This Annex provides additional information regarding the results of a simulation exercise evaluating the potential benefits of an employment increase for lowering the poverty rate for different family types belonging to the Israeli-Arab, Haredi and Jewish non-Haredi communities. In its first part, it describes the main characteristics of the OECD Tax Benefit model that was used for this exercise. The second part presents the main assumptions retained to perform these simulations, and the last part provides a short discussion of the main results.
OECD Economic Surveys: Israel 2018
OECD Economic Surveys: Israel
Annex A.1. The simulated impact of increasing employment rates on poverty in typical families of the main Israeli communities
Abstract
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
OECD Tax-Benefit model
The OECD Tax-Benefit model, versions of which are available for each OECD Member country, are tools designed to assess the redistribution policies, income adequacy and benefit generosity for working people and their families. To this end, these models consist of a set of equations allowing the calculation of disposable income of households taking into account the specific characteristics of the family (for example, the number of people in the household), their labour income, social transfers and income taxes provided by the relevant legislation.
These models, which are presented in detail in OECD (2016), incorporate detailed tax rules and benefit entitlements covering a broad set of social and fiscal policy levers: personal income tax, social security contributions, unemployment benefits, social assistance, guaranteed minimum-income schemes, family benefits, housing benefits for rented accommodation, in-work benefits, childcare support and parental leave benefits. The latest update of the indicators covers the year 2015. Benefits included in the calculations exclude those benefits that are “in-kind”. Hence free school meals, subsidised transport, free health care, etc. are not included. In general, occasional or irregular payments are also not included, as are benefits strictly related to the purchase of particular goods and services (other than housing or childcare as described below), such as transport, domestic fuel, medical insurance and prescription medicines.
Net incomes are defined as gross earnings plus cash benefits minus income taxes and social security contributions. Any taxes or contributions not paid directly by the wage earner or benefit recipient are not included in gross incomes. Housing costs and any other forms of “committed expenditure” are not deducted when computing net incomes.
For each country the Tax-Benefit model allows the calculation of net household incomes for a wide range of policy-relevant family situations. Computing tax and benefit amounts using existing policy rules illustrates the features of these redistributive instruments. And by repeating these calculations for a number of different household situations, they permit an assessment of the circumstances (e.g. family situation or income level) for which each of these features becomes relevant.
Family size and income level assumptions
For the specific simulations carried out for the draft Economic Survey, the tax-benefit model has been used to evaluate the impact of the tax-benefit system for representative households of the three main Israeli communities (Israeli-Arabs, Haredim and non-Haredi Jews) given their characteristics (their number of children) and differences in income levels. The model has also been used to estimate the impact of higher employment on family income for each of these three different groups. To perform these simulations it was therefore necessary to specify their average wage level and their average number of children for each standardised family type.
As shown in the Table A.1.1, the earnings difference between communities is substantial. Non-Haredi Jews earn around 110% of the median hourly wage and around 110% of the median monthly wage. On the other hand, Israeli-Arabs and Haredim work in low-productivity, often non-tradable sectors with low wages. Israeli-Arabs earn only around 70% of the median hourly wage and 74% of the median monthly wage. The Haredim earn around 87% of the median hourly wage, but only 68% of the median monthly wage. This difference stems from high share of part-time workers among this group. In the simulations, for the standardised families we have thus assumed that workers earn 110% of the median hourly wage in non-Haredi families, 70% in Israeli-Arab families and 90% in the Haredi families.
Table A.1.1. Gross earnings in 2015
Source: Ministry of Finance based on Labour Force Survey data.
Disadvantaged groups have much larger families. The fertility rate in Israel is 3.1 children per mother, the highest in the OECD (OECD, 2017). The fertility rate of non-Haredi Jews is somewhat above 2. The Israeli-Arab fertility has decreased substantially from around 4.5 children in 2000-04 to above 3 (CBS, 2017a). The average rate among Haredi families is estimated to be around 6-7 (CBS, 2017b). For the simulations, it was assumed that average non-Haredi families have two children and Haredi families six. As fertility rate of Israeli-Arabs came down to 3 only in recent years, we assume the average number of children in Israeli-Arab families is still four.
Results of simulating the Tax-Benefit model for Israel
The results of the simulations suggest that with the current Israeli tax-transfer system, it is difficult to escape poverty for families with only one breadwinner and children. In a family with two children, the wage of the breadwinner must exceed at least 150% of the national median wage for household income to exceed the national poverty line (Figure A.1.1, Panel A). While the direct taxation system makes a contribution to a reduction of inequality similar to the OECD country average (Bank of Israel, 2016), the overall redistributive effect of the country’s tax-transfer system is low because of the low level of social assistance and benefits (Figure A.1.1, Panel A).
Figure A.1.1. Families with one breadwinnerref refid="fn-0052" format="note"/> are less likely to escape poverty
1. One-earner couple where the breadwinner works 40 hours per week.
Source: OECD calculations using the OECD Tax-Benefit model.
For larger families with one breadwinner it is even more difficult to escape poverty. The family poverty line increases with the number of children, but the level of transfers does not sufficiently adjust for these increases, mainly because of a low generosity of child allowances. Therefore, the gap between family income and the poverty line increases with the number of children. In families with four or more children, even if the breadwinner earns double the median wage, it would not be sufficient for the family to escape poverty (Panels B and C).
The main route out of poverty in Israel is by increasing the number of breadwinners in the family. However, even increasing employment would not necessarily help to escape poverty in a case of disadvantaged groups. For example, the household income of the Haredi family with six children and a wage of around 90% of the median wage would be approximately 180% of the median earnings, but this would still not be enough for the family to escape poverty (Figure A.1.2).
Figure A.1.2. Large families even with two breadwinnersref refid="fn-0053" format="note"/> would not necessary escape poverty
Haredi family with two breadwinners and six children
1. Two-earner couple where both spouses work 40 hours per week.
Source: OECD calculations using the OECD Tax-Benefit model.
In non-Haredi Jewish families with expected income of 110% of the median wage and two children, even part-time work for the second spouse would be enough to help family income exceed the poverty threshold (Figure A.1.3, Panel A). However, for the typical Israeli-Arab family with income of around 70% and four children, even two earners in the family would not be enough to escape poverty (Panel B). Also in the case of Haredi with almost 90% of the median hourly wage and six children additional income coming from the salary of the second earner would not be enough to exit poverty (Panel C). The earnings of workers in an average Arab family with four children would need to reach around 160% of the median wage for net family income to exceed the poverty line, and, in the case of a Haredi family with six children, it would need to reach around 230% of the median wage. In sum, the results suggest that the effect of increasing employment on poverty rate reduction can be limited for these disadvantaged groups.
Figure A.1.3. Higher employment of Haredim and Israeli-Arabs may not be enough to lift them out of poverty
Estimates of family income according to the numbers of earners and the community groupref refid="fn-0054" format="note"/>
1. One earner corresponds to a family with one earner, one and a half earners corresponds to two-earner family where one works full‐time and the second half-time, and two earners corresponds to two-earner family where both work full-time.
2. Workers are assumed to earn 110% of the average wage.
3. Workers are assumed to earn 70% of the average wage.
4. Workers are assumed to earn 90% of the average wage.
Source: OECD calculations using the OECD Tax-Benefit Model.
Bibliography
Bank of Israel (2016), Annual Report – 2015, Jerusalem, www.boi.org.il/en/NewsAndPublications/Regular Publications/Pages/DochBankIsrael2015.aspx.
CBS (2017a), “Statistical abstract of Israel” No. 68, Subject 3, www.cbs.gov.il/reader/shnaton/templ_ shnaton_e.html?num_tab=st03_13&CYear=2017.
CBS (2017b), “Projections of the population of Israel up to 2065”, http://cbs.gov.il/reader/?MIval=cw_usr_ view_SHTML&ID=811.
OECD (2016), “OECD tax and benefits model- methodology”, www.oecd.org/els/soc/Methodology.pdf.
OECD (2017), OECD, Family Database, www.oecd.org/els/family/SF_2_1_Fertility_rates.pdf.