The State of Israel faces several severe problems in the socio-economic realm: high levels of poverty and income inequality, and economic growth rates that are low – in relative terms – compared to leading developed nations. These problems are connected in many areas and in particular in the area of education.
Economic growth is accompanied by a steady and continuous process of structural change. As a result, the demand for educated and skilled workers increases while the relative demand for unskilled labor declines. As long as comprehensive measures to reduce the supply of uneducated and unskilled labor are not implemented, these workers will find it difficult to find employment and their wages will suffer. This will in turn have severe consequences for poverty and inequality.
Figure 1 (from the Taub Center’s State of the Nation Report: Society, Economy and Policy 2009) shows the relationship between education, employment and income for 2008 among individuals between the ages of 25 and 54. The higher the level of education, the lower the rate of non-employment and the higher the income.
This relationship has been becoming much more pronounced over time, as is evident from Figure 2. The graph shows the average rate of non-employment within low-education groups among prime-working age men aged 35-54 from 1970 through 2008. Four decades ago, the percentage point differences in non-employment rates among the various education levels were very small compared to today. Non-employment was less than 10 percent for all groups.
Since then, non-employment rates among men with only 1-4 years of schooling have exhibited a five-fold increase, reaching approximately 50 percent today. There was also a significant increase in non-employment among men with 5-8 years of study, although their rates of non-employment still remained below those with 1-4 years of study. The increase in non-employment becomes more moderate as the level of education increases. The lowest rates of non-employment are among those with 16+ years of study (generally people with an academic degree). In contrast with the other education groups, average rates of non-employment in the 16+ group have not increased since the mid-1990s.
A nation seeking to reduce rates of poverty and inequality at their source must increase the level of education among its population. A person whose education is upgraded will have better prospects of finding employment and of obtaining a higher income – and reduced chances of living in poverty. As more and more individuals upgrade their education, there will be less competition for jobs among those who remain less educated, and they too will find that their prospects of garning employment and raising their incomes have improved. As in other countries, the economic growth process and the increasing demand for educated workers guarantees a positive return to education even when the educated population in the economy grows.
While complementary stimulatory measures – such as a negative income tax for low-income workers and a tax on employment of foreign workers – can make a non-negligible contribution toward improving employment and wages among Israelis, only comprehensive policies dealing with the problem sources, including upgrading levels of education and skills in Israel, can bring about substantial changes in Israel’s long-term trends of poverty, inequality and economic growth.