Demographics and Israels Economy

8/7/2019 Demographics and Israels Economy

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" " Herzlia Herzlia ConferenceConference" "

Prepared byPrepared by

Dr.Dr. YacovYacov SheininSheininTranslated from HebrewTranslated from Hebrew



22

The Long Term Ramifications of GDP GrowthThe Long Term Ramifications of GDP Growth

and the Economic Burdenand the Economic Burden

Analysis of the low level of economic development inAnalysis of the low level of economic development in

Israel reveals three key causes:Israel reveals three key causes:

1.1. A low rate of participation in the labor force. A low rate of participation in the labor force.

2.2. A high fertility rate (natural increase). A high fertility rate (natural increase).

3.3. A high proportion of population under 15. A high proportion of population under 15.

Due to these factors, GDP per capita remainsDue to these factors, GDP per capita remainslow, the budget deficit is high, the tax burden islow, the budget deficit is high, the tax burden is

one of the highest in the developed world and theone of the highest in the developed world and the

Israeli economy has difficulty allotting resourcesIsraeli economy has difficulty allotting resources

for fixed asset investments.for fixed asset investments.



33

The Effects of Demographic Composition onThe Effects of Demographic Composition on

GrowthGrowthGDP per capita is much lower in Israel compared withGDP per capita is much lower in Israel compared with

developed countriesdeveloped countries -- $16,400$16,400 in Israel versusin Israel versus $37,500$37,500

in the U.S. andin the U.S. and $27,500$27,500 in the EU.in the EU.

From 1975From 1975--1999 (before the recent wave of terror and1999 (before the recent wave of terror and

the collapse of the Hithe collapse of the Hi--Tech bubble in 2000), GDP perTech bubble in 2000), GDP per

capita grew by an annual average of capita grew by an annual average of 1.6%1.6% in Israel versusin Israel versus

2.2%2.2% in the U.S. andin the U.S. and 1.7%1.7% in the E.U.in the E.U.

If this trend continues, the gap between Israel and theIf this trend continues, the gap between Israel and thedeveloped countries will widen and may result in a socialdeveloped countries will widen and may result in a social

crisis.crisis.



44

Population BreakdownPopulation Breakdown

We have divided Israel We have divided Israel’’s population into threes population into threebroad categories, based on labor forcebroad categories, based on labor force

participation, the natural rate of increase and aparticipation, the natural rate of increase and atendency to form an identifiable category.tendency to form an identifiable category.

HaredimHaredim (Ultra(Ultra--Orthodox Jewish)Orthodox Jewish) –– 6% of 6% of

population.population.

ArabArab –– 19% of population.19% of population.

General & Other General & Other –– 75% of population.75% of population.



55

Characteristics per Household by CategoryCharacteristics per Household by Category

2030 Estimates2030 Estimates

12.2

54.3%

28.4%

3.4

2.9

Total

9.6

39.0%

41.2%

5.0

4.4

Arab

12.614.5Average Yrs. Education

58.0%45.0%Participation in the Labor

Force

23.6%

3.2

2.3

General

47.4%% of Pop. below Age 15

4.4Persons per Household

5.8Children per Woman

Haredim



66

Economic Data by CategoryEconomic Data by Category2030 Estimates, NIS2030 Estimates, NIS ’’000000’’ss

1191285275Of which:

Income, not from Allowances

14%

19

138

75

216

Total

24%

24

99

32

158

Arab

12%40%

% of Income from

Allowances

1735Income, from Allowances

145

89

226

General

87Income per Household, Total

35GDP per Capita

169Production per Employee

Haredim



77

The Effects of Demographics on GrowthThe Effects of Demographics on Growth

The Arab andThe Arab and HarediHaredi populations have a natural rate of increase of populations have a natural rate of increase of aboveabove 3%3% a year, compared witha year, compared with 1%1% in the general population.in the general population.

Since 1970, participation in the labor force has increased fromSince 1970, participation in the labor force has increased from 50%50% totooverover 54%,54%, as a result of waves of immigration and the entry of womenas a result of waves of immigration and the entry of womento the labor force.to the labor force.

The base assumption is that the period of growth through immigraThe base assumption is that the period of growth through immigrationtionhas ended and the fertility rate of the majority population willhas ended and the fertility rate of the majority population will remainremainconstant.constant.

On these assumptions, we forecast a decline in labor forceOn these assumptions, we forecast a decline in labor force

participation, and a change in the trend of increasing participaparticipation, and a change in the trend of increasing participationtionsince the founding of the State.since the founding of the State.



88


We estimate that the decline in the rate of participation inWe estimate that the decline in the rate of participation in

the labor force, and the increase in the percentages of the labor force, and the increase in the percentages of HaredimHaredim and Arabs in the population, will reduce GDPand Arabs in the population, will reduce GDP

growth per capita bygrowth per capita by 0.4%0.4% a year.a year.

In comparison, if the labor force participation rates,In comparison, if the labor force participation rates,

fertility rates and GDP per Employee (wages) of thefertility rates and GDP per Employee (wages) of the

HaredimHaredim and Arabs were to match the general population,and Arabs were to match the general population,

GDP per capita would beGDP per capita would be 20%20% greater.greater.



99

Economic Burden on the General PopulationEconomic Burden on the General Population

The excess taxes, required from the generalThe excess taxes, required from the generalpopulation, to finance social services andpopulation, to finance social services andallowances that flow to theallowances that flow to the HarediHaredi and Araband Arabpopulations.populations.

This economic burden is calculated by theThis economic burden is calculated by thepercentage in gross income (without allowancepercentage in gross income (without allowancepayments) of each household in the generalpayments) of each household in the general

population, and has reached in 2003, by our population, and has reached in 2003, by our calculations, tocalculations, to 9%.9%.



1010

Calculation of Economic Burden on theCalculation of Economic Burden on the

General PopulationGeneral Population

Transfer payments to minorities,Transfer payments to minorities,

(+) Proportion of public expenses to minorities, based on(+) Proportion of public expenses to minorities, based onsize of population (Education, Health).size of population (Education, Health).

((--) Tax revenues , both direct and indirect, from) Tax revenues , both direct and indirect, from

minorities.minorities.

(=) Excess of payments to minorities, as financed by taxes(=) Excess of payments to minorities, as financed by taxesto the general population.to the general population.

The cost of fixed public expenses (Defense, ForeignThe cost of fixed public expenses (Defense, ForeignAffairs, etc.) are not part of the economic burden.Affairs, etc.) are not part of the economic burden.



1111


Arabs andArabs and HaredimHaredim have a natural rate of increase abovehave a natural rate of increase above

3%3% a year, compared with onlya year, compared with only 1%1% for the generalfor the generalpopulation.population.

If current trends continue, the General population willIf current trends continue, the General population will

reach onlyreach only 63%63% in 2030 and participation in the labor forcein 2030 and participation in the labor forcewill fall towill fall to 52.6%.52.6%.

This forecasted decline in labor force participation will be aThis forecasted decline in labor force participation will be a

change in the trend of increasing participation since thechange in the trend of increasing participation since thefounding of the State (since 1970, labor force participationfounding of the State (since 1970, labor force participationhas risen fromhas risen from 50%50% to aboveto above 54%).54%).



1212

Three Possible ScenariosThree Possible Scenarios

Status Quo ScenarioStatus Quo Scenario – – A continuation of current trends of A continuation of current trends of fertility rates, labor force participation, etc.fertility rates, labor force participation, etc.

Investment in Education ScenarioInvestment in Education Scenario – – To implement theTo implement thesuggestions in this presentation to reinforce education (to besuggestions in this presentation to reinforce education (to beexplained), that will bring inexplained), that will bring in--line the characteristics of theline the characteristics of theminority populations with the General population in the areasminority populations with the General population in the areas

of fertility rates, labor force participation and production perof fertility rates, labor force participation and production peremployee.employee.

Alternative ScenarioAlternative Scenario – – A sensitivity analysis to the InvestmentA sensitivity analysis to the Investmentin Education Scenario, that we propose, that will show anin Education Scenario, that we propose, that will show an

equalization of all factors, but fertility rates will remain asequalization of all factors, but fertility rates will remain as perperstatus quo.status quo.



1313

Basic Assumptions for each ScenarioBasic Assumptions for each Scenario

Economic productivity will increase byEconomic productivity will increase by 1.3%1.3% a year, thea year, the

average increase in productivity over the past 25 years, beforeaverage increase in productivity over the past 25 years, before

the current outbreak in terrorism (i.e. 1975the current outbreak in terrorism (i.e. 1975--2000).2000).

General population participation in the labor force will remainGeneral population participation in the labor force will remain

atat 58%.58%.

By 2010, the economy will shift to full employment withBy 2010, the economy will shift to full employment withunemployment remaining atunemployment remaining at 6%.6%.

Fertility rates and immigration ratesFertility rates and immigration rates – – according to the middleaccording to the middle

forecast of the Central Bureau of Statistics.forecast of the Central Bureau of Statistics.Public service spending will rise in proportion to the rise inPublic service spending will rise in proportion to the rise in

GDP but without incurring a budget deficit.GDP but without incurring a budget deficit.



1414

Demographic Composition in 2030Demographic Composition in 2030Status Quo ScenarioStatus Quo Scenario

52.6%

100.0%

100.0%

10,359

Total

39.0%

18.9%

27.3%

2,830

Arab

58.0%45.0%

Labor Force Participation

Rate

73.6%

62.6%

6,489

General

7.5%% of Households

10.0%% of Population

1,040Population (Thousands)

Haredim



1515

Forecast for GDP Growth and the EconomicForecast for GDP Growth and the Economic

Burden in 2030 in Status Quo ScenarioBurden in 2030 in Status Quo Scenario

The economic burden on the General population will reachThe economic burden on the General population will reach17%17% of household income.of household income.

GDP growth per capita will reachGDP growth per capita will reach 1.3%1.3% a year (of whicha year (of which 0.2%0.2%derives from the move to full employment).derives from the move to full employment).

The gap with Europe in GDP per capita will increase byThe gap with Europe in GDP per capita will increase by 23%.23%.GDP per capita will beGDP per capita will be 49%49% of European levels.of European levels.

The gap with the U.S. in GDP per capita will increase byThe gap with the U.S. in GDP per capita will increase by 26%.26%.

GDP per capita will beGDP per capita will be 35%35% of U.S. levels.of U.S. levels.



1616

Significance of the Status Quo ScenarioSignificance of the Status Quo Scenario

The increasing par in economic conditionsThe increasing par in economic conditions

between Israel and the developed economies willbetween Israel and the developed economies willincrease the discord between the Generalincrease the discord between the Generalpopulation and the minorities.population and the minorities.

Increase of the economic burden on the GeneralIncrease of the economic burden on the Generalpopulation will also increase the discord betweenpopulation will also increase the discord betweenthe populations.the populations.

The combination of these two factors may lead toThe combination of these two factors may lead toa social crisis with serious consequences for sociala social crisis with serious consequences for socialrights and welfare policies.rights and welfare policies.



1717

Barriers to GDP Growth in theBarriers to GDP Growth in the HarediHaredi PopulationPopulation

The very low participation rate of men between the ages of The very low participation rate of men between the ages of

2525 -- 4040 is due to barriers related to compulsory militaryis due to barriers related to compulsory military

duty.duty.

The fact that the average wage is onlyThe fact that the average wage is only 75%75% of the averageof the average

wage of the General population, indicates the lack of wage of the General population, indicates the lack of professional training required by the job market.professional training required by the job market.

A very low participation rate of young women between theA very low participation rate of young women between the

ages of ages of 2020 -- 4040 (apparently due to the high fertility rates(apparently due to the high fertility ratesand the lack of suitable daycare).and the lack of suitable daycare).



1818

Barriers to GDP Growth in the Arab PopulationBarriers to GDP Growth in the Arab Population

The rate of participation in the labor force by Arab men declineThe rate of participation in the labor force by Arab men decliness

after age 45 as overafter age 45 as over 50%50% of Arab men are employed inof Arab men are employed in

professions requiring hard physical labor.professions requiring hard physical labor.

The fact that the average wage is onlyThe fact that the average wage is only 70%70% of the average wageof the average wage

of the General population, indicates the low level of education.of the General population, indicates the low level of education.

The usage of cheap foreign labor has repressed, for the nearThe usage of cheap foreign labor has repressed, for the near--

term, the representation in the labor force of populations withterm, the representation in the labor force of populations withlow income levels.low income levels.

The presence of cheap foreign labor acts to prevent a shift toThe presence of cheap foreign labor acts to prevent a shift to

more advanced technologies and methods in labor intensivemore advanced technologies and methods in labor intensivesectors and works to keep the wage level down.sectors and works to keep the wage level down.

There is a very low level of participation of Arab women in theThere is a very low level of participation of Arab women in the

labor force (onlylabor force (only 17%17%) with a very low level of income.) with a very low level of income.



1919

Suggested SolutionsSuggested Solutions

Investment in education, leading to a change in theInvestment in education, leading to a change in thelevels of education, especially for the Arab andlevels of education, especially for the Arab and

HarediHaredi populations.populations.Reformation of the educational system, including:Reformation of the educational system, including:

1. Move to a long learning day.1. Move to a long learning day.

2. A focus on educational areas with a high demand2. A focus on educational areas with a high demandfor work.for work.

Move to a long learning day will allow weak populations Move to a long learning day will allow weak populations

to advance to postto advance to post-- high school education.high school education.

Establishment of sufficient daycare centers for Establishment of sufficient daycare centers for children below age 5, allowing mothers to find fullchildren below age 5, allowing mothers to find full

time employment.time employment.



2020

Suggested SolutionsSuggested Solutions –– Cont.Cont.

Implementation of theImplementation of the TalTal law and offering anlaw and offering anoption of national service, instead of military duty,option of national service, instead of military duty,

will result in a higher level of participation of the will result in a higher level of participation of the

HarediHaredi population in the labor force.population in the labor force.A prohibition on hiring foreign workers atA prohibition on hiring foreign workers atmarginal wages will lead to a switch to the higher marginal wages will lead to a switch to the higher skilled methods being used today for labor skilled methods being used today for labor

intensive sectors.intensive sectors.

We believe, that by taking these steps (and othersWe believe, that by taking these steps (and othersthat will become necessary)that will become necessary) , production per , production per

employee will rise (higher wages) among the minority employee will rise (higher wages) among the minority populations and match the General population. populations and match the General population.



2121

The Investment in Education ScenarioThe Investment in Education Scenario

Educational levels in all populations will be equivalent.Educational levels in all populations will be equivalent.

Production per employee (wages) in the minorityProduction per employee (wages) in the minoritypopulations will rise and match the General population.populations will rise and match the General population.

There will be an increase in fixed asset investments and aThere will be an increase in fixed asset investments and ashift from work in labor intensive industries toshift from work in labor intensive industries toknowledge intensive industries (hiknowledge intensive industries (hi--tech).tech).

An increase in the participation rate of the minorityAn increase in the participation rate of the minoritypopulations in the labor force to match that of thepopulations in the labor force to match that of theGeneral population.General population.

A decline in fertility rates to match that of the GeneralA decline in fertility rates to match that of the Generalpopulation.population.



2222

Demographic Composition in 2030Demographic Composition in 2030Investment in Education ScenarioInvestment in Education Scenario

58.0%

100.0%

100.0%

9,512

Total

58.0%

21.9%

23.7%

2,251

Arab

58.0%58.0%Labor Force ParticipationRate

70.2%

68.2%

6,489

General

7.8%% of Households

8.1%% of Population

772Population (Thousands)

Haredim



2323


Burden in 2030 in Investment in EducationBurden in 2030 in Investment in EducationScenarioScenario

There will be no economic burden on the General population.There will be no economic burden on the General population.

GDP growth per capita will reachGDP growth per capita will reach 2.2%2.2% a year (of whicha year (of which0.2%0.2% derives from the move to full employment).derives from the move to full employment).

The gap with Europe in GDP per capita will decrease byThe gap with Europe in GDP per capita will decrease by 3%.3%.

GDP per capita will beGDP per capita will be 62%62% of European levels.of European levels.

The gap with the U.S. in GDP per capita will decrease byThe gap with the U.S. in GDP per capita will decrease by 1%.1%.




2424

The Alternative ScenarioThe Alternative Scenario

This scenario is a sensitivity analysis to the Investment inThis scenario is a sensitivity analysis to the Investment in

Education Scenario.Education Scenario.

Similar to the Investment in Education Scenario, all ourSimilar to the Investment in Education Scenario, all our

recommendations will be implemented.recommendations will be implemented.

The difference is that in this scenario, though theThe difference is that in this scenario, though the HarediHaredi andand

Arab populations will be integrated into the job market, theirArab populations will be integrated into the job market, their

fertility rates will not decline (from the trend for the past 15fertility rates will not decline (from the trend for the past 15

years for the Arab population).years for the Arab population).



2525

Fertility Rates among Arab CountriesFertility Rates among Arab Countries

6.8

6.25.9

5.3

4.5 4.4

3.7

3.5

3.1 3.1 3.0 3.0 3.02.9

2.72.6

2.3

2.0 2.0 1.9

0

1

2

3

4

5

6

7

Y e m e n

S a

u d i A r a b i a

O m a n

P A

I r a q

I s r a

e l ( A r a b s )

S s y r i a

L y b i a

U A E

K u q a i t

E g y p t

Q a t a r

J o r d a n

M o r r o c o

B a h r a i n

A l g e r i a

I s

r a e l ( M a j . )

I r a n

L e b a n o n

T u n i s i a

Source: The CIA



2626

Demographic Composition in 2030Demographic Composition in 2030Alternative ScenarioAlternative Scenario

58.0%

100.0%

100.0%

10,359

Total

58.0%

18.9%

27.3%

2,830

Arab

58.0%58.0%Labor Force ParticipationRate

73.6%

62.6%

6,489

General

7.5%% of Households

10.0%% of Population

1,040Population (Thousands)

Haredim



2727


Burden in 2030 in Alternative ScenarioBurden in 2030 in Alternative Scenario

There economic burden on the General population willThere economic burden on the General population willdecline to only 2% of household income.decline to only 2% of household income.

GDP growth per capita will reachGDP growth per capita will reach 1.9%1.9% a year (of whicha year (of which0.2%0.2% derives from the move to full employment).derives from the move to full employment).

The gap with Europe in GDP per capita will increase by 4The gap with Europe in GDP per capita will increase by 4%.%.

GDP per capita will beGDP per capita will be 57%57% of European levels.of European levels.

The gap with the U.S. in GDP per capita will increase byThe gap with the U.S. in GDP per capita will increase by 7%.7%.




2828

Summary of the Different ScenariosSummary of the Different Scenarios

17%

1.3 %

23.2

62.6%

10.4

Status Quo

2 %

1.9 %

27.5

62.6%

10.4

Alternative

68.2%General Populationas % of Total

0 %Economic Burdenon the GeneralPopulation

2.2 %GDP Growth perCapita

29.5GDP per Capita

(US$ ‘000’s)

9.5Population (Millions)

Investment inEducation



2929

Development of the Gap BetweenDevelopment of the Gap BetweenIsrael and the E.U. from 2004Israel and the E.U. from 2004--20302030

49%

22.7%

2.1%

1.3%

Status Quo

57%

3.7%

2.1%

1.9%

Alternative

2.1%Avg. GDP Growth PerCapita in the E.U.

62%GDP per Capita in Israelvs. E.U. in 2030

3.2%-Accumulated Gap w/the E.U. (2004-2030)

2.2%Avg. GDP Growth PerCapita in Israel




3030

Development of the Gap BetweenDevelopment of the Gap BetweenIsrael and the U.S. from 2004Israel and the U.S. from 2004--20302030

35%

26.2%

2.2%

1.3%

Status Quo

41%

6.7%

2.2%

1.9%

Alternative

2.2%Avg. GDP Growth PerCapita in the U.S.

44 %GDP per Capita in Israelvs. U.S. in 2030

0.5%-Accumulated Gap w/the U.S. (2004-2030)

2.2%Avg. GDP Growth PerCapita in Israel




3131

SummarySummary -- II

The current demographic composition necessitates action toThe current demographic composition necessitates action tochange the trend in growth.change the trend in growth.

Without any action, growth is expected to be slow andWithout any action, growth is expected to be slow andaccompanied by an increase in the economic burden on theaccompanied by an increase in the economic burden on theGeneral population, and increase social tensions.General population, and increase social tensions.

An increase in the educational levels of the minority populationAn increase in the educational levels of the minority populationssand integration into the modern job market is of primeand integration into the modern job market is of primeimportance.importance.

A reform in education requires a switch to a long school day,A reform in education requires a switch to a long school day,

leading to an increase in the amount of higher education amongleading to an increase in the amount of higher education amongthe minority populations.the minority populations.

Establishment of sufficient daycare centers for children below aEstablishment of sufficient daycare centers for children below agege5, allowing mothers to find full time employment.5, allowing mothers to find full time employment.



3232

SummarySummary -- IIII

A ban on employment of foreign workers is necessary forA ban on employment of foreign workers is necessary forthe development of higher use of technology and morethe development of higher use of technology and more

modern methods in all sectors.modern methods in all sectors.

Implementation of theImplementation of the TalTal Law and an option of nationalLaw and an option of nationalservice in place of military duty is necessary in order toservice in place of military duty is necessary in order to

integrate theintegrate the HarediHaredi population into the job market.population into the job market.

Adoption of our recommendations will put a halt to theAdoption of our recommendations will put a halt to thecurrent deterioration of the situation and allow reasonablecurrent deterioration of the situation and allow reasonable

growth, comparable to developed markets.growth, comparable to developed markets.

Any delay in implementation will worsen the situation, andAny delay in implementation will worsen the situation, andso our plan must be put into action immediately.so our plan must be put into action immediately.



3333

ConclusionsConclusions

Steps to integrate the Arab andSteps to integrate the Arab and HarediHaredi populations into thepopulations into the

labor force are also expected to lead to an increase inlabor force are also expected to lead to an increase in

participation of the General population in the labor force andparticipation of the General population in the labor force andrise aboverise above 58%.58%.

A gradual increase in participation in the labor force, to U.S.A gradual increase in participation in the labor force, to U.S.

levels of levels of 65%,65%, will lead to an annualwill lead to an annual 3%3% GDP growth perGDP growth percapita and reduce the gap between Israel and Europe bycapita and reduce the gap between Israel and Europe by 50%50%

by 2030.by 2030.

We are of the opinion, that at the current time, theWe are of the opinion, that at the current time, theeconomy has a rare opportunity to create sustainable growtheconomy has a rare opportunity to create sustainable growth

per capita, for many decades, through both investment inper capita, for many decades, through both investment in

education and in investments in infrastructure.education and in investments in infrastructure.

Documents

Demographics and Israels Economy