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March 30, 2012
Israeli middle class is shrinking
Recent data from the central bank show prices have begun outpacing gains in income.
DAVID ROSENBERG THE MEDIA LINE
Israel’s middle class – the people who keep the country’s high-tech industry humming, pay most of the taxes, serve in the army and volunteer for school committees – is shrinking even as the economy is thriving and unemployment is at its lowest in decades. This has economists and policy makers worried.
The combined share of the middle and upper-middle class in Israel’s household population declined to 50.4 percent in 2010/11, down from 55.7 percent in 1997, the Bank of Israel said in a study (bankisrael.gov.il/press/eng/120313/120313b.htm) released last week. The bank defined the middle class as anyone with income between 75 percent and 125 percent of the national median and upper-middle class as 125 percent to 200 percent. That works out to between $1,925 Cdn and $5,140 Cdn a month after taxes.
While the wealthiest as a percentage of the population grew slightly, the biggest change was the growth of the lowest wage earners – those earning 75 percent or less of median income – which grew nearly five percentage points to 30.2 percent of the population.
“There is clearly social significance to this trend. It says more and more people – basically all wage earners and self-employed – have seen their incomes stagnate while the economy is booming. This is one explanation for the outburst of protests last summer,” said Joseph Zeira, a professor of economics at the Hebrew University.
Sparked by the high price of cottage cheese, Israelis erected tent cities and staged mass rallies across the country last summer demanding action to help a middle class who feel squeezed by rising prices and fewer opportunities. The protests shook the government and prompted it to implement in January a package of reforms, including free early-childhood education.
While the protests faded by last autumn, many – not the least the protest organizers themselves – say Prime Minister Binyamin Netanyahu did too little to address the problem. Many observers expect the movement to come back to life in the spring and summer.
“There are a lot of people who remain very active and are planning summer activities. They are really determined to do it and this time it will be more planned than last time around, a lot more effective,” said Roni Kaufman, a lecturer in the social work department of Ben-Gurion University. “The activists haven’t disappeared.”
Israel is not alone is seeing its middle class come under pressure. In the United States, for instance, the percentage of households whose income falls within 50 percent of the median dropped to 42.4 percent of the total last year, from 44 percent in 2000 and just over 50 percent in 1970. Some economists blame factors such as a globalized economy that has eliminated many well-paying jobs in the industrialized West, as well as tax polices that favor the wealthy.
The Israeli economy has shared many of these global trends, but the declining weight of its middle class comes as the economy, by almost every other measure, has been thriving for the last decade. Economic growth barely stalled during the 2008/09 global recession and Israel’s jobless rate fell to 5.4 percent in the fourth quarter of last year, the lowest in 30 years.
But the Bank of Israel found that the prices for products and services used by the middle class, which include everything from housing to automobile upkeep and education, have started increasing faster than incomes. Incomes were rising faster for the decade until 2007, but the trend has since reversed, the bank found. Meanwhile, government spending on services that benefit the middle class most, like health and education, remain low by Western standards.
On the balance, the Bank of Israel believes the country’s middle class is unhappy. “They are the ones most likely to say that the burden – social, economic and security – are carried by them, but that they feel that their standard of living and the quality of services they get from the state are deteriorating,” the bank report stated.
A poll conducted last June by the Israel Democracy Institute and Tel Aviv University found that three-quarters of those surveyed said their economic conditions had worsened in recent years or remained the same. Only three percent said it had “greatly improved,” according to the poll.
Zeira attributed middle-class squeeze to multiple factors, among them the increased use of workers under temporary contracts, who tend to be hired at lower wages and with fewer social benefits than those directly on the payrolls of government and corporate employers. As well, the large number of foreign workers in Israel, he argued, has driven down wages even for the middle class.
This means that, even as gross domestic product per capita and productivity have risen in Israel, middle- income earners have not seen those gains reflected in their paycheques.
Kaufman dismissed the impact of globalization as a factor in the decline of the middle class and puts the blame on Netanyahu’s free-market economic policies. “In the last decade, the labor market has changed. There is no unemployment. People are working, but not full time and at lower wages,” Kaufman claimed, urging the government to create new, full-time jobs by reviving the social services that have been cut back over the last decade. He added, “A welfare state gives a lot of work to middle-class professionals. They’re the big beneficiaries from it, even if it serves the poor.”
The Bank of Israel figures indicate how important full-time work is to the middle class. Among middle-class families, more than 40 percent had two full-time wage earners.
Zeira, who acted as an adviser on economic policy to last summer’s protest movement, believes the most effective way to reverse the trend would be for the government to increase social spending. His committee recommended last summer that the budget should be increased by 2.5 percentage points of GDP, which would work out to about 20 billion shekels ($5.3 billion Cdn) annually.
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