Transcript The Israeli economy: structural challenges and unsustainable

The Labor Market of Israeli Arabs
(joint work with Nitsa Kasir, Bank of Israel)
September 16, 2013
Presentation at the SVF meeting, NYC
Eran Yashiv
Chair, Department of Public Policy
Associate Professor, the Eitan Berglas School of Economics
Director of the Center for Regulation Policy
Tel-Aviv University









Macroeconomist, dealing a lot with labor markets
At Tel Aviv University since 1992, ; visiting positions at MIT, NYU and LSE
Regular research: models of unemployment, firms and workers search behavior
This week visiting Yale and giving PhD classes on the connections between the
stock market and the labor market
This talk: following consulting work at the Bank of Israel 2007-2012
Based on a number of papers and a new policy paper (executive summary
distributed), joint with Nitsa Kasir, Head of the Labor and Welfare Section of the
BOI Research Division
We have presented to reps from the OECD (2009, 2012) and the IMF (2012)
The new paper is in the process of presentation to President Peres, key ministers,
key MKs and high officials (Treasury, Economy, Education) , and to the media
Chair of Public Policy Department and Director of the new Center for Regulation
Policy at Tel Aviv University
Some Background
Eran Yashiv, TAU
2
 Macroeconomic background
 Key data points on the labor market of Israeli Arabs
 The major problems
 Policy proposals
 Simulations: returns on policy
 Challenges for policy implementation
Plan of Talk
Eran Yashiv, TAU
3
 Israel’s current macroeconomic indicators are good
 For example, in the letter to the Government and Knesset of
Governor Fischer upon publication of the most recent Bank of
Israel report (published April 2, 2013) it was noted:
• the unemployment rate remained stable at its lowest level of the
past thirty years
• employment and labor force participation rates continued to rise.
• inflation in 2012 was 1.6 percent, below the center of the
inflation target range (2%).
Some macroeconomic background:
the good news
Eran Yashiv, TAU
4
 But Governor Fischer also noted:
Looking forward, the economy faces a number of structural challenges:
• the government must reduce its high structural deficit
• efforts must continue to further integrate Arabs and the ultra-Orthodox in the
labor market.
• labor productivity in Israel is low relative to other advanced economies and
increasing it is essential to increasing the long-term rate of growth.
• cost of living should be reduced, an issue that was the focus of the social issues
protest.
The economic challenges: human
infrastructure
Eran Yashiv, TAU
5
 The situation is actually quite bad
 The employment rate of some key working age (25-64) groups is low:
 27% for Arab women
 46% for Ultra Orthodox men
 Arab men are concentrated in low-skill, low-wage occupations
 Ultra-Orthodox women work part-time
 Arabs and Ultra-Orthodox have high poverty rates (57% below poverty
line, compared to 24% average)
 High inequality (Gini coefficient of 0.38, similar to U.S., higher than
Europe)
 Overall low productivity growth; about 60% of the OECD average
growth rate
The economic challenges: human
infrastructure
Eran Yashiv, TAU
6
 In a March 28, 2012 letter Governor Fischer wrote:
 Improved infrastructure, first and foremost in the mass
public transport systems, and in public transportation in
general, is expected to help increase productivity, and
improve the quality of life.
The economic challenges: physical
infrastructure
Eran Yashiv, TAU
7
 Infrastructure investment grew between 1995 and 2010 by
about 2% a year on average
 It constituted 2% of GDP in 2010 as compared to about
4% in advanced economies
 Only in 2011 there was some improvement, with 16.5%
growth, reaching 3% of GDP
 Roads, public transport, water, electricity in need of big
boosts
The economic challenges: physical
infrastructure
Eran Yashiv, TAU
8
2009
Sep 2013
2019
2029
2049
Total
7,552
8,081
8,848
10,250
13,630
Jews without the Ultra-Orthodox
5,267
5,612
5,842
6,341
7,371
(70%)
(69%)
(66%)
(62%)
(54%)
750
799
1,101
1,591
3,083
(10%)
(10%)
(12%)
(16%)
(23%)
1,536
1,670
1,904
2,318
3,177
(20%)
(21%)
(22%)
(23%)
(23%)
Ultra-Orthodox Jews
Arabs
Note: percentage of total in parentheses.
Source: Paltiel, Ari, 2012. Long-Range Population Projections for Israel: 20092059., October 21, Central Bureau of Statistics, Jerusalem, Israel.
Demographics
Eran Yashiv, TAU
9
Poverty
rates 2010/11
Male employment rates
Female employment rates
2011
2011
Total
24.3
77.7
66.3
Non Orthodox Jews
10.6
81.4
75.4
Ultra-Orthodox Jews
55.4
45.1
61.0
Arabs
56.6
72.2
26.8
Notes:
1. In percentages
2. The poverty rate is the percentage of people below the official poverty line,
which is half the median income of a standardized household.
3. The employment rate is the number of the employed divided by the working age population.
Source:
Chapter 8 of the Bank of Israel Annual Report, 2011,drawing upon Central Bureau of Statistics data.
10
Eran Yashiv, TAU
Pct.
Participation Rate over Time, Men, 1970–2011
80
Jewish Men
75
Arab Men
70
65
60
55
50
1970
1974
1978
1982
1986
1990
Year
Source: calculations based on CBS Labor Force Surveys.
1994
1998
2002
2006
2010
Participation Rate over Time, Women, 1970–2011
70
Jewish Women
60
Arab Women
50
Pct.
40
30
20
10
0
1970
1974
1978
1982
1986
1990
Year
Source: calculations based on CBS Labor Force Surveys.
1994
1998
2002
2006
2010
Arab Men, Life Cycle Participation Rates, 2011
90
80
70
Pct.
60
50
40
30
20
10
0
20-24
25-29
30-34
35-39
40-44
45-49
Age
Source: calculations based on CBS Labor Force Surveys.
50-54
55-59
60-64
65-69
70+
Pct.
Men, Life Cycle Participation Rate, Selected Countries, 2010
100
90
80
70
60
50
40
U.S.
30
Italy
20
France
Germany
10
0
Israeli Arabs
15-19
20-24
25-29
30-34
35-39
40-44 45-49
Age
Source: calculations based on CBS Labor Force Surveys.
50-54
55-59
60-64
65+
Men, Life Cycle Participation Rate, Comparison with Moslem Countries, 2010
100
90
80
70
Pct.
60
50
40
Iran
Jordan
30
Pal. Authority
20
Syria
10
Turkey
Israeli Arabs
0
15-19
20-24
25-29
30-34
35-39
40-44
Age
Source: calculations based on CBS Labor Force Surveys.
45-49
50-54
55-59
60-64
65+
Arab Women, Life Cycle Participation Rates, 2011
2011
45
40
35
30
Pct.
25
20
15
10
5
0
20-24
25-29
30-34
35-39
40-44
45-49
Age
Source: calculations based on CBS Labor Force Surveys.
50-54
55-59
60-64
65-69
70+
Women, Life Cycle Participation Rates, Selected Countries, 2010
0
100
U.S.
90
Italy
80
France
Germany
70
Israeli Arabs
Pct.
60
50
40
30
20
10
0
15-19
20-24
25-29
30-34
35-39
40-44
45-49
Age
Source: calculations based on CBS Labor Force Surveys.
50-54
55-59
60-64
65+
Women, Life Cycle Participation Rate, Comparison with Moslem Countries, 2010
50
Iran
45
Jordan
Pal. Authority
40
Syria
Turkey
35
Israeli Arabs
Pct.
30
25
20
15
10
5
0
15-19
20-24
25-29
30-34
35-39
40-44
Age
Source: calculations based on CBS Labor Force Surveys.
45-49
50-54
55-59
60-64
65+
Arab Men, Employment by Occupation, 2011
Unskilled workers, 13%
Academic professionals,
8%
Associate professionals
and technicians, 5%
Managers, 2%
Clerical workers, 4%
Agents, sales workers
and service workers,
15%
Manufacturing,
construction and other
skilled workers, 50%
Source: calculations based on CBS Labor Force Surveys.
Skilled agricoltural
workers, 2%
Arab Men, Employment by Industry, 2011
Health, welfare and
social work services, 4%
Community, social and
personal and other
services, 3%
Agriculture, 3%
Education, 5%
Manufacturing, 16%
Public administration,
3%
Business activities, 6%
Banking, insurance and
other financial
institutions , 1%
Transport, storage and
communications, 8%
Accommodation
services and restaurants,
6%
Wholesale and retail
trade, and repairs, 18%
Source: calculations based on CBS Labor Force Surveys.
Construction, 26%
Arab Women, Employment by Occupation, 2011
Unskilled workers, 10%
Manufacturing,
construction and other
skilled workers, 1%
Academic professionals,
15%
skilled agricultural
workers, 2%
Agents, sales workers
and service workers,
22%
Associate professionals
and technicians, 28%
Clerical workers, 19%
Source: calculations based on CBS Labor Force Surveys.
Managers, 1%
Arab Women Employment By Industry, 2011
Community, social and
personal and other
services, 6%
Manufacturing, 8%
Construction, 1%
Wholesale and retail
trade, and repairs, 12%
Health, welfare and
social work services,
16%
Accommodation
services and
restaurants, 4%
Education, 20%
Transport, storage and
communications, 4%
Banking, insurance and
other financial
institutions , 5%
Public administration,
5%
Source: calculations based on CBS Labor Force Surveys.
Business activities, 13%
Modern vs Traditional Women LFP
Proportion in population
Modern females
6.8%
Traditional females
10.7%
Participation Rate
1. The definition of a “modern” female here is a female with 13 + years of education, personal status: separated or divorced or
single or married (or widowed) with no more than 2 children, uses a computer and has a driving license.
2. The definition of a “traditional” female here is a female with 10 or less years of education, personal status: married or widowed
with 3 children or more, doesn’t use a computer and doesn’t have a driving license.
Source: Based on Central Bureau of Statistics, Social Survey, 2005.
An Arbitrary Exercise
Modern vs Traditional Women LFP
Proportion in population
Participation Rate
Modern females
6.8%
75.4%
Traditional females
10.7%
1.1%
1. The definition of a “modern” female here is a female with 13 + years of education, personal status: separated or divorced or
single or married (or widowed) with no more than 2 children, uses a computer and has a driving license.
2. The definition of a “traditional” female here is a female with 10 or less years of education, personal status: married or widowed
with 3 children or more, doesn’t use a computer and doesn’t have a driving license.
Source: Based on Central Bureau of Statistics, Social Survey, 2005.
Wages and Hours by Gender and Sector,
2010
Jews
Arabs
Men
Women
Men
Women
10,421.0
6,416.0
5,784.0
4,383.0
Average number of hours per week (NIS)
45.0
36.0
44.0
32.0
Gross average wage per hour (NIS)
53.0
41.0
31.0
33.0
Gross average wage per month (NIS)
Source: Central Bureau of Statistics, Income Survey, 2010.
• For men – a high degree of concentration in industries and
occupations located at the bottom of the skill distribution.
• Consequences and implications:
1. early retirement due to the physical nature of work
2. retirement that is premature even compared with Palestinian
men and with men in Muslim and Arab countries
3. below-average productivity and wages
4. underemployment in more highly-skilled occupations, even
among those with appropriate skills
5. disincentives to study and acquire skills for the younger
generation
6. Israeli Arabs rank among the country’s poorest population
sectors
7. entrapment in a “poverty cycle.”
Summary of Labor Market Problems
Eran Yashiv, TAU
26
• For women – the headline issue is that of low rates of
labor force participation.
• Implications:
1. women do not yet play a meaningful role in the
economy's productive side
2. women do not (to a significant degree) help their
families escape the poverty cycle
3. there is insufficient incentive for young women to
pursue education and acquire skills – including social
skills – necessary for labor market participation.
Summary of Labor Market Problems
Eran Yashiv, TAU
27
• The problems are exacerbated by two phenomena:
1. Employment and wage discrimination
2. High costs of getting to work
• Vicious cycle:
• When the population is poor and its labor market
participation is only partial (women) and subject to barriers
(men), it is difficult to invest in basic and higher education
and to develop jobs
• This in turn leads to continued poor performance in the labor
market.
• The physical and cultural distance from Jewish employment
and residential hubs intensifies feelings of alienation and
poses an obstacle to efforts that might reduce discrimination.
• When these problems compound each other over the course
of time, the incentive and willingness to change the situation
are negatively affected
Summary of Labor Market Problems
Eran Yashiv, TAU
28
 As the problems are multi-faceted, a comprehensive plan is
needed
 Moreover, the relevant population in question is large, so
policy needs to be at the appropriate scale
 The market on its own will not rectify most of the
problems, an issue for the provision of public goods
 Detailed plans for employment, education, infrastructure,
taxation and legislation are outlined and budget
requirements assigned
Policy Proposals
Eran Yashiv, TAU
29













Setting up industrial zones
Credit for business creation
Guidance on entrepreneurship and business initiatives
Geographical diversification and expansion
Development of towns and villages (especially Bedouin)
Welfare to Work
EITC
Centers for search and for matching
Job training
Foreign/guest workers issues
Anti-discrimination legislation and enforcement
Promotion of highly educated workers, the Intel example
Employment in the public sector
Policy Proposals
Eran Yashiv, TAU
30
 Education, biggest issue
 From kindergarten to universities
 Short, medium and long term policy plans
 Physical infrastructure
 Teacher training
 IT infrastructure
 Contents
 Parents involvement
 Relation to labor market
 Budgets
Policy Proposals
Eran Yashiv, TAU
31
 Govt. budget proposal, annual (flow) additions (cumulative):
 Short term: between 1 and 1.4 billion NIS (0.1% to 0.2% of GDP)
 Medium term: between 2.6 and 3.3 billion NIS (0.3% to 0.4% of GDP)
 Long term: between 4.9 and 6 billion NIS (0.6% to 0.7% of GDP)
 These sums are about 6 to 8 times bigger than latest budgeting and are permanent rather than
temporary
 One-off: between 3 and 4 billion NIS (04% to 0.5% of GDP)
 Roughly half allocated to education
 Important: this is not “throwing money at the problem”




We simulate the effects of investing in Arab women:
Female labor force participation rises, without and with policy
Output per each worker (labor productivity) rises (capital, technology)
Total output of Arab women rises; compare with and without policy
Policy Proposals
Eran Yashiv, TAU
32
billions NIS
200
GDP Simulations
180
160
140
baseline
with policy
120
100
80
60
40
20
0
2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050
Simulated Returns
Eran Yashiv, TAU
33
 Compare outlays (50% of afore-cited budget plan) and
revenues in the form of additional output
 The IRR, the return on the government investment is
LF forecasts
5% LFPR effect 6% LFPR effect
Scenario 1
5.7%
9.6%
Scenario 2
6.7%
10.8%
Simulated Returns
Eran Yashiv, TAU
34
 Political will
 Fiscal priorities
 The “standard” difficulties in the fiscal process
 Implementation of large policy plans
 Partnership with private sector
 Tracking and evaluation
Policy implementation challenges
Eran Yashiv, TAU
35
 Some of the issues here pertain to regulation
 This includes anti-discrimination measures, foreign
workers regulation, labor laws etc.
 TAU is setting up a new center for policy research
 Will cover all key areas including banking, finance, antitrust, IT, environment, education, health systems,
welfare and more
 Modeled after Mossavar-Rahmani Center for Business
and Government at Harvard and the Searle Center on
Law, Regulation and Economic Growth at Northwestern
The New Center for Regulation Policy at
TAU
Eran Yashiv, TAU
36
The New Center for Regulation Policy at
TAU
Eran Yashiv, TAU
37