Although massive vaccination campaign against COVID-19 is taking place in Israel – which leads the world, by far, per-capita, in such an effort – the pandemic will have long-term, harmful effects by increasing distress and poverty in the country, according to the 2020 State of the Nation Report just released by the Taub Center for Social Policy Studies in Israel.  The non-profit, independent research institute located in Israel said that the pandemic will have significant implications on the working-page population, especially young adults, and on Arab Israelis. 

The incidence of poverty was expected to grow by 8% to 14% in 2020 and inequality – already too high – was predicted to grow by 1.5% to 4% during the year of the pandemic. 

Worse or much worse than their situation before the crisis

According to the report, 45% of the Israeli working age population (ages 21to 64) and nearly half of Arab Israelis report that their economic situation is worse or much worse than their situation before the crisis.

As many as 44% of the workers who were fired or placed on unpaid leave in April 2020, which saw a peak in unemployment, were young adults up to the age of 34, while their share of the labor force is only 38%. Almost one-half of unemployment insurance recipients during the crisis were under the age of 35. In addition, many of the young people still working experienced a drop in their wages. Of all age groups, the group where the highest share of earners experienced a drop in their wages was among 18 to 24-year-olds (53%). At the same time, the share of people looking for jobs up to age 34 increased between March and October, and the share of young adults among workers returning to the labor market rose from 41% in March to 54% in August.

Employed women especially suffered under the pandemic. At the beginning of the crisis, 38% of Israeli women were unemployed or on unpaid leave compared to 30% of men. In June, the trend reversed and the rates were somewhat higher among men. Unemployment then rose again among women and was three percentage points higher than men in October.

The main victims of the crisis

A breakdown according to level of education shows that the main victims of the crisis, particularly during the lockdowns, were individuals with low levels of education. The impact of the crisis was particularly severe among young workers (18-29) and among older workers above retirement age (65 to 74), even between the lockdowns.

The unemployment rate of haredi (ultra-Orthodox Jewish) men reached 48% in April, compared to 28% among non-haredi men, and remained high through the second lockdown. Among the self-employed the respective rates were 11% in June 2020, compared to 2% in the previous year. The impact of the crisis is not confined to the share of workers who left the labor market; it also affected the average number of hours worked. Average workhours in Israel declined substantially during the first wave of the crisis – April 2020 workhours were about 14% lower than workhours in February 2020 and 9% lower than in April 2019 – but were actually higher during the second wave in October than during the same time the previous year (likely for reasons unrelated to the pandemic).

Similar to countries with the lowest rankings

Before the coronavirus pandemic, the labor market in Israel was “tight, resilient and characterized by full or near-full employment. However, the Israeli labor market, as well as markets around the world, experienced substantial disruption in 2020 with the outbreak of the coronavirus pandemic and the implementation of social distancing,” the researchers wrote. 

While Denmark and Sweden consistently spend over 11% of their gross domestic product (GDP) on social investment, Israel’s spending varies between only 6.7% and 8% of GDP. Israel spent only about 4% of GDP per capita on social investment for working-age individuals (ages 20 to 64), similar to countries with the lowest rankings. For people from birth to 19-years-old, Israel is ranked lowest, with social investment of about only 15% of GDP per capita (versus 27% in Sweden and Denmark).

Among the lowest in the OECD

Public expenditure on early childhood education and care for young children ages 0 to 4 is very low in Israel and stands at only about 8% of GDP per capita, in contrast to about 27% in other advanced countries. Israel’s rate of investment in active labor market policies (ALMPs), which focus on integration into the labor market, is among the lowest in the OECD at about 0.17% of GDP, versus an OECD average of 0.54%.

In 2018 and 2019, the Israeli government carried out no major initiatives in social welfare policy, but due to the pandemic if was forced to act in response to the burgeoning social problems in the country. As in the case of other Western countries, Israel has focused primarily on providing social protection in response to the crisis, particularly expanding the coverage of the social security safety net and unemployment insurance. Of the NIS 58 billion increase, NIS 7 billion represents a natural increase in the budget, 900 million reflects a rise in the level of cash benefits to people with disabilities, and NIS 50 billion reflects budget additions to deal with the coronavirus crisis.

The number of unemployment insurance recipients

Overall, there was a 47% increase in welfare expenditure between 2019 and 2020, compared to a 6% increase in the previous year. But in fact, only NIS 1.5 billion (US $468 million) the NIS 4.7 billion US $1.44 billion was actually allocated for social investment. Unemployment insurance was adapted through measures such as extending the maximum eligibility period through June of this year, shortening the qualification period from 12 to six months and approving dual benefit payments. There was an 11-fold increase in the number of unemployment insurance recipients – from a monthly average of about 70,000 in recent years to about 900,000 in April 2020. According to the report, the number of recipients of income support did not grow substantially in the wake of the crisis, rising by only about 17% during the first few months of the year — from about 72,000 prior to the crisis to about 84,000 in April.

Apparently with an eye toward upcoming elections, the government carried out two rounds of universal one-time grants to a large share of the population, a rare practice in other Western countries, which had only a short, minor effect on increasing income. But the money handed out by the government and allocations for Corona testing and vaccinations and hospital and community medical care has so far produced the country’s highest-ever budget deficit in 2020 – NIS 160.3 billion (US $50.4 billion), or 11.7 percent of its GDP, the Finance Ministry said Monday. The huge deficit — some three times higher than that of 2019. 

A drop in productivity

The Israeli workplace changed drastically as a result of the pandemic, and it looks as if some changes will be permanent. A Central Bureau of Statistics survey of businesses showed that 16.5% of employers who allowed their workers to work from home were interested in continuing to do so after the crisis. The good news is that work from home reduces the need to commute, makes high-quality employment more accessible in the periphery and for the handicapped and provides flexibility in workhours. However, it has also resulted in a drop in productivity in some businesses and minimizes beneficial social contact.

Employers have had to cope with the crisis by making strategic decisions and adapting ways of working. Some companies also took advantage of the crisis in order to implement efficiency measures that do not necessarily relate to the crisis itself, according to the Taub Center report. Small businesses employing five to 10 workers reported that since the beginning of the crisis, they had fired over one-fifth of the workers they had employed prior to the crisis. In industries that can switch more easily to working from home, such as hi-tech and finance, a much smaller percentage of workers were dismissed or sent on unpaid leave.

The coronavirus crisis drastically changed the trends in economic growth of recent years. During the first three quarters of 2020, the GDP dropped by 3% relative to the same period in 2019, and 2020 is espected to show a decline of 4.5% to 5%. Given an annual rate of population growth of 1.9%, this implies a drop in GDP per capita of up to 6.9%, which will set Israel back about six years. According to the Bank of Israel’s optimistic forecast, GDP is expected to grow by 6.5% in 2021, which would result in a 5% lower GDP at the end of 2021 than expected without the crisis.

The drop in GDP was accompanied by a decline in consumption, particularly during the lockdowns: average daily total credit card expenditure showed a decline in activity of 21% with the first lockdown in March, and a more moderate decline of about 10% with the onset of the second lockdown in September.

In a breakdown by sector, expenditure in gas stations declined by 49% during the first lockdown and by 21% during the second. In the restaurant industry expenditure was reduced to one-third its normal level and by 34%, respectively, and in hotel and leisure industries expenditure was reduced to one-quarter and one-half its normal level. In grocery store chains, expenditure rose by more than one-third during the first lockdown.

Looking ahead to two decades from now, the Taub Center study made a variety of forecasts of Israel’s population by 2040 using a range of realistic assumptions regarding future fertility, mortality and migration patterns. The country’s population, currently  about nine million people, is projected to reach between 12.4 and 12.8 million in 2040. The proportion of the population that is Jewish/other is expected to fall to 78%, where it will stabilize. A substantial increase in the number of over 70-year-olds is expected – from 669,000 in 2017 to about 1.41 million in 2040, with a higher rate of aging in the Arab Israeli sector. In the Jewish sector, the number of births will grow at a decreasing rate during the 2020s because of the lower number of Jewish women in their early to mid-twenties (relative to those aged 30-34). By 2030, the number of births will increase sharply as a large number of women reach childbearing age. Though the fertility rate is declining in the Arab sector, large age groups have begun to enter peak fertility ages, which is likely to generate a notable rise in the number of births in the sector. 

Together, these two population dynamics will change the ratio of Jewish to Arab births, first reducing it, then increasing it to its current level. A large group of people will age into their 50s in the next two decades – a high point for individual productivity and income, and therefore tax income and consumption for the state. There is a large group of 5 to 19-year-olds who will be entering the labor market and institutions of higher education in the coming years, much larger than the group that entered these institutions in the last 15 years.

Given the above projections, the researchers recommended that appropriate measures be taken to integrate large numbers into higher education and the labor market; preparations should be made for old-age pensions and long-term care services; and timing investment into the education system is urgent. Understanding future growth patterns for each segment of the population will help policy planning for growing populations in Israel.