The growing economic disparity among Israel's income groups places the country, along with the United States, at the top end of the inequality scale. But contrary to conventional wisdom, the problem doesn't stem from erosion of the middle class.
Rather, says economist Momi Dahan, the widening gaps are the result of ballooning wealth among the rich and the declining earning power of the poor.
"Israel's problem isn't about the middle class, rather the condtions of the weakest population," he says. "The most dramatic change of the last decade was the take-off of the top decile and collapse downward of the bottom fifth."
The Gini coefficient, a measure used to gauage inequality, stands at 0.38 for Israel on a scale of zero to one. That is the same level of inequality as in the U.S. By comparison income-equity leaders Sweden and Finland have a Gini coefficient is 0.23.
In Israel, the growing inequality reflects the growing share of national income going to the wealthiest 10 percent and a drastic drop in the share of the lowest 20 percent since 1979, says Dahan, head of the Hebrew University of Jerusalem's Federmann School of Public Policy and Government and a senior fellow at the Israel Democracy Institute.
According to Organization for Economic Cooperation and Development figures, more than 20 percent of Israeli families are poor, while the average for OECD countries is less than 12 percent of families, Dahan says. "From 1997 to 2012 the price of the basket of consumer goods bought by the middle quintile increased 44 percent while the basket of goods bought by the lowest quintile increased 48 percent. In other words, the hardest hit has been the lowest quintile," he says.
Dahan argues that policy makers should focus on the two ends of the scale that have been moving further to the extremes, as this is what is generating the inequality, choking economic growth and hurting the middle class in the long run.
"Some people blame inequality on the fact that the ultra-Orthodox and Arabs are largely outside the workforce," Dahan says. "But even if we take them out of the equation, Israel remains one of the world's least egalitarian countries. The problem is across all sectors of the population and encompasses all parts of Israeli society."
When asked if Israel's inequality might be less than official figures indicate due to the size of its black market economy, Dahan said, "There is no doubt that people conceal their real income, but this is true for the bottom rungs of the income ladder as well as the top rungs, so its impact isn't straightforward.
"Also, Israel leads the world, for example, in the divergence of educational achievements between economically advantaged and economically disadvantaged pupils, and in education you can't say inequality stems from the black market."
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