Israel Finance Ministry Says Low Pay for Arabs, ultra-Orthodox Will Hurt Economy

Treasury economist urges plan to boost labor productivity

An ultra-Orthodox man walks past advertisements against drafting Haredim to the army, Mea Shearim, Jerusalem, March 4, 2018.
Emil salman

Employment rates for Israeli Arabs and ultra-Orthodox Jews have been climbing in recent years, contributing to economic growth along the way. But the Finance Ministry said on Tuesday that the rising rate wasn’t enough to ensure long-term economic growth.

Shira Greenberg, the treasury’s chief economist, said that even if the gap between the still relatively low rates of employment for ultra-Orthodox and Arabs and non-Haredi Jews continues to narrow the gap in wages has to narrow as well. To date, it hasn’t: The pay differentials for Arab women and ultra-Orthodox men have actually been growing even as more and more enter the workforce.

The study, which was prepared by economist Assaf Geva, said the solution was to increase labor productivity – the amount of output a worker produces per hour – for the two groups. Without an increase, wages cannot rise significantly.

Israeli Arabs and the ultra-Orthodox have been entering the workforce in large numbers in recent years, but they have filled mainly low-pay, low-skilled jobs due to their poor education and paucity of workplace skills. They also typically work fewer hours per week.

The treasury warned that the problem of low productivity would grow worse in the years to come because the ultra-Orthodox share of Israel’s population is forecast to grow due to high birthrates.

The Central Bureau of Statistics forecast that non-Haredi Jews’ share of the population will shrink from more than two third in 2008 to under half by the year 2065. The Israeli-Arab share will decline slightly to 19% from 21%, but the ultra-Orthodox shares will jump from 12% to 32%. The Haredi share of Israel’s working age population will grow even faster – to 26% from 8%.

Unless the situation changes their low rate of productivity will have a greater and greater impact on overall productivity and as a result on income inequality, the country’s rate of economic growth and the standard of living.

Government policy over the last several years has focused on encouraging Arabs and the ultra-Orthodox to enter the workforce, but it hasn’t dedicated the same resources to ensuring that the two groups improve their workplace skills.

The government’s Employment 2030 Commission, chaired by Prof. Zvi Eckstein, recommended more than a year ago that the government now set for the first time targets for Arab and ultra-Orthodox wages side by side with targets for employment rates. However, the government has not yet adopted the proposals as policy.

“Closing the gaps in employment, labor productivity and working hours (which is expressed in monthly pay) would contribute significantly to the rate of economic growth and reduce income inequality in the short, medium and long term,” the treasury study said.

It predicted that if the differentials could be eliminated by the year 2065, gross domestic product would grow 3.4% that year, all other things being equal, compared with 2.5% if current trends remain unchanged.

Per capita GDP by that year would be a third higher if the gaps are eliminated – 284,000 shekels ($82,000 at current exchange rates) versus 212,000 if the gaps remain unchanged, “ To illustrate[the significance], “the Treasury explained,” Increasing GDP per capita in Israel in 2018 by a third would place it above Finland and Canada at the current state level.”

The study said closing the gaps entirely is unlikely to happen, but it said policy makers should at least aspire to that goal by widening programs already in place, such as the extra budgets approved for Arab community development and schools approved in 2015. Among other things, it recommended programs to improve Israeli Arab Hebrew skills.

Programs to improve human capital takes years to bear fruit since they begin with children who don’t enter the workforce until years, even two decades, later, said the treasury report, urging the government to act quickly.

In particular, the Finance Ministry study said that closing the wage gaps of Arab males would have the most impact on Israel’s medium-term economic growth (through the year 2040). The reason is that Arab men’s labor force participation rate is high and close to the level of non-Haredi Jews, thus raising their productivity and pay will have a bigger effect on the overall economy.

By comparison, Israeli-Arab women’s participation rate in the workforce is rising quickly but remains very low compared to non-Haredi Jewish women.

Vis a vis ultra-Orthodox women, the pay gap with their non-Haredi Jewish sisters remains wide. But the reason is mainly because ultra-Orthodox women have many more children and work fewer hours, not because their hourly pay is much lower.

“It will be a challenge to completely close the gap due to the very high fertility rates in ultra-Orthodox society,” the treasury said.