The Origins of Income Inequality in Israel - Trends and Policy

Abstract

This paper analyzes the trends in the level and the composition of income inequality in Israel between the years 1987 and 2011. The main trends found in income inequality among individuals are: a decline in the wage share of the middle wages, an increase in the prevalence of part-time jobs at the lower end of the labor market, and an increase in the concentration of income at the high end of the labor market. We analyze the relative contribution of income inequality between genders, between Jews and Arabs, and by years of education to the total level of inequality. We show that individuals with secondary education or less did not benefit from the contemporary growth in GDP. In addition, we analyze the trends in levels of inequality of equivalized household income from 1997 onward. We prove that the level of inequality before redistribution has declined due to an increase in labor force participation. However, the level of inequality after taxes and transfers has increased. We show that this increase is the result of a significant reduction in direct taxes and transfers.