Gender, ethnic, and national earnings gaps in Israel: The role of rising inequality

The Israeli society is ethnically diverse and it is an ideal case for studying the role of rising inequality on the widening earnings gaps between dominant and subordinate groups. Earnings differences between Ashkenazi men-the dominant group in Israeli society-and the other major ethnic/gender groups in the Israeli labor market and society (Mizrahi men, Arab men, Ashkenazi women, and Mizrahi women) have not narrowed since the early 1970s, despite a gradual convergence in the educational attainment and other productivity-related characteristics of the five groups. In an attempt to solve this puzzle we focus on changes in the earnings structure (i.e., changes in returns to earnings determinants) of the Israeli labor market during the period 1975-2001. To this end, we identify and estimate the effects of changes in the earnings structure on the development of earnings gaps between Ashkenazi men and the other four groups over time. We hypothesize that differences in returns to human capital grew faster than the rate at which between-group mean levels of human capital converged. The analyses are based on 1975, 1982, 1992, and 2001 Income Surveys conducted by the Israeli Central Bureau of Statistics. The results suggest that rising returns to productivity-related variables is indeed the main explanation for the widening earnings gaps between the major demographic groups in the Israeli labor market. Discrimination plays only a minor role, mainly in the case of Arab worker.