Growth and Inequality in the Israeli Economy: Trends and Challenges - PowerPoint PPT Presentation

Growth and Inequality in the Israeli Economy: Trends and Challenges CEPR Dr. Karnit Flug, Governor of the Bank of Israel 15.5.2018 1

Israel’s GDP per capita is growing at a pace similar to that of OECD countries GDP per capita in selected OECD countries, constant prices, PPP , 2011 dollars $ 60,000 United States 50,000 Germany Canada OECD 40,000 Italy Israel 30,000 Greece Chile 20,000 10,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2 Source: IMF

Israel is not closing the productivity gap GDP per hour worked in selected OECD countries, constant prices, USD, 2010 PPP $ 70 United States Germany 60 Canada 50 Italy OECD 40 Israel 30 Greece Chile 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 3 Source: OECD

The participation rate has increased slightly more than in OECD countries Labor force participation rate in selected OECD countries, ages 25-64 % 85 Germany Canada Israel 80 OECD United States Chile 75 Greece Italy 70 65 60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 4 Source: OECD & CBS (Israel)

The employment rate has increased for all population groups, but large differences among groups remain Employment rate by population groups, 2001-2017, ages 25-64 Men Women % % 100 100 90 90 Jewish Non-ultra-Orthodox Jewish Non-ultra-Orthodox 80 80 OECD 70 70 Arab 60 OECD 60 50 50 Ultra-Orthodox Ultra-Orthodox 40 40 30 30 Arab 20 20 10 10 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 5 Source: CBS, OECD

The increase in employment rates is most pronounced at the lowest income quintile Average number of employed people per household Ages 25–54, by net income quintiles, 1997–2016 Average # of wage earners per household 2.25 Other quintiles 2 1.75 Second-lowest quintile 1.5 1.25 Lowest quintile 1 0.75 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 *Includes part-time positions 6 SOURCE: Based on Labor Force Surveys of the Central Bureau of Statistics (Bank of Israel Annual Report 2017).

Large gaps remain in hourly wages among the quintiles Ratio of hourly wage for each quintile vis-à-vis the highest quintile Ages 25–54, 2003–16 ratio 80 Second highest quintile 70 60 Third quintile 50 Second lowest quintile 40 30 Lowest quintile 20 10 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 7 SOURCE: Based on Labor Force Surveys of the Central Bureau of Statistics (Bank of Israel Annual Report 2017).

For the lowest quintile, labor income as a share of total net income has increased markedly Labor income as share of total equivalized net income By net income quintiles, households, ages 25–54 % 100 Upper quintile 90 86 80 Middle quintile 80 78 70 61 60 Bottom quintile 50 40 44 30 35 20 10 0 1997 2000 2003 2006 2010 2012 2016 8 SOURCE: Based on Labor Force Surveys of the Central Bureau of Statistics (Bank of Israel Annual Report 2017).

The largest gains in disposable income are in the 2 nd and 3 rd quintiles Net equivalized household income, by net income quintiles, Quintiles Index 2003=100 190 2 3 4 170 1 5 150 130 110 90 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 9 Source: Bank of Israel based on CBS data

To Sum Up • Reducing progressive income tax and welfare payments incentivized an increase in labor force participation, but also reduced the level of income redistribution. • This policy resulted in a reduction of market income inequality due to an increase in the number of breadwinners per household in the lowest quintile. • However, until 2010, net income inequality rose due to the reduced redistribution policy. • In recent years, with the stabilization of income redistribution policy, the continuing reduction in market income inequality also translated into a decline of inequality in disposable income. 10

Gini Index, for disposable and market income, and the contribution of taxes and transfers to lower inequality, 2001-2016 Gini 0.55 32 Gini - market income (left scale) 0.53 30 0.51 0.49 28 Government policy contribution to 0.47 lower inequality (right scale) 0.45 26 0.43 24 0.41 Gini - disposable income ( left scale) 0.39 22 0.37 0.35 20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2011 11 Source: Bank of Israel

The Productivity Challenge

Headwinds to future potential growth Global trends Demographic trends and exhaustion of the increase in schooling years Thousand of Index 100 = 2003 NIS 280 Simulation for WT and GDP growth Estimates for GDP growth under different 2003-2020 scenario assumptions, 260 2000-2059, 2010 Prices 240 1.4% Pace of pre-crisis 220 WT growth Convergence of 200 World trade education and participation 180 0.8% Pace of 2000-2014 160 World GDP 140 0.5% 120 Without convergence of education 100 and participation 80 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 13 Source: OECD ,The Global Trade Slowdown: Cyclical or Structural, IMF, WEO Economic Outlook No 95 - May 2014 - Long-term baseline projection.

14 Score 67 72 77 82 87 92 100 120 140 20 40 60 80 0 Greece Chile Luxemburg Israel 2007 2018 Australia Israel’s rank Turkey Latvia Ireland Chile Slovak Republic skills & infrastructure, and overburdening regulation Key factors holding back productivity include deficiencies in Hungary Israel Poland General government capital stock #26 #54 Germany Belgium United Kingdom Belgium Mexico Turkey Czech Republic 2015, in GDP percent Hungary Iceland Canada Italy Norway Estonia Slovak Republic Switzerland Korea Slovenia OECD Austria Japan Slovenia United States Switzerland New Zealand Spain Netherlands Source: BoI , Doing Business, OECD, IMF. Italy Netherlands France Sweden Total score (0-100) in 2018 France Doing Business index Czech Republic Portugal Greece Portugal Finland Denmark Spain Mexico Luxembourg Poland Japan Iceland 265 270 275 280 285 290 295 300 Austria Poland Germany Problem-solving in technology-rich environment Israel Latvia Russia Canada skills according to PIAAC survey Ireland Ireland UK Lituania Belgium Australia Aged 15+, 2015 Slovak… Finland Germany Estonia OECD Sweden Korea Norway Austria United Kingdom Netherlands United States Norway Korea Sweden Denmark Finland New Zealand Japan 14

The level of skills relevant to the labor market is relatively low in all education groups Skills level in Israel and OECD countries, by education levels Score 2014 320 300 280 260 240 220 200 Pre-High School High School Secondary Bachelor's Degree Master's degree + OECD Average Israel 15 Source: BOI

There are large gaps in the average skill level between the various population sectors Achievements in PIAAC by population groups, 2014 Score 290 270 250 230 210 190 170 150 Problem Solving in Technology- Numeracy Literacy Rich Enviroments Non-ultra-Orthodox Jews Ultra-Orthodox Arabs 16

Increasing productivity is the key to supporting inclusive and sustainable growth � Increase human capital: Education and vocational training, including expansion of affirmative action � Integrate population groups into the labor market: Active labor market policy and tailoring the adequate policy for each group � Remove obstacles to growth and productivity • Infrastructure • Business environment • Competitiveness • Promote reforms (ports, electricity, and the natural gas and energy industry) � Increase quality and efficiency of public service systems (health, long-term care, welfare, pension, etc.) 17

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