Demographics and Israel's Economy

1
Demographics and Israel's Economy
"Herzlia Conference" Prepared by Dr. Yacov
Sheinin Translated from Hebrew
December 18, 2003
2
The Long Term Ramifications of GDP Growth and the
Economic Burden

• Analysis of the low level of economic development
  in Israel reveals three key causes
• A low rate of participation in the labor force.
• A high fertility rate (natural increase).
• A high proportion of population under 15.
• Due to these factors, GDP per capita remains low,
  the budget deficit is high, the tax burden is one
  of the highest in the developed world and the
  Israeli economy has difficulty allotting
  resources for fixed asset investments.

3
The Effects of Demographic Composition on Growth

• GDP per capita is much lower in Israel compared
  with developed countries - 16,400 in Israel
  versus 37,500 in the U.S. and 27,500 in the EU.
• From 1975-1999 (before the recent wave of terror
  and the collapse of the Hi-Tech bubble in 2000),
  GDP per capita grew by an annual average of 1.6
  in Israel versus 2.2 in the U.S. and 1.7 in the
  E.U.
• If this trend continues, the gap between Israel
  and the developed countries will widen and may
  result in a social crisis.

4
Population Breakdown

• We have divided Israels population into three
  broad categories, based on labor force
  participation, the natural rate of increase and a
  tendency to form an identifiable category.
• Haredim (Ultra-Orthodox Jewish) 6 of
  population.
• Arab 19 of population.
• General Other 75 of population.

5
Characteristics per Household by Category2030
Estimates
6
Economic Data by Category2030 Estimates, NIS
000s
7
The Effects of Demographics on Growth

• The Arab and Haredi populations have a natural
  rate of increase of above 3 a year, compared
  with 1 in the general population.
• Since 1970, participation in the labor force has
  increased from 50 to over 54, as a result of
  waves of immigration and the entry of women to
  the labor force.
• The base assumption is that the period of growth
  through immigration has ended and the fertility
  rate of the majority population will remain
  constant.
• On these assumptions, we forecast a decline in
  labor force participation, and a change in the
  trend of increasing participation since the
  founding of the State.

8
The Effects of Demographics on Growth

• We estimate that the decline in the rate of
  participation in the labor force, and the
  increase in the percentages of Haredim and Arabs
  in the population, will reduce GDP growth per
  capita by 0.4 a year.
• In comparison, if the labor force participation
  rates, fertility rates and GDP per Employee
  (wages) of the Haredim and Arabs were to match
  the general population, GDP per capita would be
  20 greater.

9
Economic Burden on the General Population

• The excess taxes, required from the general
  population, to finance social services and
  allowances that flow to the Haredi and Arab
  populations.
• This economic burden is calculated by the
  percentage in gross income (without allowance
  payments) of each household in the general
  population, and has reached in 2003, by our
  calculations, to 9.

10
Calculation of Economic Burden on the General
Population

• Transfer payments to minorities,
• () Proportion of public expenses to minorities,
  based on size of population (Education, Health).
• (-) Tax revenues , both direct and indirect, from
  minorities.
• () Excess of payments to minorities, as financed
  by taxes to the general population.
• The cost of fixed public expenses (Defense,
  Foreign Affairs, etc.) are not part of the
  economic burden.

11
The Effects of Demographics on Growth

• Arabs and Haredim have a natural rate of increase
  above 3 a year, compared with only 1 for the
  general population.
• If current trends continue, the General
  population will reach only 63 in 2030 and
  participation in the labor force will fall to
  52.6.
• This forecasted decline in labor force
  participation will be a change in the trend of
  increasing participation since the founding of
  the State (since 1970, labor force participation
  has risen from 50 to above 54).

12
Three Possible Scenarios

• Status Quo Scenario A continuation of current
  trends of fertility rates, labor force
  participation, etc.
• Investment in Education Scenario To implement
  the suggestions in this presentation to reinforce
  education (to be explained), that will bring
  in-line the characteristics of the minority
  populations with the General population in the
  areas of fertility rates, labor force
  participation and production per employee.
• Alternative Scenario A sensitivity analysis to
  the Investment in Education Scenario, that we
  propose, that will show an equalization of all
  factors, but fertility rates will remain as per
  status quo.

13
Basic Assumptions for each Scenario

• Economic productivity will increase by 1.3 a
  year, the average increase in productivity over
  the past 25 years, before the current outbreak in
  terrorism (i.e. 1975-2000).
• General population participation in the labor
  force will remain at 58.
• By 2010, the economy will shift to full
  employment with unemployment remaining at 6.
• Fertility rates and immigration rates according
  to the middle forecast of the Central Bureau of
  Statistics.
• Public service spending will rise in proportion
  to the rise in GDP but without incurring a budget
  deficit.

14
Demographic Composition in 2030Status Quo
Scenario
15
Forecast for GDP Growth and the Economic Burden
in 2030 in Status Quo Scenario

• The economic burden on the General population
  will reach 17 of household income.
• GDP growth per capita will reach 1.3 a year (of
  which 0.2 derives from the move to full
  employment).
• The gap with Europe in GDP per capita will
  increase by 23.
• GDP per capita will be 49 of European levels.
• The gap with the U.S. in GDP per capita will
  increase by 26.
• GDP per capita will be 35 of U.S. levels.

16
Significance of the Status Quo Scenario

• The increasing par in economic conditions between
  Israel and the developed economies will increase
  the discord between the General population and
  the minorities.
• Increase of the economic burden on the General
  population will also increase the discord between
  the populations.
• The combination of these two factors may lead to
  a social crisis with serious consequences for
  social rights and welfare policies.

17
Barriers to GDP Growth in the Haredi Population

• The very low participation rate of men between
  the ages of 25 - 40 is due to barriers related to
  compulsory military duty.
• The fact that the average wage is only 75 of the
  average wage of the General population, indicates
  the lack of professional training required by the
  job market.
• A very low participation rate of young women
  between the ages of 20 - 40 (apparently due to
  the high fertility rates and the lack of suitable
  daycare).

18
Barriers to GDP Growth in the Arab Population

• The rate of participation in the labor force by
  Arab men declines after age 45 as over 50 of
  Arab men are employed in professions requiring
  hard physical labor.
• The fact that the average wage is only 70 of the
  average wage of the General population, indicates
  the low level of education.
• The usage of cheap foreign labor has repressed,
  for the near-term, the representation in the
  labor force of populations with low income
  levels.
• The presence of cheap foreign labor acts to
  prevent a shift to more advanced technologies and
  methods in labor intensive sectors and works to
  keep the wage level down.
• There is a very low level of participation of
  Arab women in the labor force (only 17) with a
  very low level of income.

19
Suggested Solutions

• Investment in education, leading to a change in
  the levels of education, especially for the Arab
  and Haredi populations.
• Reformation of the educational system, including
• 1. Move to a long learning day.
• 2. A focus on educational areas with a high
  demand for work.
• Move to a long learning day will allow weak
  populations to advance to post- high school
  education.
• Establishment of sufficient daycare centers for
  children below age 5, allowing mothers to find
  full time employment.

20
Suggested Solutions Cont.

• Implementation of the Tal law and offering an
  option of national service, instead of military
  duty, will result in a higher level of
  participation of the Haredi population in the
  labor force.
• A prohibition on hiring foreign workers at
  marginal wages will lead to a switch to the
  higher skilled methods being used today for labor
  intensive sectors.
• We believe, that by taking these steps (and
  others that will become necessary) , production
  per employee will rise (higher wages) among the
  minority populations and match the General
  population.

21
The Investment in Education Scenario

• Educational levels in all populations will be
  equivalent.
• Production per employee (wages) in the minority
  populations will rise and match the General
  population.
• There will be an increase in fixed asset
  investments and a shift from work in labor
  intensive industries to knowledge intensive
  industries (hi-tech).
• An increase in the participation rate of the
  minority populations in the labor force to match
  that of the General population.
• A decline in fertility rates to match that of the
  General population.

22
Demographic Composition in 2030Investment in
Education Scenario
23
Forecast for GDP Growth and the Economic Burden
in 2030 in Investment in Education Scenario

• There will be no economic burden on the General
  population.
• GDP growth per capita will reach 2.2 a year (of
  which 0.2 derives from the move to full
  employment).
• The gap with Europe in GDP per capita will
  decrease by 3.
• GDP per capita will be 62 of European levels.
• The gap with the U.S. in GDP per capita will
  decrease by 1.
• GDP per capita will be 44 of U.S. levels.

24
The Alternative Scenario

• This scenario is a sensitivity analysis to the
  Investment in Education Scenario.
• Similar to the Investment in Education Scenario,
  all our recommendations will be implemented.
• The difference is that in this scenario, though
  the Haredi and Arab populations will be
  integrated into the job market, their fertility
  rates will not decline (from the trend for the
  past 15 years for the Arab population).

25
Fertility Rates among Arab Countries
Source The CIA
26
Demographic Composition in 2030Alternative
Scenario
27
Forecast for GDP Growth and the Economic Burden
in 2030 in Alternative Scenario

• There economic burden on the General population
  will decline to only 2 of household income.
• GDP growth per capita will reach 1.9 a year (of
  which 0.2 derives from the move to full
  employment).
• The gap with Europe in GDP per capita will
  increase by 4.
• GDP per capita will be 57 of European levels.
• The gap with the U.S. in GDP per capita will
  increase by 7.
• GDP per capita will be 41 of U.S. levels.

28
Summary of the Different Scenarios
29
Development of the Gap Between Israel and the
E.U. from 2004-2030
30
Development of the Gap Between Israel and the
U.S. from 2004-2030
31
Summary - I

• The current demographic composition necessitates
  action to change the trend in growth.
• Without any action, growth is expected to be slow
  and accompanied by an increase in the economic
  burden on the General population, and increase
  social tensions.
• An increase in the educational levels of the
  minority populations and integration into the
  modern job market is of prime importance.
• A reform in education requires a switch to a long
  school day, leading to an increase in the amount
  of higher education among the minority
  populations.
• Establishment of sufficient daycare centers for
  children below age 5, allowing mothers to find
  full time employment.

32
Summary - II

• A ban on employment of foreign workers is
  necessary for the development of higher use of
  technology and more modern methods in all
  sectors.
• Implementation of the Tal Law and an option of
  national service in place of military duty is
  necessary in order to integrate the Haredi
  population into the job market.
• Adoption of our recommendations will put a halt
  to the current deterioration of the situation and
  allow reasonable growth, comparable to developed
  markets.
• Any delay in implementation will worsen the
  situation, and so our plan must be put into
  action immediately.

33
Conclusions

• Steps to integrate the Arab and Haredi
  populations into the labor force are also
  expected to lead to an increase in participation
  of the General population in the labor force and
  rise above 58.
• A gradual increase in participation in the labor
  force, to U.S. levels of 65, will lead to an
  annual 3 GDP growth per capita and reduce the
  gap between Israel and Europe by 50 by 2030.
• We are of the opinion, that at the current time,
  the economy has a rare opportunity to create
  sustainable growth per capita, for many decades,
  through both investment in education and in
  investments in infrastructure.