Momi Dahan - The Evolution of Income Inequality - Israeli Exceptionalism

Income inequality in Israel Momi Dahan Hebrew University

Market income inequality in Israel 0.54

0.52

0.50

0.48

0.46

0.44

2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979

0.42

Searching for explanations of the inverted U-shape evolution

Explanations that are not in line with inverted U-shape (+) SBTC (+) Globalization (+) Labor market institutions 1) labor union coverage 2) decentralization of collective agreements 3) minimum wage

20

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

The evolution of minimum wage (minimum to average wage ratio, percent)

55

50

45

40

35

30

25

Explanations that are consistent with inverted U-shape (+, -) Unemployment (+, -) Mass immigration (+, -) Immigrant workers

Unemployment and market income inequality

0.00

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Immigration

(share of the population, percent)

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Immigrant workers (share of total employees)

14

12

10

8

6

4

2

The correlates of market income inequality Unemployment Welfare state generosity index

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

1.02*** (0.184)

1.06*** (0.232)

0.80*** (0.153)

0.60*** (0.197)

1.03*** (0.145)

0.83*** (0.094)

0.68*** (0.113)

0.86*** (0.090)

−0.465 (0.473)

Direct statutory tax rate index

−0.074*** (0.012)

Minimum wage/average wage

25.021** (10.660) 0.245*** (0.081)

Participation rate Arab coverage rate in income survey

0.324*** (0.031) 0.825*** (0.150)

Share of immigrant workers Technical change in income/labor force survey Constant Adjusted R2 No. of observations

3.219*** (0.488) 41.470*** (1.403)

43.539*** (2.298)

50.173*** (2.057)

34.190*** (5.167)

28.018*** (4.048)

38.197*** (0.694)

37.298*** (1.130)

40.909*** (0.771)

0.495

0.426

0.724

0.265

0.606

0.855

0.744

0.791

35

34

35

28

35

32

35

35

Net income inequality in Israel

Market and net income inequality

0.40

0.54

0.38

0.52

0.50

0.36

0.48

0.34

0.46

0.32

Market income inequality Net income inequality 0.44

0.30

0.42

2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979

Redistribution and inequality (-) Income tax reducing inequality higher effect on net inequality (?) Income assistance widening market inequality ambiguous effect on net inequality

10

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1997* 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Welfare Generosity Index

(The share of transfer payments in net income based on income survey)

24

22

20

18

16

14

12

60

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Statutory Income Tax Index

140

130

120

110

100

90

80

70

Unemployment and net income inequality

Income inequality in Israel in comparative perspective

0.50

0.00 Ireland Greece Portugal United Kingdom Spain Italy Estonia Germany United States France Latvia Chile Austria Finland Belgium Japan Australia Luxembourg Mexico OECD Slovenia Poland Czech Republic New Zealand Hungary Israel Sweden Denmark Canada Netherlands Slovak Republic Turkey Norway Switzerland Iceland Korea

Market income inequality in OECD (2013 or the latest available year)

0.70

0.60

0.47 0.46

0.40

0.30

0.20

0.10

Market income inequality in OECD (OECD is composed of 16 countries for which data are available for the last decade) 0.53

Israel OECD average

0.52 0.51 0.50 0.49 0.48 0.47 0.46 0.45

2013

2012

2011

2010

2009

2008

2007

2006

2004

0.43

2005

0.44

Israel and US Market Income Inequality 0.55

0.50

0.45

0.40

0.35 United States

0.30

Source: OECD Stat

Israel

Israel and UK Market Income Inequality 0.55

0.50

0.45

0.40

0.35 United Kingdom

0.30

Source: OECD Stat

Israel

Israel and France Market Income Inequality 0.55

0.50

0.45

0.40

0.35 France

0.30

Source: OECD Stat

Israel

Israel and Germany Market Income Inequality 0.55

0.50

0.45

0.40

0.35 Germany

0.30

Source: OECD Stat

Israel

0.40

0.35

0.00 Chile Mexico United States Turkey Israel Estonia United Kingdom Lithuania Latvia Spain Greece Portugal Australia New Zealand Japan Italy Canada OECD Ireland Korea Poland Switzerland France Germany Hungary Netherlands Sweden Luxembourg Austria Slovak Republic Belgium Czech Republic Finland Slovenia Denmark Norway Iceland

Net income inequality in OECD (2013 or the latest available year)

0.50

0.45

0.37 0.32

0.30

0.25

0.20

0.15

0.10

0.05

Market income inequality in OECD (OECD average is composed of 16 countries for which data are available for the last decade) 0.40 0.38 0.36 0.34 0.32 0.30 0.28 0.26 0.24

Israel

OECD

2014

2013

2012

2011

2010

2009

2008

2007

2006

2004

0.20

2005

0.22

Israel and US Net Income Inequality 0.45

0.40

0.35

0.30

0.25 United States Israel 0.20

Source: OECD Stat

Israel and UK Net Income Inequality 0.45

0.40

0.35

0.30 United Kingdom Israel 0.25

0.20

Source: OECD Stat

Israel and France Net Income Inequality 0.45

0.40

0.35

0.30

0.25 Franc e Israel 0.20

Source: OECD Stat

Israel and Germany Net Income Inequality 0.45

0.40

0.35

0.30

0.25 German y Israel 0.20

Source: OECD Stat

Israel distinctiveness • Cultural preferences • Restricted opportunities • Unemployment • Redistribution policy

Labor force participation rate in Israel & OECD (age 15-64, percent) 73

72

71

70

69

Source: https://data.oecd.org/emp/labour-force-participation-rate.htm

2015

2014

OECD

2013

2012

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

67

2011

Israel

68

Unemployment rate in Israel & OECD (age 15-64, percent) 12

10

8

6

4

Source: oecd.stat.

2015

OECD

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0

Israel

2014

2

Redistribution policy Social protection (of GDP)%

Direct taxes (of GDP)%

OECD

Israel

OECD

Israel

23.8

16.7

20.5

19.1

1995

20.8

16.2

20.5

19.0

2002

22.0

13.8

21.1

16.0

2014

25

0 Chile Mexico Turkey United States United Kingdom Portugal New Zealand Israel France Greece Estonia Italy OECD Australia Japan Spain Luxembourg Canada Ireland Germany Poland Switzerland Hungary Netherlands Korea Sweden Czech Republic Austria Finland Iceland Belgium Denmark Norway Slovenia Slovak Republic

The net income share of top decile in OECD (2013 or the latest available year)

45

40

35

30

25.6 24.6

20

15

10

5

8

6

0 Czech Republic Denmark Iceland Finland Slovenia Slovak Republic Norway Germany Netherlands Belgium Sweden Switzerland France Luxembourg Austria Ireland Hungary Poland OECD New Zealand Canada United Kingdom Australia Portugal Estonia Italy Korea Spain Japan Greece Turkey Israel United States Chile Mexico

The net income share of the bottom quintile in OECD (2013 or the latest available year)

12

10

7.7

5.5

4

2