Israel's Middle Class Really Is Disappearing

The middle class is in trouble all over the world, and now the problem has reached Israel, too. Here's why.

The hundreds of thousands who took to the streets in the summer of 2011 were protesting against the cost of living in Israel and the erosion of the middle class. The protesters, who for the most part themselves belonged to the middle class, were decrying the fact that they had difficulty living in dignity and were almost unable to make ends meet.

Two years after the social protest, an accumulation of economic data supports the protesters. The middle class is in trouble all over the world, and the problem has reached Israel, too. The data indicate that the middle class in Israel is gradually weakening and has almost disappeared.

The figures come from researchers at the Taub Institute for Social Policy Studies in Israel, Prof. Dan Ben-David and Prof. Ayal Kimhi. They conducted different analyses, which led to a similar conclusion: The problem in Israel is not the wealthiest people, and surprisingly, nor even the poorest. The problem is actually focused on the middle class.

The first surprising statistic is that inequality in Israel does not stem from the establishment of a narrow and very wealthy class of oligarchs − there is almost no such group here. The percentage of income represented by the top 100th percentile, 6.3% gross (5.3% net − after taxes and allowances) ranks them only in eighth place among the developed countries. Believe it or not, the concentration of wealth in Israel is lower than that in Norway, Finland and Germany. The top tenth decile is also ranked only sixth in the world in concentration of wealth. The problem of inequality, in other words, is not focused on the existence of a small wealthy class.

The problem is revealed when we subtract the extremes in Israeli society, in other words the top and bottom 10%. The gaps, which exist throughout the ranking, become evident when we compare the income of those in the 90th percentile with that of median workers and those in the 10th percentile.

In other words, the income gap between the 90th percentile and the median worker in Israel is the highest of all the developed countries, as is the income gap between the median (50th percentile) and the 10th percentile. And if that is not enough, the income gap between the 75th percentile and the 25th percentile, in other words the income gap within the middle class − between the upper and lower middle class − is also the highest in the developed world.

To put it simply, the income gaps in Israel between the wealthy and the median worker, between the median and the weak and between the upper and lower middle class is the highest in the developed world. The meaning is clear: The problem of inequality in Israel is not concentrated only on the wealthiest group, which is moving up, or on the ultra-Orthodox and the Arabs who are left stagnating behind. The problem of inequality is far more serious, and is spread over all the deciles − and especially in the middle class.

Kimhi explains this by the inequality in the Israeli job market. By concentrating only on those who are employed rather than on the entire population, he discovered the phenomenon of the “disappearing middle class” in the Israeli job market, too. It turns out that the (gross) salary ratio between the median worker and the worker in the 10th percentile in Israel is very high, but is clearly declining. That means that the gap between the middle class and the low-wage worker is gradually narrowing.

The immediate explanation − that the middle class has weakened and is becoming poorer − is apparently only a partial one. What explains the decline in this gap is actually a positive development that is usually ignored: an improvement in the low-wage workers' situation. It turns out that between 1997 and 2011 the hourly wage of the low-wage workers (the 10th percentile) increased at a relatively sharp rate of 20%. That is far greater than the wage increase in the United States during those years at all wage levels, and is also far greater than the wage increase of the median worker and the high-wage worker (90th percentile) in Israel. Those two groups saw their salaries increase by only 6%-7%, and in effect their salaries have been in retreat since 2007.

The wage increase of low-wage workers in Israel, apparently due to the increase in the minimum wage and to changes in the job market, has created an interesting but difficult phenomenon in the job market. In the 14 years between 1997 and 2011, and in comparison to the median, the situation of the high-wage workers (90th percentile and above) improved very little, while that of low-wage workers (35th percentile and below) improved greatly. On the other hand, the situation of the 6th-8th deciles (the 55th-85th percentiles) deteriorated. It even deteriorated seriously. The wage of an employee in the 70th percentile eroded by an average of 0.3% annually during that period. Over 14 years that is a considerable cumulative erosion.

Kimhi’s figures, in other words, reinforce the uncomfortable feeling of the Israeli middle class − it really has eroded. That’s a fact. Apparently the erosion is part of the growing polarization in the job market worldwide − there is no substitute for the low-wage manual workers, and therefore their situation has remained stable and even improved. Social welfare policies, such as the negative income tax raising the minimum wage, also improve their situation, along with the expansion of high-school education and higher education in Israel − which turns out to have benefited low-wage workers as well. The high-wage workers, who are very well educated and are familiar with the new world of technology, are also becoming stronger.

Those who are paying the price are those in the middle: the middle class, which is losing jobs at an accelerated pace due to globalization and technological improvements. For example, a high percentage of middleman occupations, which are the classic middle class professions, are being lost in the era of the Internet, and the middle class is finding it difficult to adapt itself to the rapidly changing situation. In Israel there is also a serious problem of productivity, which particularly harms the class that is most threatened by technology. What can be done to change this situation − that’s already a really difficult question.

120,000 marching to 'social justice' protest in Tel Aviv, July 30, 2011 (Tal Cohen)
Tal Cohen