Households' Labor Income - Challenges, Scenarios, and Policy

This paper discusses the changes in households’ labor income over the last twenty years, as well as possible scenarios for the coming years, and outlines the required policy to support the continuing growth of the Israeli economy and the closing of gaps between population groups.
Over the last twenty years:
• Household’s labor Income has increased across all population groups and disparity between the various groups has decreased, yet it is still significant; as of 2021, the income of Haredi (ultra-Orthodox) households (in which the head of the household is aged 25-44) is around half of that of non-Haredi Jewish households, while the income of Arab households stands at around 60 percent.
• This gap stems from the low employment rates of Arab women and Haredi men, as well of the low employment quality (wages) of Arab and Haredi men and Arab women. These outcomes are all strongly affected by educational attainment level.
• The share of dual-income couples has more than doubled among Arab and Haredi households, however it is still around a half of their share among non-Haredi Jewish couples.
• There has been an increase in the share of post-secondary education graduates (either academic or non-academic), however the gaps are still large – their share among Arab men is less than half of that of non-Haredi Jewish men, among Haredi men it is around a third, and among Arab women it is around 60% of that of non-Haredi Jewish women.
• The increase in households income, in employment and in the wages of employees is a result of a comprehensive, consistent, and continuous government policy which started in 2003, working to boost incentives for work and to encourage education, while focusing on low-income earners and large families.
Possible scenarios for future changes in employment and education, and their impact on labor income (which approximates their impact on GDP and growth):
• A demographic shift in population distribution -> a 5% decrease in households’ labor income, a major challenge for the growth of the economy.
• Closing the employment rate gaps within each educational attainment level -> a 1% increase in households’ labor income, closing one quarter to one third of income gaps.
 
• Closing educational attainment gaps -> a 3% increase in overall labor income, closing one third to one half of the gaps.
• Closing education gaps and employment gaps within each educational attainment level -> an 8% increase in overall labor income, closing over a half of the gap between Arabs and non-Haredi Jews, and 80% of the gap between Haredi and non-Haredi Jews; this is probably an underestimation, as the actual impact is likely to increase households’ income even further.
• For Arab households the contribution of men and women toward the increase in labor income is similar, whereas For Haredi households the increase in labor income stems almost exclusively from men.
• For Arab households the gaps compared to non-Haredi Jewish households are explained, to a similar extent, by employment rate within each educational attainment level and by educational attainment level, whereas for Haredi households, the differences in educational attainment level account for a larger proportion of the gap.
The required policy:
• It is more crucial than ever to cut budgets which do not promote growth and to take steps to encourage employment and education – a primary tool for addressing the economic and national-security crisis and the expected increase in government expenditure.
• If an appropriate policy is enacted, current positive trends can continue; its absence – and particularly the implementation of negative incentives for employment and education – may halt the current trends and even reverse them.
• In order to reduce gaps and enhance growth, it is important to also enact policy measures which would raise the population’s educational attainment level, rather than focusing solely on measures which impact employment.
• In Arab society there is a need for policy measures which would target both men and women, while in Haredi society the policy should focus on men.
 
• Investment in employment and human capital through imparting employable skills and providing incentives, specifically:
o Improving education quality – preparing all students for integration in post-secondary education and employment; incentives and funding for the tuition of Hebrew, English, mathematics, and digital skills.
o Bridging gaps in basic skills and imparting soft skills in the school system, as well as in post-secondary frameworks for populations who emerge from the school system without these skills, including Haredi educational institutions.
o Improving the quality of tertiary vocational and technological training programs, and expanding the scope and variety of vocational and technological training programs available for Arab and Haredi societies, including Practical Engineering studies within Yeshivas.
o Cutting down allowances which are not conditioned on employment and on full utilization of earning capacity.
o Integrating Haredi men in consensual military service, and establishing avenues for national-civic service for Haredi and Arab societies.
• Comprehensive implementation of the aforementioned measures will boost education and employment, thereby also raising households’ labor income and improving employment quality (wages and productivity), which in turn will contribute to inclusive growth, social mobility, and poverty reduction.