Why Is Israel the Second Poorest Nation in the OECD?

Jobs can prevent poverty, but not for ultra-Orthodox, says the latest BoI annual report, highlighting need for government intervention - but which kind?

Haredi women working in computer programming at the Matrix company, in Modi'in Ilit.
Eyal Toueg

The paradox of poverty and inequality in Israel was once again addressed in the Bank of Israel report for 2015. When we measure poverty in gross terms (i.e., economic poverty – salary, before government intervention), the country is in good shape. It is ranked 26th among OECD members in its poverty rate, and the latter falls below the average in the developed countries.

On the other hand, when we measure poverty in net terms – in other words, disposable income after government intervention – Israel is in the second-worst place: Only Mexico is poorer. The measurement relating to inequality yields a similar result.

Israel’s poverty problem, therefore, mostly centers around insufficient intervention by the government, which does not provide enough help to the poor to improve their situation.

Government intervention takes two forms: taxing the wealthy and granting allowances to the poor. As opposed to what is commonly believed, the first of these is not problematic.

Bank of Israel Governor Karnit Flug and Finance Minister Moshe Kahlon, March 9, 2016.
Olivier Fitoussi

“The direct tax system,” wrote the Bank of Israel in its annual report, “contributes to reducing inequality to an extent similar to the average in the OECD countries, although in Israel direct taxes are not a significant component of wages. This finding attests to the fact that direct tax in Israel is highly progressive: Its percentage is low, in the third and fourth income quintiles, and relatively high in the highest quintile, and particularly in the top 10th percentile.”

Put simply: The Bank of Israel confirms that compared to other developed countries, Israel collects more than enough taxes from the rich.

The heart of the problem of government intervention in reducing poverty therefore lies in the system of allowances. Since these allowances are stingy in Israel, this creates a situation where the government’s influence when it comes to curtailing poverty is 30% – as compared to 60% in other developed countries. In other words, Israel’s assistance to its poor is half that of the OECD countries.

The obvious conclusion from this analysis by the Bank of Israel: Israel should greatly increase its budgets for allowances. After an investigation, the central bank even found that allowance payments here are carried out efficiently. The allowances handed out are as effective as those in the other developed countries, and thus increasing their budget to the level customary elsewhere would seem like a surefire recipe for reducing our high poverty rates. Right? Well, not really.

Poverty by choice

At this point the Bank of Israel was forced once again to address Israel’s other paradox of poverty: poverty by choice.

“Reducing poverty to the levels customary among the developing countries apparently depends on a significant increase of transfer payments and a parallel increase in the tax burden,” according to the report. “But if policy moves bring about a rise in the government’s support for low-income families who don’t work, they are liable to change the incentives for going to work and become part of the negative trends in the job market.

“The dilemma becomes greater because about half of the poor in Israel belong to the ultra-Orthodox (Haredi) community – a population sector that attributes great value to devoting time to studying the Holy Scriptures – and the traditional Muslim community, in which there are cultural restrictions on the employment of women.”

The dilemma of what to do about those who choose to be poor and to live on allowances, which means that increasing the money they receive would only make that situation easier for them and exacerbate their poverty, is a unique Israeli problem. There is no other developed country in the world that is confronting this dilemma as broadly or intensively. And that is apparently the principal answer to the question of why a country with the second-highest poverty rate among the developed countries allocates almost half as much as other countries to allowances.

In Israel, it seems, paying allowances can do as much harm as good in the attempt to reduce poverty and inequality.

The solution to the dilemma described by the Bank of Israel is, in fact, to refrain from raising allowance payments, and instead to continue trying to reduce poverty by means of employment. The central bank has thus proposed greatly increasing government support to encourage employment of workers from weaker communities, and improving their productivity and wages by means such as a negative income tax, professional training and of course, education.

“The subsidies for sectoral school systems that fail to develop students’ ability to join the job market in the future have a similar effect [i.e., increasing poverty in the long run]: A subsidy augments the families’ disposable income in the present but undermines both the parents’ incentive to work in the present, and the children’s chances of working in future,” writes the Bank of Israel diplomatically, regarding the tremendous damage caused by the Haredi school system (in which the core curriculum is not taught), in exacerbating poverty in the community throughout the generations.

Almost half earn nothing

The fact that work can extricate people from poverty is not in dispute. The Bank of Israel points to a considerable improvement in the indexes of inequality in the country in the past decade due to entry of weaker population groups into the job market in very large numbers. Poverty rates did not decline in parallel, but that is only due to the paradox of measuring poverty in relative terms: The poverty line soared by 27% within a decade, together with the increase in GDP, due to the increase in the number of people employed. Relatively, therefore, the proportion of poor people remained the same – although their situation, as working poor, improved greatly.

Additional evidence that work extricates people from poverty, or at least greatly improves the situation of the poor, is the clear connection between the poverty of a household and the number of breadwinners it has. The percentage of poor families with two breadwinners is 5.8%, compared to 64% in households with no breadwinners and 26% in households with one breadwinner. When the two breadwinners work full time, poverty plummets to only 1%. In effect, among Jews who are not Haredi, when both members of the couple work full time, the poverty rate is negligible – only 0.7% of poor families. There is no question that full-time work by both parents prevents poverty.

But that is not the case when it comes to Haredi families. Only in 9% of them do both parents work full time (the figure is 32% among non-Haredi Jews). But the poverty rate among them is enormous: 22%. So although their situation is far better than that of Haredi families without breadwinners (49%), or with one full-time and one part-time breadwinner (34%) – in the case of the Haredim even full-time employment of both parents does not have a substantial effect on preventing poverty.

In effect, in the case of the Haredim even allowances do not prevent poverty – the Bank of Israel calculated that even if these sums were to be doubled, the poverty rate among the Haredim would decline by only 3% (from a rate of 62% in homes where the head of the household is 30-50 years old). The reason is the size of Haredi households, which have an average of about six children per family. If the number of children in the Haredi family were similar to that in the rest of the population, their poverty rate would decline by 31%.

In addition to the exceptional size of the households there is another problem that makes it very difficult for Haredim to be extricated from poverty: the lack of education among the men, which leads to low productivity and low wages. If the salary of Haredi men were equal to that of the rest of the population, their poverty rate would decline by about 15%.

“The characteristics of poverty among the Haredim attest to the fact that when we take family size into account, their poverty could be reduced by increasing their earning ability through the study of professions relevant to the job market,” writes the Bank of Israel.

In other words, in order for the Haredim to escape the cycle of poverty, they need both full-time employment and jobs offering an especially high wage, which requires suitable education. Have we mentioned that the absence of the core curriculum in the Haredi school system is the worst injustice being committed by the State of Israel – to itself and to the impoverished Haredim who live in it?