Treasury: Income Growth Best Among Lowest Wage Earners

Study shows Israeli household incomes, spending rose fastest among bottom 50%

Shuk Rothschild Allenby in Tel Aviv, January 2017.
David Bachar

The eight years of economic growth in Israel since 2007 have benefited the country’s lower-income groups more than higher earners, a treasury study released Sunday showed, defying conventional wisdom.

“The rate of growth for households in the five lowest [income] deciles was 1.5 times the rate of growth for the five highest deciles,” the treasury study by Chief Economist Yoel Naveh concluded. “That relatively fast rate of growth was due to a major expansion of employment, which in turn increased the integration of weaker elements of the population into the labor force.”

The report came just two days after the Central Bureau of Statistics reported that the economy expanded at a preliminary 6.2% annual rate in the fourth quarter, a very high rate that was mentioned by Prime Minister Benjamin Netanyahu Sunday. That put the preliminary growth figure for all of 2016 at 4%.

“We’re on a clear rising trend in everything connected with economic growth. When you look at the countries of the OECD, we’re at the top of the list, almost the leader, and that’s very important: Growth creates jobs and raises wages,” he said.

While Israel has enjoyed almost nonstop economic growth since its last big recession ended in 2002, critics in the government and academia have contended that the fruits of economic growth haven’t fallen into the arms of the poorest Israelis.

That has been the case for most developed economies since the 2008 recession, but the treasury report was the first to study the matter systemically and it came to the conclusion that in Israel, that was not the case.

From 2007 to 2015, the after-tax income of Israeli households climbed an average of 2.2% annually. That was a rate in excess of the gross domestic product on a per capita basis, which grew 1.8% annually on average during those years, the Finance Ministry found.

The poor are getting richer

It attributed the faster pace to lower tax rates, which put more money into the hands of households, and to increased payments from abroad.

Household net income grew at an even slightly faster rate of 2.3%, which the Finance Ministry attributed to the long-term trend of more and more Israelis entering the workforce. Among the lowest half of income earners, the rate of growth was a much higher 3.3% while household spending climbed at 2.8% a year on average.

Household spending, meanwhile, grew at an average rate of 1.7% a year in 2007-15, as the slower rate of increase (relative to that of household income) accounted for a boost in savings that occurred at all income levels. Spending by the bottom five deciles of income earners rose 2.8% a year, while at the top half it grew by 1.6% annually.

The treasury’s conclusions were echoed in the National Insurance Institute’s latest estimates for poverty in Israel, which showed a decline in 2015 in the percentage of the population living under the official poverty line – from 22% in 2014 to 21.7% the following year.

Like the treasury report, the NII ascribed the phenomenon of rising incomes and falling poverty to growing numbers of Israelis entering the workforce, as well as some increases in government allowances. In particular, ultra-Orthodox men, who have long shunned the labor market, have begun taking jobs – albeit in many cases low-paying work because they lack skills and education.

The treasury report said that overall, Israel’s workforce had grown at a 3.1% annual rate during 2007-15, a far faster rate than the 1.8% annual increase in the population. Meanwhile, the percentage of the working-age population holding a job or actively looking for one climbed 4.6% during those years.

But even as Israelis streamed into the labor force, wages continued to grow – at an 0.5% annual rate after taking into account inflation, it said.

After-tax wages grew much faster because of falling tax rates – and for the lowest income group, negative income tax rates. For the lowest 50% earners, the increase worked out to 3.3% annually while for the upper 50% it was 2.1%.