The call for social justice has again become a leading cry in public discourse. In the economy, injustice is seen in the growth of inequality between families, and in the fall in the incomes of the weakest in society. So what has happened with incomes and inequality in Israel and in the world?
Many economic studies, particularly the 2011 OECD report, indicate that, over the past 25 years, a steady process of growth in inequality of incomes has taken place in almost all developed countries. The real disposable income of an average household in the 27 developed countries rose from the mid 1980s until 2009 (about 25 years) by 1.7% a year. The income of the bottom 10% rose by 1.3% a year, whereas the income of the top 10% rose by 1.9% a year. The income gap between the top 10% and the bottom 10% is nine to one.
In Israel, the inequality growth curve is the worst among all the developed countries. The average income of an Israeli family rose by exactly the same as the average for the 27 developed countries, and so the average standard of living in Israel remained same in relation to that of the developed countries. However, in Israel, the position of the bottom 10% worsened, with its income actually declining by 1.1% a year. Meanwhile, for the top 10%, incomes rose by 2.4% a year, so that the gap between them and the bottom 10% grew by 3.5% a year, and now stands at fourteen to one. In the other developed countries, the gap grew by only 0.6% a year. Israel has become the social injustice champion of the developed world. Why?
Unfortunately, to this day no comprehensive, thorough study has been carried out in Israel examining this question. From studies done in the rest of the world, one can point to a number of important reasons. The growth in inequality mainly arises from the labor market. In Israel, inequality in gross and net pay has risen substantially, and there is also a continuing, extraordinary decline in the employment and working hours of those with low employment qualifications.
Globalization, technological improvements, and weak regulation in the labor market, are the three main factors in the widening inequality in earnings from work. Global integration, which has brought an influx of poor countries into international trade, causes a rise in earnings for skilled workers and a fall for the rest. This process has been accompanied in recent years by technological improvements that benefit the educated. In countries where this process has not been matched by legislation and government policy that protect the employment and wages of the unskilled, gaps have widened at a greater rate.
In Israel, a splendid high-tech industry has grown up, in which the workers compete with their counterparts in Silicon Valley in California. At the other end of the scale, the uneducated workers compete with Chinese building laborers, Thai agricultural laborers, and Philippine care givers. Labor laws and their enforcement in defense of unskilled workers have become weakened, and so an industry of contract workers and part-time employment has developed, contributing to the decline in wages, hours of work, and jobs for unskilled Israelis.
The challenge of dealing with these processes is huge. Research shows that the main way to change the trends is through improvement in the capabilities and human capital of the low-skilled working-age population. The main policy tool is massive government intervention in professional training at the workplace, in protection for weak workers and continued support for improvement of their professional ability. For that, a labor ministry such as exists in every developed country is required.
Globalization, the integration of capital markets, and the increasing competitiveness and flexibility of the product and labor markets, represent an opportunity to boost economic growth. These phenomena need to be matched by active policy in the labor market, stressing improvement in the capabilities and bargaining power of low-skilled workers. Otherwise, economic growth will be harmed, and the protest will be liable to lead to social and political unrest, and that will lead to bad decision making.
Professor Zvi Eckstein is dean of the School of Economics at The Interdisciplinary Center Herzliya, and was formerly Deputy Governor of the Bank of Israel.
Published by Globes [online], Israel business news - www.globes-online.com - on February 2, 2012
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