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The negative labour market outcomes of a Moslem minority: How policy can make a big difference

The labour market outcomes of Israeli Arabs, who are mostly Muslim, are negative in terms of participation, employment, and wages. There is a significant gap between their outcomes and those of the majority in Israeli society. This column introduces CEPR Policy Insight 78, which shows that government policy may make a big difference through investment in education, active labour market policies, physical infrastructure, tax and benefits reform, and anti-discrimination legislation and enforcement. The estimated rate of return on these policies is relatively high. And the lessons to be learned could be applied to other Muslim minorities. 

In Israel, almost 21% of the 8.3 million population is Arab, predominantly Muslim. The economic performance of this native minority lags behind that of Jews, in particular in the labour market. Recent work has documented the key features of this under-performance and has studied policy solutions. Some of these issues and solutions may be relevant for other advanced economies with Muslim minorities.

Unfavourable labour market outcomes

The key problems of Israeli Arabs are1:

  • For men – a high degree of concentration in industries and occupations located at the lower part of the skill distribution.

This fact has several consequences. Early retirement due to the physical nature of the work in question, retirement that is premature even compared with Palestinian labour force participation patterns, and with those of men in Muslim and Arab countries; below-average productivity and wages; under-employment in more highly-skilled occupations, even among those with appropriate skills; and disincentives to study and acquire skills for the younger generation.

  • For women – the headline issue is that of low rates of labour force participation.

This fact has the following implications. Women do not play a meaningful role in the economy's productive side; they do not (to a significant degree) help their families escape poverty; and there is insufficient incentive for young women to pursue education and acquire skills – including social skills – necessary for labour market participation.

These problems are the result of many factors, including relatively low education levels, limited geographical distribution, inadequate resource allocation on the part of the public sector, and cultural differences. Consequently, Israeli Arabs rank among the country’s poorest population sectors and seem to be ‘stuck’ in a poverty trap.

The problems are exacerbated by two phenomena:

  • Employment discrimination and wage discrimination, with many Arabs facing barriers to suitable employment.
  • A high cost of getting to work due to a lack of transportation or the absence of support services (e.g., child care facilities). Some of these problems are related to Israeli Arabs’ geographical dispersion and to poor transportation infrastructure.

The problems create a vicious cycle. When the population is poor and its labour market participation is only partial (women) and subject to barriers (men), it is difficult to invest in basic and higher education and to develop employment opportunities. This, in turn, leads to continued poor performance in the labour market. The physical and cultural distance from Jewish employment and residential hubs intensifies feelings of alienation and poses an obstacle to efforts that may reduce discrimination. When these problems compound each other over the course of time, the incentive and willingness to change the situation are negatively affected.

Policy solutions

In a new CEPR Policy Insight (Yashiv and Kasir 2015), we present wide-ranging policy solutions to these problems. The solutions span the spheres of education and higher education policy, matching jobseekers and job vacancies, taxation and subsidisation, transportation, encouraging population dispersion, encouraging the employment of university graduates, promoting employment of women, and more. The proposed solutions include policy measures aimed at addressing issues within the Arab sector and measures to increase integration with the Jewish sector.

Given the multiplicity of problems and their gravity, these solutions entail significant fiscal costs. The policy paper presents a budget breakdown. Expenditures run into the hundreds of millions or even billions of New Israeli Shekels (NIS) for certain items (4 NIS = 1 USD). The budget numbers reflect the recognition that the proposed expenditures are meant to address structural problems of the economy from a long-term perspective, with the expectation of significant returns in terms of increased employment, GDP and economic welfare.

Rate of return on policy measures

In line with the latter, the paper undertakes an analysis of the return to be expected from the proposed policy measures, by comparing the cost of these measures with their value in terms of increased GDP. The internal rate of return on the fiscal investment in promoting Arab women’s employment, over a horizon of 40 years, is around 7% per annum, under the most conservative estimates, making for a substantial lower bound on the expected returns.

Implications for European economies

The situation of Arab Israelis is evidently not the same as that of Muslim minorities in Europe. The former group is a native minority, while the latter is the result of immigration over decades. Israel has conflictual relations with the Arab world surrounding it, which impact the relations of the Jewish majority and its Muslim minority. This is not the case in Europe. However, there are important similarities. In both cases these are Muslim minorities in advanced economies that are economically disadvantaged. Claims of discrimination are prevalent. Cultural issues are important for labour market outcomes. Policy is lacking in both cases. Hence, there is some room to learn from the Israeli experience and the cited policy proposals to the European case.


Yashiv, E and N Kasir (Kaliner) (2011), "Patterns of Labor Force Participation Among Israeli Arabs", Israel Economic Review, 9, 1 , 53-101. 

Yashiv, E and N Kasir (Kaliner) (2013), “Arab Women in the Israeli Labor Market: Characteristics and Policy Proposals”, Israel Economic Review, 10,  2 , 1–41.

Yashiv, E and N Kasir (Kaliner) (2015.), “The Labor Market of Israeli Arabs: Key Features and Policy Solutions”, CEPR Policy Insight 78, February.


1 The issues which follow are discussed in detail, including empirical evidence, in Yashiv and Kasir (2011, 2013).

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