The Labor Market as an Engine for Growth and Poverty Reduction

Two main processes characterize the labor market in Israel since the beginning of the 2000s: the major increase in employment among individuals and households, and the increase in households’ labor income. The increase in employment has encompassed all population groups, education levels and age groups; however, a breakdown of the increase in employment shows that the most significant increase has occurred among the ultra-Orthodox Jews and the Arabs, individuals with low levels of education and older workers (aged 55-64). The main question addressed in this policy paper is what has caused the reversal in trend and the significant increase in the employment rate since 2002, why was this increase biased towards groups with low earning potential, and what was the effect of the growth in employment on wages, income and poverty.

Estimating employment and wage equations, we show that most of the increase in the rate of employment can be attributed to a series of policy measures to increase work incentives and in particular the reduction in income supplements and the child allowance. The increase in the rate of employment was larger for a particular type of household to the extent that the reduction in its social welfare payments was larger. In addition, the increase in individuals’ level of education is responsible for about 20 percent of the increase in the rate of employment among men and about 40 percent among women.

A main result of the growth in employment is increased labor and disposable household income, implying that the positive effect of increased employment on disposable incomes was larger than the negative effect of reduced welfare payments. Labor income rose faster for ultra-Orthodox and Arab households while disposable income rose more slowly for these households, thus the gaps in labor income between the groups have narrowed while the gaps in disposable income have widened. Similarly, the poverty rate according to labor income fell continuously from 2002 to 2015, while the poverty rate according to disposable income started to decline later.

In light of these findings, we a policy that will focus on the labor market and will continue to position it as an engine that will bring about both growth in output and a reduction in poverty, using two types of policy tools - continuation of the increase in work incentives, and implementation of measures to raise productivity and increase workers’ human capital. Such policy will maintain the growth trend in employment in general and among the lower employment groups in particular, and will also increase earning ability in general and that of the lower half of the distribution in particular, thus contributing to the welfare of households, growth and economic resilience.