Central bank data show prices have begun outpacing gains in income.middle class

Israel's middle class - the people who keep the country's high tech industry humming, pay most of the taxes, serve in the army and volunteer for school committees - is shrinking even as the economy is thriving and unemployment is at its lowest in decades. And that has economists and policy makers worried.

The combined share of the middle and upper-middle class in Israel's household population declined to 50.4% in 2010/2011, down from 55.7% in 1997, the Bank of Israel said in a study released this week. The bank defined the middle class as anyone with income between 75% and 125% of the national median and upper middle class as 125% to 200%. That works out to between $1,925 and $5,140 a month after taxes.

While the wealthiest as a percentage of the population grew slightly, the biggest change was the growth of the lowest wage earners - those earning 75% or less of median income - grew nearly five percentage point to 30.2% of the population.

"There is clearly social significance to this trend. It says more and more people - basically all wage earners and self employed - have seen their incomes stagnate while the economy is booming. This is one explanation for the outburst of protests last summer," Joseph Zeira, a professor of economics at The Hebrew University, told The Media Line.

Sparked by the high price of cottage cheese, Israeli erected tent cities and staged mass rallies across the country last summer demanding action to help a middle class squeezed by rising prices and fewer opportunities. The protests shook the government and prompted it to implement in January a package of reforms, including free early-childhood education.

While the protests faded by last autumn, many - not the least the protest organizers themselves - say Prime Minister Binyamin Netanyahu did too little to address the problem. Many observers expect the movement to come back to life in the spring.

"There are a lot of people who remain very active and are planning summer activities. They are really determined to do it and this time it will be more planned than last time around, a lot more effective," Roni Kaufman, a lecturer in the social work department of Ben-Gurion University, told The Media Line. "The activists haven't disappeared."

Israel is not alone is seeing its middle class come under pressure. In the U.S., for instance, the percentage of households whose income falls within 50% of the median dropped to 42.4% of the total last year from 44% in 2000 and just over 50% in 1970. Economists blame a host of factors, including a globalized economy that has eliminated many well-paying jobs in the industrialized West as well as tax polices that favor the wealthy.

The Israeli economy has shared many of these global trends, but the declining weight of its middle class comes as the economy by almost every other measure has been thriving for the last decade. Economic growth barely stalled during the 2008-2009 global recession and Israel's jobless rate fell to 5.4% in the fourth quarter of last year, the lowest in 30 years.

But the Bank of Israel found that the prices for products and services used by the middle class, which include everything from housing costs to automobile upkeep and education, have started faster than incomes. Incomes were rising faster for the decade until 2007, but the trend has reversed in recent years, the bank found.

Meanwhile, government spending on services that benefit the middle class like health and education remain low by Western standards.

On the balance, the Bank of Israel believes the country's middle class is unhappy. "They are the ones most likely to say that the burden - social, economic and security - are carried by them, but that they feel that their standard of living and the quality of services they get from the state are deteriorating," the bank said.

A poll conducted last June by the Israel Democracy Institute (IDI) and Tel Aviv University found that three-quarters of those surveyed said their economic conditions had worsened in recent years or remained the same. Only 3% said it had "greatly improved," according to the poll.

Zeira attributed middle class squeeze to multiple factors, among them the increased use of workers under temporary contracts, who tend to be hired at lower wages and with fewer social benefits than those directly on the payrolls of government and corporate employers. The large number of foreign workers in Israel, he said, has driven down wages even for the middle class.

This means that even as gross domestic product per capita and productivity have risen in Israel, middle-income earners have not seen those gains in their paychecks.

Kaufman dismissed the impact of globalization as a factor in the decline of the middle class and puts the blame on Netanyahu's free-market economic policies

"In last decade, the labor market has changed. There is no unemployment. People are working, but not full time and at lower wages," Kaufman said, urging the government to create new, full-time jobs by reviving the social services that have been cut back over the last decade," Kaufman said. "A welfare state gives a lot of work to middle class professionals. They're the big beneficiaries from it even if it serves the poor."

The Bank of Israel figures indicate how important full-time work is to the middle class. Among middle class families, more than 40% had two full-time wage earners, which enabled them to accumulate enough household income, up from just over 30% in 1997.

Zeira, who acted as an adviser on economic policy to last summer's protest movement, said the most effective way to reverse the trend would be for the government to increase social spending. His committee recommended last summer that the budget should be increased by 2.5 percentage point of GDP, which would work out to about 20 billion shekels ($5.3 billion) annually.

by David Rosenberg via The Media Line