Eran Yashiv Chair, Department of Public Policy

The Labor Market of Israeli Arabs

(joint work with Nitsa Kasir, Bank of Israel)

September 16, 2013Presentation at the SVF meeting, NYC

Eran YashivChair, Department of Public PolicyAssociate Professor, the Eitan Berglas School of EconomicsDirector of the Center for Regulation Policy

Tel-Aviv University

2Some Background

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

Eran Yashiv, TAU

3Plan of Talk

Macroeconomic backgroundKey data points on the labor market of Israeli

ArabsThe major problems Policy proposalsSimulations: returns on policyChallenges for policy implementation

Eran Yashiv, TAU

4

Some macroeconomic background: the good news

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%).

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The economic challenges: human infrastructure

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.

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6The economic challenges: human infrastructure

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

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7The economic challenges: physical infrastructure

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.

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8The economic challenges: physical infrastructure

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

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Eran Yashiv, TAU

9Demographics

2009 Sep 2013 2019 2029 2049

Total 7,552 8,081 8,848 10,250 13,630

Jews without the Ultra-Orthodox 5,267

(70%)

5,612

(69%)

5,842

(66%)

6,341

(62%)

7,371

(54%)

Ultra-Orthodox Jews 750

(10%)

799

(10%)

1,101

(12%)

1,591

(16%)

3,083

(23%)

Arabs 1,536

(20%)

1,670

(21%)

1,904

(22%)

2,318

(23%)

3,177

(23%)

Note: percentage of total in parentheses.Source: Paltiel, Ari, 2012. Long-Range Population Projections for Israel: 2009-2059., October 21, Central Bureau of Statistics, Jerusalem, Israel.

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Poverty

rates 2010/11

Male employment rates

2011

Female employment rates

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 percentages2. 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.

Participation Rate over Time, Men, 1970–2011

Source: calculations based on CBS Labor Force Surveys.

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

50

55

60

65

70

75

80

Jewish Men

Arab Men

Year

Pct

.

Participation Rate over Time, Women, 1970–2011


1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

10

20

30

40

50

60

70Jewish WomenArab Women

Year

Pct

.

Arab Men, Life Cycle Participation Rates, 2011


20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70+0

10

20

30

40

50

60

70

80

90

Age

Pct

.

Men, Life Cycle Participation Rate, Selected Countries, 2010

15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+0

10

20

30

40

50

60

70

80

90

100

U.S.

Italy

France

Germany

Israeli Arabs

Age

Pct

.


Men, Life Cycle Participation Rate, Comparison with Moslem Countries, 2010

15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+0

10

20

30

40

50

60

70

80

90

100

Iran

Jordan

Pal. Authority

Syria

Turkey

Israeli Arabs

Age

Pct

.


Arab Women, Life Cycle Participation Rates, 20112011

20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70+0

5

10

15

20

25

30

35

40

45

Age

Pct.


Women, Life Cycle Participation Rates, Selected Countries, 2010

0

15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+0

10

20

30

40

50

60

70

80

90

100U.S.

Italy

France

Germany

Israeli Arabs

Age

Pct

.


15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+0

5

10

15

20

25

30

35

40

45

50Iran

Jordan

Pal. Authority

Syria

Turkey

Israeli Arabs

Age

Pct.


Women, Life Cycle Participation Rate, Comparison with Moslem Countries, 2010

Academic professionals; 8% Associate profes-sionals and techni-

cians; 5%

Managers; 2%

Clerical workers; 4%

Agents, sales workers and service workers;

15%

Skilled agricoltural workers; 2%

Manufacturing, con-struction and other

skilled workers; 50%

Unskilled workers; 13%


Arab Men, Employment by Occupation, 2011

Arab Men, Employment by Industry, 2011

Agriculture; 3%

Manufacturing; 16%

Construction; 26%

Wholesale and retail trade, and repairs; 18%

Accommodation ser-vices and restaurants;

6%

Transport, storage and communications; 8%

Banking, insurance and other financial institu-

tions ; 1%

Business activities; 6%

Public administration; 3%

Education; 5%

Health, welfare and social work services; 4%

Community, social and personal and other services; 3%


Academic profes-sionals; 15%

Associate professionals and technicians; 28%

Managers; 1%Clerical workers; 19%

Agents, sales workers and service workers;

22%

skilled agricultural workers, 2%

Manufacturing, construction and

other skilled work-ers; 1%

Unskilled workers; 10%


Arab Women, Employment by Occupation, 2011


Arab Women Employment By Industry, 2011

Manufacturing; 8%

Construction; 1%Wholesale and retail

trade, and repairs; 12%

Accommodation services and restaurants; 4%

Transport, storage and communications; 4%

Banking, insurance and other financial institu-

tions ; 5%

Business activities; 13%Public administration; 5%

Education; 20%

Health, welfare and social work services; 16%

Community, social and personal and other services; 6%

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.

Participation RateProportion in population

Modern vs Traditional Women LFP

Modern females

Traditional females

6.8%

10.7%

An Arbitrary Exercise

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.

Participation RateProportion in population

Modern vs Traditional Women LFP

Modern females

Traditional females

6.8% 75.4%

10.7% 1.1%

Wages and Hours by Gender and Sector, 2010

Men Women Men Women

Gross average wage per month (NIS) 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

Jews Arabs

Source: Central Bureau of Statistics, Income Survey, 2010.

Summary of Labor Market Problems

• 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 work2. retirement that is premature even compared with Palestinian men

and with men in Muslim and Arab countries3. below-average productivity and wages 4. underemployment in more highly-skilled occupations, even among

those with appropriate skills5. disincentives to study and acquire skills for the younger generation6. Israeli Arabs rank among the country’s poorest population sectors7. entrapment in a “poverty cycle.”

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• 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 side2. women do not (to a significant degree) help their

families escape the poverty cycle3. there is insufficient incentive for young women to

pursue education and acquire skills – including social skills – necessary for labor market participation.

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• The problems are exacerbated by two phenomena:1. Employment and wage discrimination2. 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

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29Policy Proposals

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

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30Policy Proposals

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

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31Policy Proposals

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

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32Policy Proposals

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

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33Simulated Returns

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0

20

40

60

80

100

120

140

160

180

200

baseline

with policy

billions NIS GDP Simulations

34Simulated Returns

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

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LF forecasts 5% LFPR effect

6% LFPR effect

Scenario 1 5.7% 9.6%

Scenario 2 6.7% 10.8%

35Policy implementation challenges

Political willFiscal prioritiesThe “standard” difficulties in the fiscal

processImplementation of large policy plansPartnership with private sectorTracking and evaluation

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36The New Center for Regulation Policy at TAU

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,

anti-trust, 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

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37The New Center for Regulation Policy at TAUEran Yashiv, TAU

Documents

Eran Yashiv Chair, Department of Public Policy