at most, the increase was 270%. No other developed nation had an influx like that of unskilled labor.

Consequent to the leap in employment rate, chiefly thanks to unskilled workers, Israel’s economic statistics improved wondrously in the last 15 years: Israel boasted rapid economic growth, inequality narrowed and poverty rates fell. Ben-David points at “economic poverty” figures (poverty arising only from wages before the state’s intervention through taxing the rich and allowances to the poor). It turns out that economic poverty rates in Israel also improved massively; Israel is fifth among the world’s nations in that criterion.

More men at work
Labor force participation rate for ages 35-54

Ben-David associates the revolution in employment among weaker workers to Netanyahu’s social-security cuts in 2003. It bears saying that not everybody agrees.

Dr. Adi Brender of the Bank of Israel ascribes the employment surge to the advent of colleges in Israel under Yitzhak Rabin, which improved Israeli human capital and enabled a lot more people to acquire education. In other words, Brender thinks the leap in employment in Israel wasn’t just about weak workers joining the labor force because they had to; it’s about increasing the supply of educated workers.

There is no controversy about the education revolution in Israel. Only the United States and Switzerland have more educated people per capita; when it comes to academic degrees, only three countries have more per capita – South Korea, Ireland and the U.S.

So in the last 15 years, Israel became one of the most educated countries in the world and its employment rates grew wondrously. All is well – almost.

Short of perfect

What is short of perfect lies in Israel’s qualitative performance, rather than its quantitative one.

The rate of poverty in Israel, after the state’s intervention, is the highest among the developed nations. The rate of poor families with two breadwinners doubled since 2002. Labor productivity has lagged behind the developed markets for 40 years and at this point, is 42% lower than America’s.

As for that vaunted education, qualitatively, our “achievements” are positively shocking. In all international tests, Israeli students rate about 40th in the world. Israel has the biggest group of weak pupils among the developed nations. A third of Israeli children ranked in the lowest group in the international tests. The second-weakest was Hungary, with a 28% proportion of weak students. And remember that ultra-Orthodox pupils don’t even take the tests. If they had, they’d put Israel in a negative league of its own.

The ensuing qualitative picture is that Israel has tons of uneducated poor workers with shockingly poor productivity.

It is an improvement achievement that many of the impoverished people work, but that achievement is nowhere to advance. The labor market is brimming with workers who have no ability or learning to improve their performance. Israel therefore cannot improve its productivity, economic growth or quality of life.

Growing parts of the Israeli population are not given the tools or conditions to successfully contend in the modern, competitive economy, Ben-David writes. Since the recession of 2002-2003, Israel adopted a policy that succeeded in greatly reducing unemployment rates; but though it handled the quantitative problem, it almost completely ignored the qualitative one – worker quality.

Here he and other researchers are in agreement: Israel has exhausted the quantitative advantages of its higher education system (the colleges revolution) and of its employment market (the employment miracle). It’s crashing into the glass ceiling, not of sexism, but of the poor quality of its human capital.

There are hordes of college graduates, which is good – but, for one thing, the poor education in high schools is already lowering the quality of college degrees. The colleges have no choice but to accept these inferior students and their quality is suffering.

Some of the population belongs to “startup nation,” but productivity as a whole is among the lowest in the developed nations. Israel has got to stop thinking about quantity and start thinking about quality, Ben-David stresses.

The working poor

A key problem, he says, is the funnel feeding the higher education in Israel: the schools, which are lousy, especially the Arab and ultra-Orthodox schools. Some 15 years after leading the policy that created the employment miracle, Netanyahu, now as prime minister, is leading a policy that destroys any chance of improving the quality of education. Former Education Minister Shay Piron started forcing the ultra-Orthodox schools to provide core subjects too, like math and English; the Netanyahu government canceled those moves, and thus a historic opportunity to change ultra-Orthodox education was missed.

Netanyahu has given the Arab community budgets, but far below what they need (and the money for the five-year Bedouin program hasn’t arrived at all). In any case, with messages like squealing “They’re coming in droves to the polling booths,” it’s hard to advance Israeli Arab society.

Plans to improve education systems among vulnerable populations – such as the plan to transfer the vocational schools from the Economy and Industry Ministry to the Education Ministry, and the plan to reform the tech colleges – Netanyahu halted, because of some devious political deal with Social Affairs Minister Haim Katz.

Netanyahu has poured budgets into the education system, but he isn’t moving on structural reforms in education – though clearly the problem in the education system is management, not money; and even though Netanyahu himself brayed about the need for management reform in education while he was himself in the opposition.

Nor does Israel have worker retraining programs. Israel has the highest proportion of working poor in the OECD, but spends a quarter of the budgets compared with the other members of the organization.

These failures are all Netanyahu’s personally, and they could well eradicate Israel’s economic growth. Israel could make a great leap forward if it improves the quality of its human capital. But he, who 15 years ago led Israel to great things, is leading it down the opposite road. Maybe he shouldn’t take Ben-David on his next campaign.