Press Release: The State of the Nation Report 2018

Embargo until Monday, December 31^st, 6:00am

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The Taub Center’s State of the Nation Report 2018 has been released

The Taub Center’s annual report presents a picture of Israel’s society and economy in 2018. The report contains 10 new research studies in the fields of macroeconomics, employment, education, health, and welfare, as well as executive summaries of other studies published by the Taub Center over the past year.

The editor of the report is Prof. Avi Weiss, President of the Taub Center and Professor of Economics at Bar-Ilan University.

Selected findings from The State of the Nation Report 2018

Economic Developments in Israel: An Overview
Prof. Benjamin Bental and Gilad Brand

In 2018, employment is at an all-time high, unemployment is at a historic low, GDP growth is high, and wages have risen. However, growth potential is declining due to demographic changes and trends in labor productivity, which is not growing at all.

• Assuming that the government will increase its expenditure in accordance with the relevant legal rules and limitations, it seems that as of 2020 the government will breach the deficit limit as it is set by law, and that the problem is likely to become even more severe in the long run. The budgetary problem is expected to increase further if the government follows through with its plan to increase the defense budget to about 6% of GDP, and to peg it to the GDP growth-rate. Such tendencies will impair the government’s ability to improve services and infrastructure and may weaken the standing of the Israeli economy in the global capital market.
• Since 2012, increased employment has been the main source of Israel’s per capita GDP growth. Despite the fact that most of the workers joining the labor force were low-skilled workers, there was an improvement in the quality of employment due to an increase in experience and education levels. However, the working-age population is shrinking, as is the potential for future economic growth from increased employment rates. Therefore, it will be difficult for the Israeli economy to continue growing without an improvement in other growth-enhancing factors.
• Expanded employment and the rise in wages were reflected in an impressive increase in households’ income and consumption. This was particularly apparent among households in the middle and lowest income quintiles (an increase of 16% and 13%, respectively, between 2012 and 2016), while among the highest income quintile there was a more moderate increase (9%).
• In recent years, prices in Israel have increased at a significantly lower rate than in the OECD. As a result, consumer prices relative to the OECD average have declined by 5.2% since 2014. This is surprising given the good state of Israel’s economy and the sharp rise in wages in recent years, and resulted from measures taken to increase domestic competition after the 2011 social protests.
• Nevertheless, price levels in Israel remain significantly higher than expected given income levels, which negatively affects the standard of living. Against the backdrop of mounting public pressure and reports of expected price hikes, removing barriers and encouraging competition in the local market could help the country cope with this challenge.
  

Rising Housing Prices and Their Impact on Households’ Ability to Purchase a Home
Kyrill Shraberman

Housing prices have risen over the past decade, but the ratio of disposable household income to housing prices is similar to that of the mid-1990s.

• The rise in housing prices over the past decade has reduced the ability of households to purchase housing. However, assessing the ability to buy a home in terms of total disposable household income (which usually includes the incomes of two earners, as well as income from sources other than work), rather than in terms of average salary (as is common practice), reveals that the decline in Israelis’ ability to purchase housing is more moderate, and the ratio of disposable household income to housing prices is similar to what it was in the mid-1990s. The reason for this is that the total disposable income of households rose to a greater degree than wages over this period, primarily due to an increase in the average number of earners per household.
• The disposable income of young adult households (25-34) grew at a rate similar to the average disposable household income between 1998 and 2016, so their ability to purchase housing was no more affected than was that of the general population. The age group whose housing-purchasing ability suffered the most is the 35-54-year-olds, because the income of these households increased at a lower rate than the average for the general population.
• The ability to purchase housing has declined significantly in Tel Aviv, Jerusalem, and Israel’s Southern District.
• The average level of household leveraging – the size of households’ net financial liabilities to creditors as a percentage of GDP – has increased since 2009, which could potentially make it hard for them to receive additional credit in the future. The current level of leveraging is only slightly lower than it was in 2000, the year that witnessed the highest leverage levels recorded.
  

Israel’s Labor Market: An Overview
Prof. Avi Weiss and Hadas Fuchs

The employment rate in Israel is high, and has increased greatly among Arab Israeli women, but has declined among Haredi men. For employment to continue rising, there needs to be improvement in the employment of Arab Israelis and Haredi men.

• Both employment and labor market participation rates continue to be high in 2018. The employment rate of non-Haredi Jews is higher than the average employment rate in the OECD, and among women, it is the second highest in the OECD (after Iceland). In order to further improve these figures, employment rates need to increase in sectors where they are relatively low – among Arab Israelis and Haredi men.
• Wages have continued to rise in 2018 at a fast pace. This increase is consistent with the rapid rise in real wages since 2014 – an increase of 11% in total.
• Over the past decade, the share of workers in high tech has increased from 8% to 15% among non-Haredi Jewish men, but among Arab Israelis and Haredim the percentage has remained minimal. The share of women employed in the high tech sector is low (as it is in the rest of the world), and those women employed in high tech are mostly non-Haredi Jews. However, there has been an impressive rise in the share of Haredi women employed in the field: from less than one percent to about 3%.
• After several years of stagnation, the employment rate of Arab Israeli women increased substantially and stands at about 40% – an increase of more than 6 percentage points between 2016 and 2018 – and is now very close to the government’s 2020 target. Most of the increase (72%) stems from the improved education of Arab Israeli women, and, because more Arab Israeli women are pursuing higher education, it is likely that their employment will continue to rise. Arab Israeli men’s education levels have not risen in a similar manner, and the improvement in their employment rate is relatively low. After years of gradual decline followed by gradual improvement, it is only in the last two years that their employment levels returned to what they were in 1995. Low levels of education also affect the employment opportunities available to Arab Israeli men, 50% of whom work in occupations characterized by low wages: manufacturing, construction, and agriculture (as of 2017).
• The employment rate of Haredi men has declined slightly in recent years, and stands at about 48%. Therefore, the government’s target rate for this segment of the population (63% by 2020) seems unrealistic. The decline may partially be a result of increased transfer payments in 2015. 42% of employed Haredi men ages 30-64 worked part time in 2017, mostly due to yeshiva studies.
• Among Haredi women, the employment rate increased by 5.5 percentage points between 2013 and 2018, and stands at 76%. A large percentage of Haredi women are still employed in education, but this figure is declining while the share of women learning technological studies in seminaries is on the rise. Improving the quality of education in seminaries and opening additional engineering tracks could open up more high-paying employment opportunities for Haredi women.
• Israel’s population is aging at a slow pace relative to the OECD, but when taking into account Israel’s high birth rate, the dependency ratio (the ratio between those not of prime working age and those of prime working age) is the highest in the OECD. One possibility for coping with this situation is to raise the retirement age for women. This would save money for the National Insurance Institute (NII), which is at risk of bankruptcy.
  

How Much Can the Israeli Start-Up Nation
Continue to Grow?
Gilad Brand

The share of high tech out of total employment in Israel is only about 8%, and it seems that efforts to expand employment in the field are only relevant for a small percentage of the population. Even if these efforts are indeed effective, expanding high tech employment is not expected to have a significant impact on the economy at large.

• Comparing the skills of workers in Israel and other developed countries, as measured by the OECD’s Basic Skills Survey (PIAAC), shows that the skills of high tech employees are very different from those of workers in other fields. In Israel, the gap between the skills of workers in high tech and workers in the rest of the economy on the survey is almost a complete standard deviation, an exceptionally large gap among the developed countries. Due to differences in skills, the wages of high tech employees are much higher as well – double those of other workers in the economy, and this gap is also exceptionally large. The share of workers employed in high tech was also found to be higher in Israel than in other developed countries, and skilled workers are already integrated into the industry on a large scale. Given all these trends, it seems that efforts to expand employment in high tech are only relevant for a small percentage of the working-age population (about 1%).
• Due to the large skills gap between high tech and other sectors, it is unlikely that expanding employment in high tech would lead to the spread of advanced knowledge and innovative work methods to other fields to a significant degree. It is also possible that expanding employment in high tech may slow the development of relative advantages in other areas of the economy, where the employment profile is more varied.
• A high share of the Haredi and Arab Israeli populations report low levels of English proficiency, as opposed to a high level of proficiency reported among high tech employees. As a result of this, and due to low levels of general proficiency among these population groups (as measured by the survey), it seems that there is limited utility in using professional training as a means of integrating them into the high tech industry (thereby narrowing gaps). Most of the potential to expand high tech employment is found among non-Haredi Jews, who already comprise the majority of high tech workers.
• Israel is characterized by a large presence of workers with low skills, which result in low earning ability. The percentage of Israeli workers whose skills are ranked in the lowest skills level in the OECD (the bottom decile) is about 16% of the adult population, and only about 7% of Israeli workers rank in the highest skills level (top decile). Among the Arab Israeli population, the picture is particularly worrying: about half of the adult Arab Israeli population ranks at the bottom of the OECD skills distribution (the bottom two deciles).
• The availability of cheap labor makes it less feasible that employers will streamline processes and adopt advanced technologies, and is likely one of the causes of low levels of investment and low productivity in non-high tech industries. Therefore, focusing on raising skill levels specifically among the workers in these industries, through appropriate professional training and by improving the education system (in order to improve the skills of the next generation), may be preferable to efforts to recruit additional highly-skilled workers to move into the high tech field.
  

The Israeli Education System: An Overview
Nachum Blass

The Ministry of Education budget has risen due to an increase in the number of students and the implementation of various programs and labor agreements. While the scores of Israeli students on Meitzav and international exams do not meet expectations, there has been an improvement in Israeli students’ achievements and the gaps are narrowing.

• The student population has grown at a rate of 2% a year since 2000. While the growth rate is declining in the Haredi, Bedouin, and Druze education systems, it is rising in Hebrew State and State-religious education.
• The Ministry of Education budget increased by 83% in real terms between 2005 and 2018. The budget increased due to a rise in the number of students, the signing of the Ofek Chadash and Oz LeTmura labor agreements, the implementation of the Compulsory Education Law for ages 3-4, and the introduction of programs such as reducing the number of children per class. The budget for Special Education increased at almost twice the rate of the overall education budget, mainly due to the tremendous rise (127%) in the number of students enrolled in Special Education.
• • Based on the latest data from 2014, the Ministry of Education’s real budget per student increased since 2010 at a faster rate than in the OECD, and it seems that this trend has continued through 2018 as a result of the measures detailed above. Despite the rapid increase, per-student expenditure in Israel remains lower than in other OECD countries: the expenditure per student in primary education in 2014 was $7,981 in Israel compared to $8,631 in the OECD, and the expenditure per student in high school education was $7,987 in Israel compared to $10,010 in the OECD.

  

• Since 2000, the number of teachers in Hebrew primary education has increased by 28%, and by 20% in Arab education. In Hebrew education there was a slight decline in the percentage of female teachers, as well as in the average age of all teachers and their seniority, while in Arab education the trends were reversed. The percentage of teachers with an academic degree has risen in both sectors since 2000: from 50% to 89% among Jews and from 37% to 94% among Arab Israelis.
• The scores of Israeli students on the Meitzav and international exams do not meet expectations, but there have been improvements in students’ performance on both the Meitzav and international exams relative to the past. Furthermore, Israel’s improvement on international exam scores and narrowing gaps (relative to the first exam) was greater than the improvement in most other participating countries.

Expenditure Per Class and Per Student in Israel’s Official Primary Education
Nachum Blass and Haim Bleikh

The Ministry of Education per-class and per-student budget has increased significantly in recent years. Most school budgets are allocated according to fixed formulas, and principals and other officials in the system have limited influence as to their scope. However, despite the universal formulas, after controlling for various school characteristics, budgeting is highest in the State-religious schools and lowest in the Arab Israeli schools.

• There are several important characteristics that affect the per-student and per-class budget in regular official primary education (institutions that contain grades 1-6 only): the school’s Nurture Index – the higher the index (which indicates a weaker socioeconomic profile), the higher the allocation per student; the size of the school – the larger it is, the lower the allocation per student; and the presence of a “long school day,” which increases expenditure per class by an average of 14%, and per student by 15%.
• An analysis that isolates each factor affecting the budget shows that the vast majority of explained variance has to do with factors that are difficult to influence, such as: Nurture Index, participation in the “long school day” program, and the size of the school. On the other hand, sector and type of supervision explain a much smaller share of the explained variance (about 13% for per-class budget and 8% for per-student budget).
• After controlling for various school characteristics, per-class and per-student budgets are highest in the State-religious education system and lowest in the Arab education system; there is a 10% gap between the two. Part of the gap can be explained by unique budgetary baskets, but the remainder of the gap cannot be explained because the considerations behind budgeting are not transparent.
• The State-religious education’s budgetary advantage stems from the fact that it receives unique budgetary baskets, such as funding supplements for prayer time, separate frameworks for boys and girls, and hours with a Rabbi. These supplements are intended to preserve the character of this education system, yet, on the other hand, it could be argued that similar funding should be granted in order to preserve the unique character of the State education system. It is also worth noting that differences in type of supervision by religiosity level is a phenomenon unique to Jewish education.
  

Technological Education: Trends and Developments, 2006 to 2017
Hadas Fuchs, Guy Yanay, and Nachum Blass

The share of high school students studying in high technological education has risen, primarily among Druze and Bedouins. The percentage of Arab Israeli girls studying in high technological education has risen, but the percentage remains low among Jewish girls in State-religious education.

• A new achievement-based classification of technological education tracks reveals that, between 2006 and 2017, the share of technological-vocational students studying in high technological tracks (where achievements are the highest) rose by 40%, alongside a lesser increase in other tracks. This increase has come mainly from outstanding students transferring from academic tracks to high technological tracks (as indicated by a decline in the share of high school students studying in academic tracks from 67% to 60% during the period).
• The greatest increase in the share of students studying in high technological tracks was in the Arab education system, especially among Druze (20 percentage points) and Bedouins (11 percentage points). This figure indicates a substantial change which could lead to better integration of the Arabic-speaking populations into more prestigious occupations in the Israeli labor market.
• The percentage of girls studying in the high technological track in Arab education has risen substantially, and is even higher than the percentage of boys (31% compared to 26%). The gap between girls and boys in Bedouin education is even larger (21% compared to 12%, respectively). This increase has been accompanied by a rise in the bagrut qualification rate and in the pursuit of academic studies among Arab Israeli women, the effects of which can already be seen in the rapid growth in their employment (see the chapter on “Israel’s Labor Market: An Overview” in this Report).
• Only a small percentage of Jewish girls study in the high technological track, particularly in the State-religious education system, whereas the percentage of boys in the high technological track is relatively high in State-religious education. It is possible that single-sex schools result in fewer study options for religious girls, because the number of high technological tracks offered in girls’ schools in the State-religious education stream is particularly low (only 18% of the schools offer these tracks, compared to 48% of all other schools, except Haredi schools).
• Though the socioeconomic profile of Arab Israeli students in the high technological track is much lower than that of Jews, their bagrut qualification rates are similar to their Jewish counterparts. Even among Bedouin students – whose socioeconomic status is particularly low – the bagrut qualification rate is about 74%.
• The number of students taking math at the five unit level (the highest level) has risen by 56% since 2012 and the number of those taking the bagrut exam at this level in English increased by 20% between 2013 and 2017 (over and above the increase in the overall number of students). However, the share of those learning English at such a high level is relatively low in the Arab Israeli sector and stood at only 17% in 2017, compared to 51% among Jews. This has a negative impact on the ability of these young adults to integrate into high-paying occupations in the future, such as high tech (see the chapter on “How Much Can the Israeli High Tech Sector Grow?” in this Report).
  

Healthcare in Israel: An Overview
Prof. Dov Chernichovsky

Israel’s current health indicators are quite good, but they reflect past investments in the healthcare system. Today, there are signs of a worsening in the relative health of Israel’s population, and the situation is likely to deteriorate further unless changes are made in the level of health funding and in the system’s public-private mix and its regulation. 

• The share of national expenditure on health out of Israel’s GDP was about 7.4% in 2017, compared to an average of nearly 9% in the OECD and 11% in European countries with health systems similar to Israel’s. The share of public expenditure out of total expenditure on health stands at about 63% in Israel, compared to 73.5% in the OECD, and 78% among countries with similar systems.
• Since 1995, per capita health expenditure in OECD countries has increased on average by 2.5 times, and in countries with health systems that are similar to Israel’s, they have increased by about 3 times.  In Israel, however, per capita health expenditure has barely doubled over the same time period.
• The growth in health expenditure was similar to the growth in GDP per capita – about 1.7% a year, on average, since 1995. However, when taking into account changes in healthcare prices relative to the Consumer Price Index and increased consumption rooted in changes in the age structure of Israel’s population, the growth was only 0.9% per age-adjusted standardized person.
• The low level of funding, as well as the high share of private funding, inhibits Israel’s ability to maintain its good health status among the developed countries. In addition, the rising share of private health funding widens gaps in the accessibility of medical services for various population groups and increases health costs.
• The relative increase in health prices is high, and stems, at least in part, from the public-private mix that has developed in the system, and the effect of this public-private mix on physicians’ wages. Physicians’ wages rose by about 42% between 2011 and 2017, compared to an increase of about 15% among other salaried employees in Israel. This increase also stands out in international comparison. One main reason for this is that doctors can refer patients from the public system to their own services in the private system, where they can charge higher prices for treatments that could largely be administered through the public system as well. At the same time, this phenomenon means that doctors are spending less time working in the public system.
• Israel can improve the state of its healthcare system by regulating the provision of privately funded medical care relative to publicly funded care, based on existing models (already in effect in various countries) of either separating the two systems or unifying regulations across them. The two models do not deny access to private healthcare, however, at the same time, they do not allow the two parts of the system to overlap, as is the case today.
  

Israel’s Exceptional Fertility
Prof. Alex Weinreb, Prof. Dov Chernichovsky, and Aviv Brill

Fertility in Israel is not only high relative to the rest of the world, but is exceptional in a number of other characteristics. Other exceptional aspects of Israel’s fertility include an increase in fertility despite a coinciding increase in age of marriage and in women’s education levels, as well as a sharper rise in fertility among the secular and traditional Jewish populations.

• The overall fertility rate in Israel is higher than in any other OECD country, and stood at 3.1 children per woman in 2015. While fertility rates in most countries have declined over time, the rate in Israel has risen by 0.2 children in the last two decades, and this growth is largely driven by the secular and traditional Jewish populations. At the same time, since 2004 the fertility rate of Muslim women has declined by almost one child, and of Haredi women by about half a child.The overall fertility rate is almost identical among Jewish and Arab Israeli women, but there are significant differences in the fertility patterns of each group. Among Arab Israeli women, age at first birth is four years younger; the percentage of women without children is much higher (13.7% among those born between 1947 and 1967, compared with 6.4% among Jewish women); and the negative correlation between education and fertility is much stronger.
  
• • In most population groups in Israel, as education increases, fertility declines. However, the situation is different for two population groups. For non-Haredi Jewish men, the number of children among academics and those with lower levels of education is the same. Haredi women with an academic degree give birth to their first child at a relatively late age, but by their late thirties their fertility rates converge with those of Haredi women with lower levels of education.
  • The main difference in fertility between Israel and other developed countries stems from the fact that, in Israel, relatively educated families – who make up a large and increasing share of all Israeli families – are having more children than their counterparts in Europe. As a direct result of these fertility patterns, a higher percentage of children in Israel are born to older parents and to more-educated parents (compared to any other OECD country).Non-marital fertility in Israel is low (less than 10%, compared to about 40% on average in the OECD), but is rising: from 3% in 2000 to 5% in 2016 among women aged 25-39 and from 7% to 17% of births among women aged 40+. In comparison to other developed countries, the increase in both marital and non-marital fertility in Israel is highly unusual.

Israel’s Social Welfare System: An Overview
Prof. John Gal and Shavit Madhala

The social investment policy Israel has adopted in recent years has emphasized improving human capital and making the labor market more accessible to various populations, yet poverty and inequality rates remain among the highest in the OECD.

• Social spending (government spending on education, healthcare and social welfare) stood at 59% of total government expenditure in 2017 – an increase of 2 percentage points from 2016. Social welfare spending alone increased by about 9%, mainly due to spending for the National Insurance Institute’s “Savings for Every Child” program and growth in the budgets of the Ministry of Labor, Social Affairs and Social Services and the Ministry of Housing. However, these changes did not have an impact on most of the needy population, and both the proportion of families living in poverty and the level of inequality in Israel remain among the highest in the OECD.
• In recent years, Israel has adopted a policy of “social investment” – measures that seek to improve the human capital of citizens and labor market accessibility – such as expanding the early childhood education system and the Savings for Every Child program. At the same time, there is still no indication that other major elements of the social investment approach have been adopted: expansion of unemployment insurance and income support programs.
• Following an intensive protest campaign in 2018 by organizations for people with disabilities, the Knesset approved an increase in the basic disability benefit as well as an increase in the “disregard” limit (the maximum income from work that a person with disabilities can earn without their disability benefit being reduced) from NIS 2,800 to NIS 3,700. This has resulted in a change in the ratio between the disability benefit and the average wage. While between 2010 and 2018 the disability benefit eroded in comparison to wages, the benefit-to-wage ratio increased in 2018 as a result of agreements that enabled disabled persons with a spouse and two children, for example, to reach about 64% of the average wage, compared to 54% previously.
  
• Expenditure on vocational training in Israel stands at about 0.06% of GDP, about half of the OECD average. In recent years expenditure in this area has been rising, but there have been no significant changes in its share of GDP.
• As part of the adoption of the Trajtenberg Committee recommendations, the Day Care Centers Department budget almost doubled between 2011 and 2017. In particular, the expenditure devoted to construction and the conversion of buildings into day care centers has increased substantially: from about NIS 2 million in 2011 to about NIS 260 million. This increase reflects the centrality that welfare states currently ascribe to early childhood education and the importance of early educational interventions for human capital enhancement, especially for children of families suffering from economic distress.
• The additional expenditure allocated to fighting poverty in 2017 is 48% of the total expenditure recommended by the Elalouf Committee. Although a large portion of the Committee’s recommendations have been adopted, their chronic under-funding together with the government’s failure to implement other major recommendations, such as more generous income support benefits, have impaired the effectiveness of current poverty-fighting efforts.

The Taub Center for Social Policy Studies in Israel is an independent, non-partisan socioeconomic research institute. The Center provides decision makers and the public with research and findings on some of the most critical issues facing Israel in the areas of education, health, welfare, labor markets and economic policy in order to impact the decision-making process in Israel and to advance the well-being of all Israelis. 

For details, or to arrange an interview, please contact Anat Sella-Koren, Director of Marketing, Communications and Government Relations at the Taub Center for Social Policy Studies in Israel: 050-690-9749.