Israelis, Think Your Standard of Living's on the Decline? Surprise, It’s Getting Better

Inflation rose more slowly than household income in 2003-12; lower income taxes and an increase in the number of families with two wage earners also pushed household income up.

Ofer Vaknin

The Organization for Economic Cooperation and Development released a thick report at the end of last week comparing the employment situation among the rich nations that comprise its membership. The 300-page report presented thousands of figures — and almost all those mentioning Israel were excellent. Israel is after all a huge success story in terms of employment over the past decade.

Nonetheless, all Israeli newspapers — without exception — chose to highlight in their headlines what was almost the sole negative item about Israel: The fact that between 2007 and 2013 the average wage in Israel declined 0.8% in inflation-adjusted terms, while elsewhere in the developed world, despite being hit hard by financial crises and unemployment, real wages continued to rise.

Emphasizing the negative data matches the public’s general impression about how difficult life is in Israel. Over the weekend many watched TV reports about the legitimacy of leaving Israel, including songs praising leaving, Internet sites to help you go, and heard from those who have left (known in Hebrew as “yordim” — those who go down, the opposite of aliyah) who openly spoke about how happy they are with their decision to leave and how much better life is in Berlin.

It’s a fact: Life is better in Berlin than in Tel Aviv — and it seems it will always remain that way. The more interesting question is whether life in Tel Aviv has deteriorated so much that it has become so horrible, or how much worse have our lives really become over the past decade.

The common wisdom that the rising cost of living has harmed Israelis quality of life is called into question by a recent analysis conducted by the Bank of Israel. In fact the study shows the standard of living in Israel has stayed about the same over the past decade across all income groups.

In fact, quality life based on average household income has improved. In the words of Karnit Flug, the governor of the Bank of Israel, speaking to the Knesset Finance Committee at the beginning of the summer: “The fruits of [economic] growth have trickled down to households.”

While Flug’s statement may sound strange to most Israelis, the truth is the cost of living, as expressed by the consumer price index, has climbed over the past decade. But the standard of living, as reflected in average net household income, has climbed faster, despite the stagnation in real, inflation-adjusted wages, reports the central bank.

More Israelis are working

Over the past decade the rate of labor force participation in Israel has risen sharply as women in general, and Arab women in particular, joined the workforce, as did Haredi men and older people as a result of the raising of the retirement age. Confounding expectations, the rise in labor force participation did not lead to an increase in the unemployment rate.

As a result, the percentage of Israeli households with two wage earners has risen quickly, from just 30% a decade ago to 44% today. This change has greatly improved the average household income, which rose by over 50% between 2003 to 2012, the last year for which there is data.

The rise in average household income was faster than the rise in consumer prices, which on average climbed only 2% annually from 2003. During this period, the prices of food and housing, as well as government services such as electricity and water, did climb rapidly, but prices of furniture and clothing fell because of the competition from imports.

The CPI does not reflect the rapid rise in housing prices in Israel over the past five years though, since the price index includes only rental costs and not the costs of buying a home. The highest rise in consumer prices came in the area of household upkeep, which includes items such as electricity and water, which are regulated by the government, or costs such as cooking gas, which is a very uncompetitive market.

This teaches us once again the high price, including in the cost of living, we pay for these corrupt government controlled monopolies.

Every Israeli remembers what happened to the prices of cellular phone calls once the industry was opened to competition. But the truth is the most dramatic lowering in the cost of living here took place in the sectors open to competitive imports: Businesses such as furniture, clothing and shoes, have seen real prices drop dramatically. This is just another reminder of the unnecessary prices we are paying in Israel for our surrender to the agricultural lobby and leading food manufacturers, who are doing everything they can to block competition from imports.

The picture behind the cost of living is therefore complex and varied. In some cases we have suffered huge price increases in housing, food and public infrastructure, while in others we have enjoyed huge price drops. All told, the average cost of living, as reflected in the official CPI figures, rose only moderately at all income levels. An examination of the CPI data, adjusted for expenses by income quintiles, shows that since 2003 the cost of living for the poorest 20% of Israelis rose 27%, while for the top 20% the increase was 23%.

Wages unchanged

The relatively encouraging picture for the cost of living over the past decade becomes even more encouraging when we see how it has affected incomes.

We must start with the negative data from the OECD report. From 2003 through 2014, according to the Bank of Israel, real wages were almost unchanged in Israel. An entire decade without a gain in real income, even though this was a decade characterized by swift economic growth. That is an exceptional and problematic development that would seem to signal a deep fault in the Israeli economy — except this seems not to be the case.

It is worth remembering the past decade one more time. It was a decade in which we moved from being one of the countries with the lowest levels of employment in the OECD to one of those with the highest employment rates.

Such a massive increase in the number of workers should have led to a jump in unemployment rates in Israel, but in fact Israeli unemployment rates fell to historic lows. This was the employment miracle of the past decade, but it did not happen without leaving a mark: Instead of increasing unemployment rates, the influx of new workers pressured wages, which remained frozen.

It is worth mentioning that a large number of these new workers entering the job market were among the weakest — without advanced education or skills, and they of course earn very low wages. The growth in the number of people earning low wages lowered the average wage for the entire economy.

The freeze in wages over the past decade is therefore not the sign of an economic failure, but of success. The number of families with two wage earners rose by an unprecedented almost 50% to 44% of all households.

The Bank of Israel calculated net household income — wages, taxes paid, government allowances received and investment incomes (which is quite difficult to measure) — and found that it had risen sharply since 2003. Much faster than the CPI, and similar to the rise in the growth of per capita GDP. The “trickle down to households” that Flug spoke of was reflected in the growth in the number of jobs, which is what led to the significant rise in household income.

In addition to the increase in the number of wage earners and the number of two income families, the growth in household income also stemmed from a number of other factors: Lower income taxes and expanded tax brackets for the middle class; as well as what seems to be higher wages for the middle classes.

Middle class 
gained, too

There are no statistical data on what happened to wages for those employed a decade ago and still working today, but it is likely that if the average real income did not change despite the entry of large numbers of people in low income jobs. If so, it seems the real incomes of higher earning employees must have risen somewhat. In other words, the average real wage for the middle class employees seems to have risen somewhat over the past decade.

As a result, the average household income for the poorest 20% rose because of the increase in the number of such workers getting jobs, while for the middle and upper classes household income rose because of lower taxes and, it seems, a real rise in wages. All together, these trends brought about a narrowing of the gaps in income between the various quintiles in recent years (again ignoring investment income and capital). The gaps rose slightly over the period of the decade under discussion, but did narrow in recent years — and the net income for all quintiles rose at almost the same rates — and for all them these rates were much higher than the rise in consumer prices.

Of course, none of this means there are no economic problems or needy people in Israel. Young people who do not own a home have suffered the most from the higher cost of living, and they are now much worse off than they would have been a decade ago. And even though there is a slight trend to narrow wage and income differentials, Israel still has one of the most unequal societies in the Western world.

Let us also not forget how we suffer every time we go to the supermarket and have to pay the price for the food and agricultural cartels; or those of the government monopolies in energy and water when we pay our electricity bills. Add to all this the low efficiency of the Israeli government and the services it provides, as well as their low quality.

In Berlin, for example, life may be easier and more efficient. But this should not blind us from seeing the advantages that also exist in Tel Aviv.