Sure you can make it in Israel — if your parents help, say economists

Sure you can make it in Israel — if your parents help, say economists

In today’s Israel, say Taub Center researchers, hard work and talent will not provide upward mobility, with a few exceptions. New immigrants ‘need to have a plan’

Simona Weinglass is an investigative reporter at The Times of Israel.

Israeli President Reuven Rivlin welcomes new immigrants from the USA and Canada, on August 12, 2014. (Mark Neyman/GPO/Flash90)
Israeli President Reuven Rivlin welcomes new immigrants from the USA and Canada, on August 12, 2014. (Mark Neyman/GPO/Flash90)

There’s an old saying among olim — immigrants to Israel — that if you want to make a small fortune in Israel, come with a large one.

Now, a series of studies by researchers Gilad Brand and Eitan Regev of the Taub Center for Social Policy Studies in Israel confirms this proposition.

Unless they are in the top 20 percent of income earners, Regev told The Times of Israel, or unless they already own significant assets, a typical professional couple making aliya from abroad will likely never be able to save enough money for a down payment on an apartment.

This is due to a convergence of three factors — Israel’s high cost of living compared to other OECD countries, its low productivity and associated low salaries, and the skyrocketing price of apartments.

“Basically the story nowadays in Israel is that wealth and assets have become more important than hard work,” Regev explained.

Unless you and your spouse both work in professions that put you in the top fifth of income earners (e.g. high-tech engineer, doctor, money manager), or you have pre-existing assets, “then it’s not only hard to make ends meet, there’s also the desperation of not being able to see yourself on a probable path of getting ahead in life and saving money.”

(Photo credit: Courtesy)
(Photo credit: Courtesy)

That’s because most young couples in Israel save money primarily through the mortgage on their apartment. But most cannot amass the NIS 400,000 they would need for a down payment on even an inexpensive apartment — without parental help.

What this means is that upward mobility in Israel is increasingly reserved for those with well-off parents, said Regev.

“Many young couples have a feeling that it doesn’t matter how hard I or my spouse work, there is no way to get ahead.”

In a series of recently published papers entitled “Causes of the Widening Productivity Gaps Between Israel and the OECD: A Multiyear Industry-Level Comparison,” “The Cost of Living in Israel: An International Comparison and Historical Perspective” and “Making Ends Meet – Household Income, Expenditures and Savings in Israel,” the two doctoral students in economics lay out in numbers and charts why this is so and what can be done about it.

(Photo credit: Courtesy)
(Photo credit: Courtesy)

In other words, if you’re having trouble getting ahead in Israel, it may be because without rich parents or a head start, it’s nearly impossible to do.

Why it’s so hard to get by in Israel

Imagine a hypothetical couple, Carole and Marc, who decide to heed Prime Minister Benjamin Netanyahu’s call to the Jews of France to make aliyah. Carole and Marc are in their early 30’s, have two small children and are healthy, ambitious, well-educated and highly skilled. Carole is a pharmacist and Marc is an economics professor. How does this exemplary couple fare when they come to Israel?

“Well,” said Regev, who is himself a dual French-Israeli citizen, “assuming they want to maintain their high lifestyle and move to a city like Tel Aviv or Netanya, the pharmacist might earn NIS 12,000 a month and the economist NIS 15,000. After taxes, this gives them a little over NIS 20,000 a month. Their rent will be NIS 5,000-6,000 a month and then there is gas, food, and childcare.”

(Photo credit: Courtesy)
(Photo credit: Courtesy)

Regev’s conclusion? “Maybe they would get by but they wouldn’t get ahead. They won’t be able to save enough to buy a house. And if there is any crisis, if someone gets sick, if someone loses their job, it puts this family at risk. Because they don’t earn enough to buy an apartment, they have no cushion when a crisis occurs.”

And this is a relatively high-earning couple. For those lower down the socioeconomic ladder, life can be a daily struggle.

“If we look at the last report of the Bank of Israel about financial stability of households, we see a dramatic rise in the scope of debt of households, not for housing,” said Regev.

“Meaning this is debt for other purposes. When you see a rise in that kind of debt, you know it’s not speculative investment in housing, you know it’s not people using the low interest rates to take bigger mortgages, these are families in distress.”

Regev said the trigger for this impoverishment of households was the market rise in the prices of housing. Prices have risen 6 percent a year since 2007 and it now costs 148 monthly salaries to buy a home here, compared with 76 in France and 66 in the U.S.

Still, not everyone in Israel is suffering. Regev points out that 70 percent of Israeli households already own one or more apartments.

“If you bought a house when they were cheap, and even bought some houses for investment, then you are benefiting from the current situation. You have some poor student paying rent to you. But if you’re a young couple that didn’t have a chance to accumulate those assets, then life can be very frustrating.”

High cost of living, low salaries

Gilad Brand looked at consumer prices in Israel and found that relative to incomes, prices are higher here than in every OECD country except Japan. He and Regev also found that outside of the high-tech sector, Israeli worker productivity has stagnated since the early 1990s, and is well below the OECD average. The last decade has also seen a near stagnation in real wages.

Both Brand and Regev surmised that these problems are caused by government regulation that allows industry after industry, including imports and wholesale, to be very concentrated.

(Photo credit: Courtesy)
(Photo credit: Courtesy)

“An Israeli importer has an agreement with a global producer and the global producer works only with him,” explained Brand. “He is not willing to sell his products to other importers. This agreement allows there to be a difference in prices between Israel and abroad. In other countries this system does not work, because other entrepreneurs come along and buy products in a secondary market, but in Israel the government ministries don’t make this possible, whether it is in the food, pharma or other industries.”

A second industry that is collecting high economic rents and dragging Israel’s productivity down are wholesalers, especially in the food industry, said Regev and Brand, where distributors often mark up the price of fruits and vegetables by hundreds of percentage points before selling them to supermarkets.

“Sometimes this middleman will even destroy produce,” said Brand, which he does with impunity because “there is no competition between middlemen, it’s an oligopoly.”

In fact, the three industries of food production, food wholesale and food retail alone account for 50 percent of the widening productivity gap between Israel and the OECD, according to Regev and Brand.

Both researchers agree with the assessment of social critics Guy Rolnik and Yaron Zalicha, who argued in their popular television series The Silver Platter that entrenched interest groups and crony capitalism are responsible for Israel’s widening gap between rich and poor.

“Many people think the problem of the Israeli market is that it’s too capitalistic,” said Regev. “Actually, it’s the exact opposite. It’s not competitive enough. It’s controlled by oligopolies and monopolies that reduce productivity and raise prices. Many Israelis blame the wrong address and think the problem is the improper distribution of public funds, when actually the real robbery is in the private sector.”

Urgently needed reforms

If they could enact four reforms to the Israeli economy tomorrow, Brand says he would completely open Israel to imports and do away with regulations by the Standards Institution of Israel that block products with European standards. He would prop up small businesses, enabling them to compete with large businesses and bring down the prices of local products as well as compete for local workers and drive up their wages.

Regev said he would introduce competition to the wholesale and retail sectors as well as bring all the bureaucracy for housing starts under a single umbrella, dramatically shortening the building period for new houses and solving the housing crisis from the supply side.

If all these reforms were enacted tomorrow, Regev and Brand estimated it would take 3-4 years for the average Israeli to see relief in their bank account. In the meantime, they said, Israeli society is in an unsustainable downward spiral.

“We’re seeing the transfer of money from the younger generation to the older generation and from working people to people with assets. It’s like Thomas Piketty wrote, revenue from assets is higher than revenue from work.”

As for young people without assets who want to make aliyah, Regev and Brand advise them to think carefully.

Professions that are prestigious abroad but may not allow you to be upwardly mobile in Israel include accountant, economist, psychologist and even lawyer.

“People should be aware of the challenges and come prepared,” said Regev. “If you have a profession in demand, such as a doctor or high-tech engineer, definitely you can make it here, but you need to have a plan.”

Brand for his part says that since the social justice protests of 2011, he has seen slow progress in the right direction. There is a committee in the Economy Ministry seeking to dismantle barriers to imports, he said, as well as a proposed law by the Finance Ministry to disrupt the monopoly of the Standards Institute.

“I’m optimistic,” he said. “We’re not discouraging people from coming to Israel. I hope they do decide to make aliyah, and help us improve things here.”

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