State of the Nation Report, 2014
Taub Center for Social Policy Studies in Israel
The Taub Center’s annual report, published today (Wednesday), presents a comprehensive picture of Israel’s 2014 socioeconomic situation in comparison to other countries and to the past. The Report brings together 13 studies in the areas of society, economics, labor, education, social welfare, health, and public expenditures.
A Selection of Findings from the State of the Nation Report, 2014:
Cost of Living
Making Ends Meet: Household Expenditures, Income and Savings in Israel
Eitan Regev (Taub Center Researcher)
- The average Israeli family cannot “make ends meet;” across all population groups in Israel, expenditures exceed income. High housing prices are the primary reason for this phenomenon, and for non-Haredi (non-ultra-Orthodox) Jews, the purchase of an apartment is the factor that shifts them from a positive to a negative monthly balance. The average household cannot purchase an apartment without assistance, which usually comes from their parents’ gradually decreasing savings.
- Among non-Haredi Jews, average monthly expenditures are NIS 864 higher than monthly income; among Muslims, this gap is NIS 1,919; and among Haredi Jews, the deficit between expenditures and income stands at NIS 3,209 – approximately one-third of their reported income.
- Total monthly benefits and support received by Haredi households stand at NIS 3,256, compared to less than NIS 2,000 for households in the other population groups. The disparity between Haredi Jews and other population groups in terms of the level of financial support they receive is largely the result of funding from organizations other than the National Insurance Institute (the source of the majority of support for other population groups), including the Ministry of Social Affairs and Social Services, the Ministry of Construction and Housing, the Jewish Agency, and yeshivas. Haredi households receive NIS 1,331 per month, on average, in support from these institutions, while the total monthly support that the average Haredi household receives is NIS 3,256.
- Although there has not been a notable increase in the price of apartments purchased by Haredi households over the past decade, their average monthly mortgage payments increased by 72% in real terms, and the share of mortgage holders among them increased substantially. Because the financial resources of Haredi households have dwindled considerably over the last decade, they are forced to take out much higher mortgages than in the past in order to buy an apartment at the same price.
- Between 2003 and 2012, the percentage of purchasers buying an apartment to live in among Haredi and non-Haredi Jewish households was similar. However, the percentage of purchasers of apartments for purposes other than to live in (e.g., for use as investments or for providing for the residence of one’s children) among Haredim is more than double the rate among non-Haredi Jews. The average monthly spending on real estate among Haredi Jewish households jumped substantially between 2007 and 2012, from NIS 1,374 to NIS 3,190, in comparison to an increase from NIS 1,407 to NIS 1,847 in the same years among non-Haredi Jews.
The Israeli Housing Market
Dr. Noam Gruber (Taub Center Senior Researcher)
- In recent years,Israeli housing prices have risen rapidly; between
April 2007 and July 2013,
prices increased by 53% in real terms. This rise is due both to increased demand on the one hand – driven mainly by low interest rates and preferential tax treatment – and to rigid supply on the other, rooted in the complex bureaucracy of the construction process, an inherent conflict of interest at the local level, and a high prevalence of condominium apartment living in Israel, which poses an obstacle to urban renewal.
- Despite the escalating prices of recent years, the percentage of households that do not own an apartment has actually declined, from 27.7% in 2006 to 26.5% in 2012. Furthermore, the share of households that own two or more apartments has risen nearly four-fold, a finding that reflects an expansion of investment activities in the real estate market.
- The percentage of young households in the 25-34 age range that do not own a home has increased from 43% in 2003 to 54% in 2012. In contrast, the share of those aged 65 and over who do not own a home has actually declined.
- There is a clear correlation between housing prices and the number of housing starts in Israel. In the early 2000s, there was a steep decline in housing starts, with about 1,000 fewer housing starts per month. The number remained low until 2008, when housing prices began to recover and the number of housing starts began to rise, ultimately returning to its level at the beginning of the decade. The upward trend in housing starts was halted, and even reversed, in mid-2011.
- The residential construction process in Israel takes an average of 13 years – of which only two years are for construction while the remaining 11 years are devoted to bureaucratic processes – assuming the construction plans are ultimately approved. The stages of the process that stand out for their length are those of district committee approval (five years on average) and local committee approval (three years on average). By comparison, in most European Union countries, the maximum amount of time needed to obtain a building permit is 8-12 weeks.
- Israel has very high residential density, as reflected by a low number of rooms per person by international comparison – even relative to countries with higher population densities. Out of 36 countries examined, only 5 countries have a lower average number of rooms per person than does Israel.
The Macro Picture and the Labor Market
Labor Market Reform in Israel and the Flexicurity Option
Prof. Dan Ben David, (Taub Center Executive Director) and Liora Bowers (Taub Center Director of Policy)
- An examination of economic and social indicators in Denmark and Israel shows that in Denmark, the employment rate of men in prime working ages (35 to 54) is 8% higher than in Israel, labor productivity is 63% higher than in Israel, and average annual wages are 57% higher. Moreover, disposable income inequality is one-third lower in Denmark than in Israel, and disposable income poverty rates are 62% lower in Denmark
- The Flexicurity countries (countries characterized by policies that provide relatively high levels of hiring and firing flexibility to employers alongside a financial safety net and employability for workers) have consistently enjoyed the highest employment rates among all developed country groupings since the early 1980s. Conversely, Israel’s low employment rate has placed the country consistently at the bottom of the list, alongside the Mediterranean countries, until recent years.An examination of economic and social indicators in Denmark and Israel shows that in Denmark, the employment rate of men in prime working ages (35 to 54) is 8% higher than in Israel, labor productivity is 63% higher than in Israel, and average annual wages are 57% higher. Moreover, disposable income inequality is one-third lower in Denmark than in Israel, and disposable income poverty rates are 62% lower in Denmark.
- The chapter proposes labor market reforms based on the advantages of Flexicurity and applicable to Israel.
Labor Income Inequality Trends in Israel
Prof. Ayal Kimhi (Taub Center Deputy Director) and Kyrill Shraberman (Taub Center Researcher)
- Wage disparities between the 90th percentile and the 50th percentile in Israel are higher than in the rest of the OECD countries.
- Wage disparities between the 50th percentile and the 10th percentile decreased sharply between 1997 and 2011. While in 1997, Israel had the highest wage gap between these groups among OECD countries, by 2011, five other countries had larger wage disparities in the bottom half of the income distribution than did Israel.
- The 7th and 8th income deciles are those primarily hurt as a result of the labor market changes that took place between 1997 and 2011. Their wages increased at a slower rate relative to those of both lower- and higher-wage earners, and as a result, the wage distribution has become even more polarized. If workers in the 6th to 8th income deciles may be regarded as middle or upper-middle class, this finding indicates that the gap between the middle and lower classes has narrowed, while the gap between the middle and upper classes has widened.
- In occupations characterized by either low or high wages, work hours increased relative to those occupations characterized by salaries in the middle of the wage distribution. In essence, a wide range of such middle class workers were made worse off by changes in the labor market, as a result of a relative decrease in both their wages and their work hours.
- The wage disparities between workers with 16 or more years of education and those with no more than a high school education grew from 83% in 1997 to 88% in 2011. The return on higher education (i.e., the education wage premium) is greater for men than for women and it only increased for men. The education wage premium in low-wage occupations rose, while it decreased for higher-wage occupations. In other words, higher education is becoming economically beneficial for low-wage workers as well.
- At the beginning of the last decade, income from labor represented two-thirds of Israel’s national income. Starting in 2001, the share of the national income pie coming from labor has decreased, reaching 62% in 2011. This means that a smaller portion of national income reaches workers via income from labor, while a larger portion of national income is transferred to the wealthy. Capital income is concentrated in the upper income deciles, a fact which intensifies the labor market’s already-existing polarization.
The Shadow Economy in Israel
Dr. Noam Gruber (Taub Center Senior Researcher)
- The size of the shadow economy in Israel is estimated at about 20% of GDP, double that of
many developed countries. It is estimated that halving the size of the shadow economy would increase government tax revenue by 3-4% of GDP, or about NIS 30-40 billion.
- The tax benefits granted by law are particularly biased in favor of large companies. For example, the four largest companies (out of 829 companies with preferential status) receive 60% of the benefits. The top decile of companies (by revenue) pays a corporate tax rate of 6.8%, less than half of the rate paid by the lowest decile (17.6%). Large companies take advantage of their bargaining power vis-à-vis the government and pay less in taxes relative to benefits – to such an extent that the taxes they pay are even less than the cost of the benefits they receive. Israel’s tax policies create a greater burden on small businesses than on large ones, and this discrimination may be viewed by the public as a justification for the norm of tax evasion.
- An international comparison of the tax burden (i.e., VAT/sales tax, corporate tax and dividend tax) as a share of total income, shows that the overall tax rate for small businesses in the country is high relative to Western countries – about 58%, in comparison to the OECD average of 51.5%.
- In 2012, a company in Israel had to spend an average of 235 working hours (about 20 hours a month) to complete the required tax filing process, in contrast to an average of 163 hours in the European Union, 175 hours in the United States, and less than 100 hours in some European countries. Such a bureaucratic burden is even more onerous to small businesses due to its high cost relative to the businesses’ revenue and particularly their profit.
- The Israeli Tax Authority does not establish goals for enforcement or service, nor does it operate with budgetary transparency. The Tax Authority apparently allocates less than 1% of its budget for enforcement, such that it is no surprise that enforcement is lenient and limited and that even punishment does not serve as effective deterrence against tax evasion.
- In countries without a mandatory tax filing requirement, the size of the shadow economy as a share of GDP is about 21%, higher on average than in countries that have a mandatory filing requirement, where the size of the shadow economy is about 16.5% of GDP. The average cost of tax collection as a share of tax revenues is lower in countries that have a mandatory filing requirement. That is, the data do not support the Tax Authority’s claim that the implementation of mandatory filing would necessarily entail higher costs.
Integration of Arab Israelis and Jews in Schools in Israel
Dr. Uri Shwed, Prof. Yossi Shavit (Taub Center Education Policy Program Chair), Maisalon
Dellashi, and Moran Ofek
- The number of students in mixed schools (those including Jews and Arab Israelis) increased 59% in the years 2003-2013. In the same period, the number of students in schools without Arab Israelis grew by 9%, and the number of students in schools without Jews grew by 33%. The share of secondary school students out of all students at mixed schools increased from 52% in 2003 to 58% in 2011.
- Special education accounts for a substantial portion of mixed schools; among the mixed schools in the Jewish education system that have up to 5% Arab Israeli students (228 schools), 49 are special education schools. Among mixed schools in the Jewish education system in which the share of Arab Israeli students is between 6% and 50%, special education schools represent a majority. Among Arab Israeli mixed schools with Jewish students, about one-quarter are classified as special education schools.
- Analysis of the mixed schools (excluding special education) according to the socio-economic level of the locality in which they are situated shows that mixed schools are prevalent in areas populated mainly by members of the middle and upper-middle class. Among the lowest socioeconomic clusters, in which the majority of localities are Arab Israeli or Haredi, there is not a single mixed school. In socioeconomic clusters 3 and 4 (lower middle class), about 4% of students study in mixed schools, while in socioeconomic clusters 9 and 10 (upper-middle and upper class), a greater share of students – around 10% – study in mixed schools. In fact, mixed schools are concentrated primarily in socioeconomic clusters 5 and higher. It is important to note, however, that mixing is common mainly in the weakest neighborhoods of the various localities.
Trends in the Development of the Education System
Nachum Blass (Taub Center Senior Researcher)
- The growth of the education budget between 2008 and 2013 enabled the reduction of average class size – the growth in the number of classes was greater than the growth in the number of students. In the lower secondary schools, there was clear growth in the number of classes (18%), which brought an 11% reduction in average class size. The average number of students per class in upper secondary schools in the same years decreased by 5%.
- The educational achievements of Israel’s students have improved; according to 2013 data, not only did the rate of eligibility for matriculation increase to 53.4% of the relevant age group (for the first time since the establishment of the state), but the rate of studying and application for matriculation also increased by more than 3%, a very meaningful achievement when considering the weaker groups within the population.
- Israeli students improved their results on the international exams (on the latest exams of PISA, TIMSS and PIRLS). When comparing their achievements to those of students in other countries that participate in all of the exams, a bright picture emerges with regard to Israel’s advancement, both in terms of average scores and in terms of the reduction in the share of weaker students and the increase in the share of stronger students.
- The share of students taking the matriculation exam for 5 units (the highest level) of mathematics decreased from 20% in 2006 to 13% in 2011. The share of students taking the matriculation exam for 4 units of mathematics also decreased in the same period, from 29.5% to 26.5%. The share of students testing in 3 units of mathematics increased by 10%. This figure should be viewed in light of the substantial increase in the share of students of low socioeconomic background among the twelfth-grade student population.
- The growth in the education system budgets between 2005 and 2013 somewhat
compensated for the continued discrimination in funding against the Arab Israeli sector of the education system. In primary education, the budget per class in the Arab Israeli sector was higher than that of the Jewish sector as early as 2005, but the budget per student was substantially lower (This is due to a much higher average class size in the Arab Israeli sector). While in primary education, the additional funding provided per class in the Arab Israeli sector was similar to that provided in the Jewish sector, because the size of Arab Israeli classes has decreased, the allocation per student in the Arab Israeli sector has increased much more (45% in the Arab Israeli sector and 25% in the Jewish sector). A similar process took place in secondary education; however, even though the allocation per student in Arab Israeli secondary schools has increased at a higher rate, it is still lower than the allocation per student in Jewish schools.
Poverty and Social Welfare
Poverty within the Elderly Population in Israel
Prof. Haya Stier and Haim Bleikh (Taub Center Researcher)
- The poverty rate among the elderly (Israelis who have reached the retirement age) is decreasing over time, despite an increase in the poverty rate among the general population. This result is primarily due to pensions, with poverty rates among those who are eligible for pensions at a very low level. Even so, in terms of disposable income (after taxes and transfers), one of out of every six elderly households in Israel is below the poverty line.
- Examination of the depth of poverty – the gap between the average income of poor households and the poverty line – reveals that in 2011, the average income of poor households with elderly persons was about 24% below the poverty line, in comparison to an average of 36% below the poverty line for poor households without elderly persons. Nevertheless, the depth of poverty among both groups rose and the situation of the poor elderly is worse today, on average, than it was in the past.
- Division into population groups clearly indicates that the poverty rate among elderly Arab
Israelis is the highest – almost 60% live below the poverty line, as compared to 18% of immigrants from the former Soviet Union and 11% of Jewish veteran Israelis (those born in Israel or who immigrated before 1990). In the last few decades, the poverty rate among Jewish veteran Israelis has decreased, as has been the case among immigrants from the former Soviet Union over the last few years. However, among the elderly Arab Israeli population, the poverty rate is high and stable – approximately 50% in most years between 1997 and the present, including a peak rate of 60% in 2010.
- About two-thirds of elderly Jewish veteran Israelis enjoy income from pensions. Only 20% of immigrants from the former Soviet Union receive a pension, although this rate is on the rise. Fewer than 15% of elderly Arab Israelis receive pensions due to the continuing challenges facing the Arab Israeli population within the labor market.
- Among immigrants from the former Soviet Union who live in a household headed by an elderly person, transfer payments from the government reduce the share of poor households by 76%; among elderly former Soviet Union immigrants living in households headed by a younger (non-elderly) person, transfer payments reduce the share of poor households by 85%. Among veteran Israelis, the reduction in poverty due to government transfers reaches 69% of households headed by working-age individuals and 67% of households headed by elderly individuals. Among Arab Israelis, the reduction is much lower among both types of living arrangements, standing at only 23% for households headed by an elderly individual and 32% for households headed by working-age individuals.
- Living arrangements, particularly among the population entirely dependent on government subsidies, affect the likelihood of elderly individuals above retirement age finding themselves under the poverty line. Those heading their own households are more likely to be poor than those living within the framework of an extended family (i.e., households headed by working-age adults).
Welfare Budgets for Israel’s Elderly Population
Sagit Azary-Viesel (Taub Center Researcher) and Prof. Haya Stier
- The total budget allocated to the elderly increased from NIS 19.8 billion in 2005 to NIS 25.9 billion in 2012, but a detailed examination of the assistance provided through various programs reveals budgetary erosion in some areas, such as in housing.
- Total allowances granted by the National Insurance Institute for the elderly, which help keep the elderly above the poverty line, have increased. Nonetheless, the level of benefits has eroded over time relative to the increase in the overall standard of living.
- Between 1990 and 2012, the average expenditure per capita on long-term care benefits increased from NIS 1,859 to NIS 2,561 per month (in 2012 prices). The number of those eligible for the long-term care benefit has also increased over the years, despite the rise in the entitlement age. During these years, the number eligible increased nearly five-fold – a sharp rise, even relative to the growth in the size of the elderly population during that time. In 2012, the share of long-term care benefit recipients among the over-65 population was 21%, as compared to 8.3% in 1991.
- Aside from allowances, many services are granted to the elderly, but such services and their budgets are dispersed among various government ministries. This dispersion impacts the ability to monitor the use of budgets, leads to the wasting of resources and results in diminished uptake of benefits among the elderly population.
- A budget analysis of the Unit of Service to the Elderly at the Ministry of Social Affairs and Social Services 2005 through 2012 shows a gap of tens of percentage points between the original budget and actual spending. Actual spending in 2012 was only 46% of the approved budget for the Unit in that year.
- The average rent assistance provided to those eligible has eroded substantially; from 40% of average rent costs in 2005 to 25% of average rent costs in 2012. The erosion mainly stems from a substantial increase in rent costs, at a rate of about 5% on average per year, in contrast to minimal increases of about 0.3% on average per year in the level of assistance. In addition, funding for assisted living has decreased over time, even though the size of the elderly population has grown, particularly the specific population for which this assistance is intended. In addition, the share of the elderly population that lives in public rental housing has declined, from 13.6% in 2003 to 11.4% in 2011.
Patterns of Food Expenditures in Israel
Prof. Dov Chernichovsky (Taub Center Health Policy Program Chair) and Eitan Regev (Taub Center Researcher)
- The per capita expenditure on food in the lowest income quintile is NIS 517 per month. In
the highest income quintile, the expenditure stands at NIS 1,224 monthly, that is, 2.4 times that of the lowest quintile.
- In 2005, most food products in Israel were cheaper in comparison to the OECD, but within six years alone, all food categories (aside from vegetables and fruit) have surpassed the OECD in terms of price. Dairy products in Israel were only 6% more expensive than the OECD average in 2005, but were 51% more expensive in 2011; fish products were 30% cheaper in 2005, but were 25% more expensive than the OECD average in 2011. Fruits and vegetables, as noted, remain slightly cheaper in Israel than in the OECD in 2011, but in 2005, they were substantially cheaper (a gap of 15% in 2011 versus 40% in 2005). The sharp rise in food prices in recent years in Israel has negatively impacted the makeup of food consumption, especially among poor families who have to forgo more fruits and vegetables, dairy products and fish.
Financing and Workforce Trends in the Healthcare System
Prof. Dov Chernichovsky (Taub Center Health Policy Program Chair) and Eitan Regev (Taub Center Researcher)
- Public funding of healthcare expenditures relative to GDP in Israel has declined over time. This stands in contrast to trends in the United States and the OECD, where the share of public funding has increased, such that the gap between Israel and developed countries is widening. In 1995, Israel, the US and the OECD countries all spent between 5-6% of GDP on public expenditures for healthcare; in contrast, in 2011, the US spent more than 7%, the OECD countries spent almost 7% and Israel spent less than 5%. That is, relative to its resources, Israel devotes a very little – and declining – share to public funding of the
- Over the last three decades, the supply of young doctors (aged 35 and under) per thousand people has decreased by 60%. In parallel, the supply of older physicians (aged 65 and over) in the population has increased by 95%. Given the overall decline in the share of doctors relative to the population in Israel, the trend of aging among physicians could lead to a further, substantial reduction in the supply of physicians in the workforce.
Health Status and Healthcare System Budgeting in Israel in the Context of Disability Adjusted Life Years (DALYs)
Prof. Dov Chernichovsky (Taub Center Health Policy Program Chair) and Liora Bowers (Taub Center Director of Policy)
- The study examined the Israeli health system in terms of the DALYs (Disability-Adjusted Life Years) metric. While measures of health system performance in Israel and globally are generally based on mortality rates, the DALYs metric is based on the burden of disease caused by both premature death and illness and disability, thereby providing a more comprehensive picture of health status.
- While cardiovascular diseases and major cancers are responsible for 42% of mortality, their contribution to overall disease burden (measured by DALYs) stands at only 18%. In contrast, orthopedic problems and major depressive disorders, which contribute to 19% of overall disease burden, are almost non-existent among the causes of death.
- In the public healthcare system budget (based on the capitation formula used to fund the HMOs), current allocations for the 15-54 year-old age groups, populations which are very important in terms of their role within households and in the labor market, are relatively low compared to this population’s share of disease burden based on DALYs.
- The Health Basket Committee dedicates almost half of its annual budget to treatments of cancer-related illnesses, which are among the main causes of mortality. In contrast, new funding for treatment of orthopedic and mental health disorders, which are among the key causes of disease burden, is minimal. This is due in part to the narrow mandate of this Committee, which is not permitted to recommend alternative treatment methods that do not entail new technologies.
The Taub Center for Social Policy Studies in Israel, headed by Professor Dan Ben-David, is an independent, non-partisan institution for socioeconomic research based in Jerusalem. The Center provides decision makers, as well as the public in general, with a big picture perspective on economic and social areas. The Center’s interdisciplinary Policy Programs – comprising leading academic and policy making experts – as well as the Center’s professional staff conduct research and provide policy recommendations in the key socioeconomic issues confronting the State.
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