Teach Your Children Well

Preliminary research conducted by Taub Center Deputy Director Prof. Ayal Kimhi that will appear in the Center’s next State of the Nation Report shows that Israeli wage gaps, after declining from Western peaks, have been rising steadily over the past several years.

As indicated in the first figure, the Israeli wage gap in 1998 was higher than in any OECD country and more than double the ratio found in a number of countries (see box for explanation of how gap is measured).

In the wake of the recession after the year 2000, Israeli wage disparities declined somewhat while the American wage gap rose (second figure).  By 2003, U.S. wage inequality exceeded Israel’s.  Since then, wage gaps increased in both countries, placing them both at the top of the OECD by 2008, with the U.S. ranked in first place and Israel second.

Among the primary factors influencing pay, it is customary to consider gender, work experience and education. The third figure focuses on wage gaps within each of these categories to see which of these may have had the greatest impact on the overall wage gaps.

The average pay of men in Israel was 44% higher than that of women in 1998. As indicated in the right panel of the third figure, this gap narrowed substantially, falling to 37% by 2008. A similar, though somewhat smaller, decline was found in the return on work experience (middle panel of the third figure). Experienced workers – those with at least ten years of experience – earned 46% more than their less experienced counterparts in 1998.  By 2008, wage differentials between the two groups declined to 42%.

In contrast to what transpired over time in the two other primary sources of wage inequality, wage gaps due to differences in education exhibited a considerable increase. Educated workers (those with at least 12 years of study) earned 68% more than their less educated counterparts in 1998.  Over the last decade, the return to education grew even larger, and the gap between those with more than 12 years of schooling and those with less grew to 77%. Insofar as this gap grew while the others lessened, it is safe to say that the primary cause of the growth in the overall wage gap is the increase in the return on education.

This increase in the return to education is itself an expression of the fact that the demand for educated workers rose more rapidly than their supply. In other words, the rate at which new, more educated workers enter the work force and replace the previous, less educated ones has been unable to keep pace with the increasing demand for educated workers.

The increase in demand for educated workers is a result of the increasing weight of knowledge-intensive sectors in the Israeli economy. As the share of these sectors grows, it is likely that the growing demand for educated workers will persist for the foreseeable future.

In light of the above, the principal policy focus for reducing wage gaps in Israel needs to be in the education of the country’s work force. The country needs to make it a national priority to provide a solid education that will enable its schoolchildren and college students to contend in a future global, competitive economy.

Although the left panel of  the third figure describes the gap in terms of return on the years of schooling, the number of years of schooling by itself is not the only consideration. Israel already boasts a high percentage fraction of students who finish twelve years of schooling. They need to receive a core curriculum geared to the modern labor market, in terms of the subject matter and the quality and effectiveness of the teaching. Research published by the Taub Center in the last few years regarding the effectiveness of Israel’s education system suggests that Israel still has a way to go in this regard.

The 90-10 ratio is one of the accepted measures for wage differentials. It is the ratio between the salary of the worker at the 90^th percentile (one who earns more than 90% of the work force) and that of the worker at the 10^thpercentile (one who earns more than 10% of the work force). This measure is not affected by changes in the earnings of senior management, who are found in the very highest percentiles, nor by changes in the earnings of workers at the very bottom of the pay scale. It is customary to measure only those employed full-time, that is, at least 35 weekly hours.