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Report Shows Grim Trend Toward Income Inequality in Israel

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On February 5, following a general election, 48 new Members of Knesset were sworn in -- the biggest number in Israel's history. That's 40 percent of the total 120 seats.

One would expect a new narrative, but it's still politics as usual: coalition forming efforts are again driven by security issues and personal likes and dislikes. The problem is that it is totally ignoring the July 2011 protests and what they meant for the country's society and economy.

To be sure, the millions of citizens who supported the protest could not, and probably still cannot, provide the hard data to back their claims, certainly not at the national level. But nevertheless, what they know in their hearts has a sound basis.

There are, of course, many dimensions to their plight. But perhaps the most powerful one -- and one that can be easily understood by Americans -- is growth in income inequality.

Growth in income inequality is a state where, over time, the wages of people with lower income grow at a slower pace compared with those with higher income. Over the course of decades, inequality may change, sometimes growing and sometimes retreating. But if it grows persistently it needs to be addressed.

On January 22, Kavitha A. Davidson, the Associate World Editor of The Huffington Post, published an eye-opening article, citing GlobalPost's global income inequality report.

The data revealed not only the high degree of inequality in the U.S. compared with other developed economies, but also the pockets of especially high inequality in specific cities. For instance, the degree of inequality in Los Angeles turns out to be close to that of Beijing and the inequality in Bridgeport Conn., the wealthiest county in the U.S., is close to that of Bangkok.

Unlike many developed countries, in Israel, good data is hard to come by. Income inequality was never a major issue in Israel and so it received little attention. But now, as it became a major concern, data is starting to pop up.

In its latest issue, the Israeli Tax Quarterly included an article written by two maverick Finance Ministry economists, Galit Ben Naim and Alexey Belinsky. Their paper, titled "Israel's Wage Divergence: An Analysis of Wage Mobility in the Last Decade" (Hebrew), more than just sheds light on the issue.

The paper is full of eye-popping data, charts and analyses that can definitely support many of the protesters' claims. But perhaps most important is the data regarding the change in wages over the course of six years -- 2003 and 2008.

Israel's main macroeconomic indicators for the period paint a rosy picture. When it started, Israel was just beginning its recovery from the dot-com bubble slump and so registered healthy GDP growth -- 5.2 percent on average. The accumulated growth between 2003 and 2008 was almost 34 percent (in current Shekels). Inflation was tame, at about 1.5 on average, and the unemployment rate fell from about 11 percent to about 6 percent.

The data in Ben Naim and Belinsky's paper indeed shows that income inequality grew. If you compare the wages at the lowest decile, that is the income at the lowest 10 percent of the income distribution, with those at the top tenth of one percent of the distribution, the factor is as high as 3x. The data also shows that the Israeli middle class is getting smaller -- the growth in deciles 6, 7 and 8 is the smallest.

To complete the picture, you need data on the actual mobility between income groups, which is also offered in the paper. Ben Naim and Belinsky provide data on the mobility between the five fifths and the top 10 percent, 5 percent and 1 percent of the income distribution between 1999 and 2009.

After sorting according to the rate of mobility, the first result is one that can be expected: the highest percentages are observed within the same groups, that is no mobility -- you stayed where you were; and the lowest percentages were observed between the groups that are farthest apart.

But another result is that the majority, 64 percent, of those who were in the middle class at the beginning of the period and moved, moved down, not up.

The data points to a grim conclusion; not only does Israel's income inequality grow, but also the middle class is getting poorer.

Of course, trends like this can go on for some time without any social or political repercussions. It takes time to sink in and even more time to ferment. Israel is beyond that point and the protests proved it. Ignoring it could be detrimental for the new Israeli government -- but devastating for its citizens.

Nathan Lipson was a business reporter and editor with Israel's Haaretz and TheMarker for almost 17 years.

(lipson.nathan@gmail.com, Facebook, Twitter, LinkedIn)