Lecture in Interdisciplinary Center, Herzlia December 2003
Demography and Economics
Dr. Yacov Sheinin, Director-General, Economic Models
"New Demographic Trends and their Economic Consequences", Task Force Report
The issue of demography is very sensitive at the moment. I will focus on the economic aspect of the problem. There is a process going on which is not simple, but there is a solution as well.
On the issue of growth and economic burden in the long run, we must consider the fact that the product per capita here is low. This is because the rate of participation in the work force is low, and because we have high natural reproduction rates. This is also because we have a government deficit, high taxes and difficulty in allocation of resources.
We have less per capita income compared with the US and the EU, and this is a point of concern. If this continues, we will have such major gaps with the western world, and social crisis might ensue.
We divided the population into 3 groups:
1. ultra orthodox 6%
2. arab 19%
3. rest 75%
We can see that there are enormous differences between the majority population and the orthodox and Arab populations, with respect to child birth, participation in the work force, etc. The majority population reaches the same objectives as countries in Europe, the other two sectors don't.
In the majority population, 12% of household income comes from allowances, but in the Arab population 24%, and in the ultra orthodox population 40%. The problem is also that these two minority groups have higher birth rates (3% a year), but since 1970 their participation rate in the work forced has increased. This happened because there were waves of immigration which took part in the work force, and because of the entry of more women into the work force. Our assumption is that the waves of immigration are over, and therefore there will be less participation in the work force. If this trend continues, it will cause a 0.5% decrease in per capita income per year.
If the last two groups catch up with the majority population, we would have a more balanced picture. We have excess taxation on the majority population, (9%) which is given to the ultra orthodox and the Arab populations, along with ordinary taxes. There is no reason why the other two groups should not behave the same.
If we continue these trends until 2030, with the 3% population growth in the 2 groups, we will have only 63% constituting the majority population, and the participation rate will decrease as well. This is not what we want.
There are 3 possible developments:
1. Continuing the status quo.
2. Investing in education as an instrument to reach a point where the minorities will produce the same product as the majority population.
3. Implementing alternative measures participation product and salary will be the same, but birth rate will be higher for the 2 minority groups.
There are different outcomes for each of these scenarios.
If we continue this burden on the majority population, the gap between us and Europe will continue to grow.
We believe this will create a social crisis. It is impossible to draw further away from western countries. In the last 7 years Israel didn't grow at all per capita. By contrast, Europe and the US grew 2% per year. If we continue the current situation, crisis will start because some groups will feel that the burden is unfair for them. It will become detrimental to the welfare status in our economy. This is my highest concern.
Inhibiters to growth: the participation rate of the ultra orthodox is lower than the majority population, mainly due to the issue of military service. In the Arab population, the participation rate is high in the younger ages, but drops significantly over the age of 45.
The use of foreign labor keeps Arab participation down. This foreign labor perpetuates the low salaries in the industries in which they are employed.
Instead of bringing in hi tech cranes, we bring in Thai workers. This suppresses the entire issue of movement towards the hi tech status.
My point is that if we start reforms in education, we will reach the same output per employee in the minority groups as in the majority group. We must have longer school hours, we must give allowances to children, not the parents, in order for them to be used properly.
We need to accelerate certain programs for the ultra orthodox community. They have more years of education, but not in areas that are in demand in the job market.
There should be daycare centers until the age of 5, so that the parents can work.
The fact that the "Tal Law" and the law against hiring foreign worker aren't being re-enforced is also hindering reforms.
If you ask me, the IDF is not a people's army anymore. Therefore national service will provide a solution (Tal Law). The employment of foreign laborers should be stopped.
If you agree to these assumptions, there's no reason why the per capita income and the participation rate will not rise. Is it even possible to lower the birth rate in the Arab population? In the Arab countries, we see that birth rates are lower than they are in the Arab community in Israel. They assimilated into the majority population, as the Arabs in Israel should do, and this trend will stop.
By using the alternative or education options, the burden on the majority population will decrease significantly. We should be optimistic; there is no reason we shouldn't grow 2.2% a year. This is a slow process; we're hoping it will happen until 2030.
Reducing unemployment to 6% will solve this problem, if we start today.
If you change the education system, the participation rate in the majority group will grow as well, and we may reach the US's rate (65%). If this happens, it alone will increase our growth rate to 3% and close the gap between us and Europe by 50%. Nothing drastic has to happen, aside of raising the participation rate, and assimilating the minority populations into the majority group.
