The Effect of Education on the Labor Force Participation Rate in Israel
- The increase in the level of education of the population is the dominant factor in the increase in the labor force participation rate in Israel during the last decade.
- The participation rates within each of the individual education levels did not increase significantly during the past decade.
- Strengthening the government's work incentive policy is important to encourage additional population groups to work and, for this purpose, to obtain the appropriate education that will enable them to enjoy the high rewards of employment.
The labor force participation rate in Israel (the percentage of workers and those searching for work out of the population aged 15 and older) increased between 2002 and 2012 by about 4 percentage points, and contributed to an increase in the rate of employment in the economy. This increase was in line with government labor market policy in the last decade, which focused to a large extent on work force participation incentives, inter alia through "Welfare to Work" programs such as the "Orot LeTa'asuka" (Lights to Employment) program and the Wisconsin Plan, the reduction of allowances to people of working age and the provision of an earned income tax credit for employees, subsidizing child care in order to encourage employment among mothers, and raising the retirement age.
Alongside the effect of policy, labor force participation has been influenced to a great extent by the level of education among the working age population. Figure 1 indicates that groups with high levels of education are characterized by a relatively high participation rate. It also shows that the participation rate among all education levels does not increase over time, yet the overall participation rate continues to increase. This is because the average education of the working age population (Figure 2) has increased over time. The combination of these facts shows that the increase in the level of education is the main reason for the increase in the participation rate.
For the purpose of assessing the effect of an increase in the average level of education on the participation rate, we estimated two theoretical participation rates. The first simulation (the blue line in Figure 3) presents only the effect of a change in the participation of each education group, while setting the weight of the education levels as they were in 1997. It thereby expresses the participation rate that would have been obtained had the level of education of the working age population in general increased since then. The second simulation (the black line in Figure 3) presents the effect of an increase in the level of education of Israeli society in general, sets the participation rate of each group, and expresses only the effect of the change in the weight of the education levels. The simulations show that since 1997, the theoretical participation rate excluding the effect of the general increase in the level of education declined slightly, and a change in the participation rate of each group separately did not contribute to the overall level. Thus, the increase in the level of education of the general population is the dominant factor in the increase in the participation rate.
The increase in the level of education of the population reflects, to a great extent, the increase in the rate of students studying at academic institutions beginning in the 1990s, mainly due to an increase in the supply of student places at colleges. This increase moderated in recent years, and between 2009 and 2011, the rate of undergraduate students among the population has almost not changed. The stoppage of the increase in the rate of students overlaps the closing of the gap between the number of those completing high schools who meet the benchmark for being accepted into universities and the number of young people continuing with academic studies. The rate of high school graduates who meet the acceptance benchmark and the rate of young people beginning studies at academic institutions (Figure 4) increased moderately in the past decade, both reaching 46.6 percent in 2010. The closure of the gap and the moderation in the increase in the rate of students among the population show that the main roadblock to a continuing increase in the level of education of young people is not the number of available spaces in the higher education system. Therefore, we must currently act with increased vigor to increase the rate of high school graduates who are fit for academic studies, and in particular to increase the rate of matriculates who are fit for such studies among ultra-Orthodox Jews and Arabs, among whom the current rates (to 2010) are just 5 percent and 35.7 percent, respectively.
The analysis shows that the increase in the level of education among the population—the result of the significant investment in expanding the higher education system, mainly during the 1990s—is the most significant factor in increasing the Israeli workforce participation rate, and that the rate of students has increased markedly even before the noticeable changes in the government's work incentive policy. At the same time, over the long term, the appropriate incentives have tremendous importance in encouraging additional population groups to join the workforce and, for this purpose, to obtain the necessary education that will enable them to enjoy the high rewards of employment.