OECD Reviews of Labour Market and Social Policies

2074-3408 (online)
2074-3416 (print)
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This series of country-specific reviews of labour makret and social policies examines policies and institutions and makes recommendations for improvements.
OECD Reviews of Labour Market and Social Policies: Israel

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20 Jan 2010
9789264079267 (PDF) ;9789264079250(print)

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This 2009 review of Israeli labour market and social policy finds that Israel has enjoyed strong economic growth over the last decade, but the benefits of this are being distributed unevenly. Poverty rates are higher than in any OECD country, which reflects the deep social and economic divides in Israeli society. On one side, there is the general Jewish population with poverty and employment rates similar to those of OECD countries. On the other, there are Arabs and ultra-Orthodox Jews, or Haredim, who have large families, poor educational outcomes and low employment rates. As a result, just over half of Arab and Haredi families live in poverty. Almost half of all children entering primary school in Israel come from one of these two groups, so profound policy changes are needed to prevent future generations of Arabs and Haredim from being scarred by the disadvantages these population groups face today. 

Tackling the root causes of such deep inequality would greatly enhance the dynamism of the Israeli economy. Greater investment to help workers improve their skills is urgently needed. Welfare-to-work programmes need to be restructured and extended, including by reducing child benefits paid to families who are able to work but do not and by sharply increasing the Earned Income Tax Credit to tackle in-work poverty more effectively. And access to means-tested income supports for the neediest should be improved. Israel has failed to enforce many aspects of its labour legislation, contributing to poor employment conditions for many resident, cross-border and foreign low-income workers. Rules to overcome discrimination against all workers need to be enforced, and the illegal hiring and employment of temporary foreign workers need to be stamped out.  

Progress has been made in many of these areas. New legislation and initiatives have been introduced. The challenge is how to make reform work in practice. The consequences of not doing so would be devastating.

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  • Assessment and Recommendations
    Israel has enjoyed strong economic and population growth over the last 20 years. Apart from the cyclical slowdown in the early 2000s and the current downturn, GDP grew by at least 4% per annum since the early 1990s. In 1990-91 immigration, largely from the former Soviet Union, amounted to around 200 000 people per annum, or 8.2% of the population. Together, "Russian immigration" and high fertility (the total fertility rate was 2.9 children per women in 2007 compared with an OECD average of 1.6), are key drivers of the rapid population growth in Israel from 4.5 million people in 1990 to almost 7.4 million people by the end of 2008. GDP per capita is now 80% of the OECD average.
  • High Poverty and Low Employment
    Poverty rates in Israel are higher than in any OECD country. The high incidence of poverty is linked to high rates of non-employment and a high incidence of low-paid work. Many low-skilled Jewish and Arab workers, Palestinian cross-border workers and workers from overseas are employed at wages close to or even below the minimum wage, and the presence of cheap foreign labour exerts downward pressure on wages at the bottom end of the distribution.
  • Reforming Labour Market Institutions
    Israel needs further reform to improve the balance between labour market flexibility and employment security. Israeli labour market institutions have evolved over the past decades as the centralised bargaining system based on a high degree of unionisation has fragmented since the early 1980s. Wage bargaining is now decentralised, except in the public sector. The share of workers not covered by collective bargaining has increased, in part due to higher employment under non-standard contracts. Employment protection legislation (EPL) is not particularly strict in Israel, but the enforcement of labour laws is lax. Measures have been taken in recent years to improve enforcement by the labour inspectorate, but they are insufficient, which is particularly damaging to those workers not covered by standard collective bargaining. The public employment service is under-resourced and understaffed, which prevents it from providing effective support to all job-seekers.
  • Increasing Employment among Low-qualified Workers
    Increasing employment among low-skilled individuals has been a major policy objective in Israel for some years. Sizeable cutbacks in welfare benefits in the early 2000s, while motivated by public finance concerns, were also seen as a way to reduce dependency on welfare among the low-skilled groups. Overall, the financial incentives to work provided by the tax and transfer system are strong. This is because of low taxation, relatively low benefits for those out of work, and the availability of income support for those in work. In practice, however, access to benefits is limited, due to very strict eligibility conditions for both unemployment benefits and income support. Since 2005, a pilot welfare-to-work programme has been running in four regions with large minority populations, which was initially tilted towards getting participants off the welfare rolls rather than into sustainable jobs. Reforms implemented in 2007 have improved the incentive structure for private operators, but problems remain. For example, competition among the operators is limited and the payment structure varies little with the characteristics of clients. A pilot earned income tax credit has also been in place since 2008 in the same regions, but the amounts are currently too small for it to ensure a decent standard of living and reduce in-work poverty.
  • Poverty and Employment Issues for Minority Groups
    This chapter looks at Israel’s social chasm between the majority of Jews in Israel’s population and the Arab and ultra-Orthodox minorities. The chapter starts by setting out the vast differences in socio-economic outcomes between these minorities and the rest of the population. These are explained in part by differences in education systems and infrastructural investment in the different communities, but also cultural influences which affect family size and employment behaviour. Socio-economic outcomes of the Arab minority are also affected by limited investment in active labour market policies, unequal access to social services, and failure to implement legislative provisions to tackle discrimination and apply employment quotas. The male ultra-Orthodox Jews or Haredim engage in religious studies rather than labour force participation. Public policy supports this lifestyle by means of exemptions from military service, stipends for religious students and recently increased child allowances. This chapter ends with a summary of the main conclusions.
  • Preparing for Population Ageing and Fighting Poverty among the Elderly
    This chapter looks at Israel’s pension, disability and long-term care policies in the light of demographic trends and the relatively high poverty rates amongst elderly people in Israel. The basic pension system provides a low level of support to nearly everyone, and additional public pension payments are either means-tested or depend on length of service. At their maximum public pension benefits exceed the poverty income threshold. However, strict means-testing limits access to income supplements, so that only a quarter of the elderly in Israel receive the maximum payment, while another quarter has incomes below the poverty line.
  • Better Managing Labour Migration
    Israel has a temporary labour migration scheme which provides a significant part of its labour force. It has recognised a need to reform the complex labour migration system to ensure that temporary foreign workers are not recruited when suitable local workers are available. The system, despite some procedural changes that have led to improvement of respect for contractual conditions, still leaves significant room for illegal practices by recruitment agencies and employers. This chapter considers the principal issues in temporary labour migration management in Israel in light of Israel’s avowed policy objectives and OECD experience.
  • Drawing Lessons from a Country Built on Immigration
    Israel, a country founded on immigration, received unprecedented numbers of permanent immigrants in the 1990s, making it a laboratory for studying processes of labour market integration of immigrants. It has been largely successful in achieving the labour market integration of these immigrants: employment rates have reached or surpassed those of natives and prior immigrants, although gaps in wages persist. Some groups have, however, not been integrated. While permanent immigration rates have fallen in the past decade to levels below those of most OECD countries, Israel continues to invest heavily in immigrant absorption and offers a range of specific policies for facilitating integration, both for the highly skilled and the least educated immigrants.
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