01.06.2010
 
The level of income and the incentive to work among people in the income support system
 
The following is a summary of an issue discussed in Economic Developments in Recent Months no. 127, January to May 2010, to appear shortly.
 
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  The income-support benefit in Israel is not generous by international comparison.
  The relatively low level of the benefit, a high degree of progressiveness of the direct taxation system in Israel, low rates of reduction of income-support benefit and of other financial benefits against income from work, and earned income tax credit (EITC, or negative income tax) (in certain localities only), create a strong incentive, by international comparison, for recipients of the benefits to work.
  Labor law enforcement should be reinforced, the EITC program should be made country-wide, and the credits increased in order to reduce poverty among workers and to boost employment.
The main objective of income-support systems in Israel and world wide is to ensure a minimum income (a social "safety net") for those who do not earn enough or do not work because of incapacity or short supply of workplaces. Entitlement to the benefit is determined by a means test and an employment test (for those capable of working). An international comparison of maximum transfer payments to two-parent households, not home owners, with two children (aged 4–6) shows that in most countries in the peer group the income of those dependent on transfer payments only is below the poverty line, according to the relative definition (50 percent of the median income standardized and adjusted for family size, by the methodology used in the OECD). Transfer payments in Israel using the above measure are markedly low compared with other countries, about 34 percent only of the median income (standardized and adjusted for family size) (Figure 1).
The features of the income-support systems (particularly the reduction of the benefit against income from work and the job search requirements), taxation on work income, and transfer payments, all these serve as means to encourage recipients of transfer payments who are capable of working to join the labor force (or to increase their working hours) and achieve economic independence. The marginal effective tax rate (METR) measures how much of a given change in gross earnings is taxed away through income tax, social security contributions and reduction of benefits because of work income. This is an accepted measure that examines the extent to which the tax and the transfer-payments systems provide an incentive to work. In Israel the incentive to work, as measured by the METR, is relatively high (compared with other countries) (Figure 2), due to several factors. (1) Israel's low position among other countries with regard to income deriving from transfer payments; (2) the relatively low reductions from the income-support benefits and transfer payments against work income; (3) the earned income tax credit (EITC) program in areas where it is operational; and (4) low rates of direct tax on low-wage earners, mainly as a result of a high minimum (income) tax threshold and low rates of National Insurance and Health Tax contributions.
Although the minimum wage in Israel is high relative to the median wage of a worker in a full-time job, the chances of finding steady work in a full-time post at that wage level are not high, and there is a low level of compliance with the Minimum Wage Law. Hence the ability of recipients of the benefit and of those with low earning capacity to integrate into the work place and obtain employment should be improved and their rights in the labor market guaranteed. To achieve that a nationwide model to take the place of the now defunct Lights to Employment scheme should be formulated, the labor laws should be more rigorously enforced, the credits in the EITC program should be increased and the program should be extended country wide, and work-support services should be widened (including improved transport access to workplaces and the provision of quality child care services––subjects featured in the OECD report on Israel's labor market).
Figure 1
Net Income of a Household with Two Parents and Two Children from Transfer Payments1 as Percentages of Median Income2, and (Gross) Minimum Wage as Percentages of (Gross) Median Wage for a Full-Time Employee