Flug: OECD puts troubling mirror before us

Karnit Flug  photo: Eyal Izhar
Karnit Flug photo: Eyal Izhar

The Governor of the Bank of Israel says Israel is not doing enough to reduce the highest rate of poverty of any OECD member.

"Israel still trails behind the developed countries in its high poverty rates and low productivity," Governor of the Bank of Israel Karnit Flug said today in her speech at the annual conference of the Aaron Dovrat Institute for Economic Policy at the Herzliya Interdisciplinary Center in response to the question posed by the conference organizers: "Is the government addressing the challenges of growth and reducing poverty?" Her answer was mixed: "Yes, but not enough."

Flug stated, "We have come a long way in reducing inequality and poverty in recent years, based on the encouraging of employment, but rates of inequality in net income and poverty rates are still high by international comparison. In addition, productivity is low and rising slowly, so productivity gaps with the developing countries are not being closed."

Flug said that the way to raising the standard of living for the general public and narrow poverty gaps was to encourage sustainable growth through a strategy of encouraging employment among all population groups (especially among haredi (ultra-Orthodox Jews) men and Arab women) and improve productivity in the long term.

"In order for productivity to increase consistently, the level of human capital should be raised and gaps in it should be closed, including in basic expertise and technological qualifications. Infrastructure should be improved, especially public transportation, and the business environment should be upgraded by streamlining regulation and reducing bureaucracy.

"Besides all of this, reducing poverty requires the allocation of resources to dealing with population sectors whose inclusion in employment and/or earning capability is limited, especially senior citizens and people with limited employment capability. " Flug added, "Our unemployment benefits are painfully stingy; they do not enable people to find suitable employment that will realize their earning potential."

Flug went on to state that inequality measures in net income and poverty measures had begun to rise in the years following the major cut in transfer payments in 2002-2003 and had begun to fall starting in 2010. Despite the reduction, poverty rates in Israel are still higher than in all other OECD countries. Segmenting the population by groups shows that poverty is highest among the Arab and haredi population and families with no wage earners in the labor age groups. In contrast to the past, poverty is not absent even in families with two wage earners.

"The decline in inequality and poverty reflects to a large extent the entry into the labor market of population groups whose employment rates were low, including Arab women and haredi men. At the same time, even after the increase in employment rates among these groups, they are still especially low, and the increase in employment among haredi men has bogged down in recent years. Higher employment rates among low-income population groups is reflected in the number of wage earners per household, which rose from 1.1 at the beginning of the century to 1.5 in 2016," Flug said.

Flug also said, "Increased employment among groups lacking the necessary expertise, meaning employees with limited earning power, is reflected in a sharp rise in poverty rates among families with two wage earners. 15% of Arab families with two wage earners are below the poverty line, and the rate among haredim is 27%."

In the second half of her speech, Flug compared Israel to other OECD countries. "Joining the OECD has put a troubling mirror before us. Productivity in Israel is very low, reflected in both qualifications and infrastructure. These gaps result from excessive burdensome regulation in Israel."

Flug explained, "The high proportion of low-paid employees reflects to a large extent relatively low average productivity, meaning the output per work hour. While per capita GDP grew at the average OECD rate at the beginning of the century and the rate of participation in the labor force rose at a slightly higher rate than the OECD average, output per work hour went up only slightly and did not narrow the 27% gap in output per work hour between us and the OECD average.

"Looking ahead, the challenge to increasing productivity is likely to grow, given the emerging slowdown in world trade, which acts to retard growth in Israel. Another challenge results from deriving benefit for human capital from in the increase in the number of years of schooling and the demographic trends. These local factors are likely to hamper growth."

Among other things, low productivity is attributable to the inferior level of education and training in Israel in comparison with OECD countries. "The gap in expertise in language skills, quantitative capability, and functioning in a digital environment between us and the OECD average is prominent in every education group, and also stands out between population groups. The Program for International Student Assessment (PISA) tests indicate a future gap in expertise. Israel has the highest variance, in other words, the widest gaps in educational achievement,” Flug stated.

Flug claims that the solutions to the existing situation lie in "improving human capital through education and professional training, increasing the number of schooling years to nearly the maximum possible, improving the quality of education, and giving everyone basic skills. Given the especially low achievement among students from disadvantaged backgrounds, and the low spending per student in terms of purchasing power parity (PPP) by international comparison, more money should be allocated with a focus on affirmative action without harming the other students. Adding study hours and providing incentives for good teachers to work in (geographically and socially) outlying areas are effective ways of improving the achievement of students from disadvantaged backgrounds."

Flug added, "Population groups should be included in the labor market through an active policy in the labor market and adapting policy tools to each group. Barriers to growth and productivity through long-term planning and removal of barriers to infrastructure investment (above all public transportation in metropolitan areas) should be removed. Regulation should be improved and bureaucracy reduced. Competition should be promoted where necessary and reforms should be pushed (ports, electricity, the natural gas industry, and energy).

"Even if we succeed in creating conditions for sustained growth, reducing poverty requires also addressing population groups with limited ability to enter the labor market and earning power through suitable incentives for encouraging employment, especially cutting the tax on benefits for people with disabilities and raising the retirement age.

"The retirement age should be adjusted to the increase in life expectancy, especially for women. In the long term, the compulsory pension law reduces poverty among senior citizens. In the short term, income supplements for low-income senior citizens should be increased. The labor grant for those of working age earning low incomes should be increased. Job training and placement services should be improved, unemployment benefits should be increased to facilitate looking for a suitable job, and employment capability tests for income supplements should be improved."

Published by Globes [online], Israel business news - www.globes-online.com - on May 24, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Karnit Flug  photo: Eyal Izhar
Karnit Flug photo: Eyal Izhar
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