GETTING INTO THE CLUB: THE IMPACT OF THE ULTRA-ORTHODOX ON THE ISRAELI ECONOMY
A THESIS
Presented to
The Faculty of the Department of Economics and Business
The Colorado College
In Partial Fulfillment of the Requirements for the Degree
Bachelor of Arts
By
Alison Levin
February 2014
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GETTING INTO THE CLUB: THE IMPACT OF THE ULTRA-ORTHODOX ON THE ISRAELI ECONOMY
Alison Levin
February 2014
Economics
Abstract
Israel’s ultra-orthodox population presents a puzzle for economists. This population has large families and forgoes secular education despite high rates of poverty. Iannacone (1992) pioneered the use of a club goods model to explain the behavior of such religious groups. This paper utilizes Iannacone’s (1992) model of club goods in the context of Israel’s ultra-orthodox, and also presents the historical and religious background of the issue.
KEYWORDS: (club goods, ultra-orthodox, Judaism, religious economics)
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ON MY HONOR, I HAVE NEITHER GIVEN NOR RECEIVED UNAUTHORIZED AID ON THIS THESIS
Signature
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TABLE OF CONTENTS
ABSTRACT 2
1 INTRODUCTION 6
2 BACKGROUND 16 2.1 Historical Background ...... 16 2.2 Theoretical Background...... 22
3 APPLICATIONS OFTHE CLUB GOODS MODEL………………………………………. 25 3.1 Yeshiva Studies and Employment ...... 25
3.2 Fertility...... 27 3.3 The Paradoxical Rise of Ultra-Orthodoxy...... 29
4 CONCLUSION 31
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LIST OF TABLES
Ultra-Orthodox Employment Rates 2012 ………. …………………………….. 8
Introduction
5 The Jewish orthodox group in Israel known as the ultra-orthodox, or
Haredim, has grown from a very small group with origins in Eastern Europe to a population numbering about 800,000 people in 2011 (IMF Country Report 2012).
Ultra-orthodox or Haredi men typically have large families and do not work, and experienced a surprising increase in population during the 20th century. Instead of traditional employment, many Haredi men choose to pursue full-time religious educations, and their families are often recipients of substantial government aid, mainly in the form of child allowances. Scanning the headlines of any Israeli newspaper will reveal that many Israelis view them as an economic burden. The ultra-orthodox families’ exclusive communities and deferment from military service have also caused a deep rift to develop between them and more secular-minded
Israelis. With more than half of Haredi families living under the poverty line (Bank of Israel Annual Report 2012), it is likely that their economic situation will soon become an unsustainable burden on the economy. According to the International
Monetary Fund, the 800,000 ultra-orthodox Jews living in Israel today account for approximately 13 percent of the population, and it is estimated that their numbers will double by 2030, presenting a serious demographic issue (IMF Country Report
2012). Currently, transfers from institutions – otherwise known as unearned income – account for approximately 30 percent of an ultra-orthodox household’s income (The Kemach Foundation 2011). Not only this, but Eli Berman’s projection for the ultra-orthodox population in Israel when he wrote Sect, Subsidy and Sacrifice in 2010 was 510,000, whereas in actuality it reached approximately 750,000 by
2009, demonstrating unprecedented growth. Surprisingly fast growth rates mean
6 that Israel is unprepared to deal with the economic and social consequences of the ultra-orthodox population’s increasing reliance on government support.
Additionally, the contribution of taxes and transfer payments to welfare has decreased steadily over the years from 31.7 percent in 2003 to 23.5 percent in 2011
(Bank Of Israel Annual Report 2012). The Israeli public is therefore squeezed at both ends, due to an increasing population, a weak labor supply and simultaneous decreases in welfare payments.
This paper will attempt to shed light on why the Haredim continue to be underemployed and have large families, and also underscore the importance of reforming the current situation in which so many ultra-orthodox live in poverty. The choices of the Haredim seem to defy conventional rational choice models, which has caused economists to develop other ways of explaining such behavior. For this explanation, I assert that a model of club goods holds the most explanatory power, and employ Iannacone’s (1992) club goods model of religion. The theory of club goods understands religious groups as mutual-benefit organizations that produce positive externalities for the group members. In order to maintain the group’s quality, the group (or club) must impose restrictions upon the behavior of its members.
7 Employment
When the state of Israel was founded in 1948, the ultra-orthodox were few in number. They were not Zionists1 and were often in disagreement with the Zionist
Yishuv2, the secular political party that acted as a representative of the Jewish people under the British Mandate. To obtain the support of the Haredim when establishing the State of Israel, the Yishuv leaders agreed to make a number of concessions. First and foremost, it was agreed in the Status Quo letter of 1948 that the ultra-orthodox would be exempt from military service, and that they would have control over their own independent educational system. Details of the split between the two Jewish groups will be explained in greater depth in the next section.
The Haredim have had a great deal of autonomy over their education system since 1953, when the State Education Law granted the schools of the Agudat Yisrael3 party formal autonomy within the Ministry of Education. Because of this autonomy, nearly all Orthodox schools leave children, especially boys, undereducated in secular subjects. The Taub Center for Social Policy Studies in Israel (year?) found that Haredi boys typically do not study any core curriculum subjects after the eighth grade, and that the quality of instruction in those subjects prior to the eighth grade is not in keeping with the non-Haredi Jewish and Arab-Israeli schools. The Central
Bureau of Statistics found that only 83 percent of Haredi elementary schools were
1 Zionism is political support for the creation and development of a Jewish homeland in ancient Palestine 2 The pre-1948 secular political party 3 Agudat Yisrael, a Haredi-Hassidic party, was established in 1912 in the Diaspora. The famous letter from David Ben-Gurion which set down the guidelines of the religious "status quo" was sent to the leaders of Agudat Yisrael in 1947. (http://www.knesset.gov.il/faction/eng/FactionPage_eng.asp?PG=22)
8 teaching math, while 100 percent of all other schools were teaching math (Taub
Center State of the Nation Report 2012). In post-elementary education, the prevalence of math instruction fell to only 41 percent. This study found that other core subjects are similarly affected in the Haredi educational system. An educated population is essential to a nation’s prosperity, and the detrimental effects of insufficient Haredi education will only worsen as the Haredi population grows. In the Taub Center study, it was found that the unemployment rate for Haredi men was around 55 percent in 2011, which was extremely close to the unemployment rate of
Israeli men who did not complete elementary school (Taub Center State of the
Nation Report 2012). This number is high because some Haredi men choose to continue studying at a Kollel (adult yeshiva).
The Deferral of Military Service for Yeshiva Students Law – also called the
“Tal Law” – that was passed in March 2001 provides the legislative basis for draft deferrals for ultra-orthodox men, so long as they continue to study full-time at a yeshiva. Deferment of service can be extended and converted into an exemption by remaining in a yeshiva until the age of 41, or until age 35 with five children (Berman
1998). When the ultra-orthodox were informally granted exemption from military service by David Ben-Gurion in 1948, the exemption applied to only 400 men, who were deemed outstanding Torah scholars (IMF Country Report 2012). In 2012, the
Bank of Israel estimated that 37,000 men were enrolled in yeshiva and not serving
(Bank of Israel 2012).
Limited education in the secular subjects and smaller networks, as a result of deferring from military service are a great hindrance to ultra-orthodox men who do
9 wish to work. Some choose to study at a vocational school to further their skills and find employment, but only about 6,500 ultra-orthodox men were enrolled in such programs in 2012 (Haaretz, July 16th 2012). However, there are increasing numbers of Haredi men who do want to find secular work. In a 2008 study conducted by the
Jerusalem Institute for Israel Studies, it was found that 60 percent of the ultra- orthodox men surveyed were interested in gaining a secular higher education, and that 28 percent would consider institutions that were not strictly ultra-orthodox. It is important to note that these men would face potential difficulties in pursuing higher education, arising around their yeshiva stipends and draft deferment, if they began their studies before they had received a full exemption. Ultra-orthodox men have been able to remain unemployed for many years because the Ministry of
Religion traditionally provides income maintenance to families of Kollel students
(married students who study full time at a Yeshiva) whose wives do not work, and who have at least three children. These allowances have been decreased in recent years and further decreases in the future are sure to increase the number of Haredi families who live in poverty.
Haredi women receive significantly more secular education than their male counterparts, and traditionally become teachers. However, there are fewer and fewer teaching posts to be had as the population has increased and has not yet proportionately expanded into new schools. Many ultra-orthodox women choose to become teachers because this provides them with a suitable workplace environment that is both accommodating to religious observance and separate from men. It is also thought to be a manageable profession while raising a family. Some
10 women’s seminaries have added vocational courses in areas such as graphic design, bookkeeping, music and computers, but a lack of connections (generally made in the military for other Israelis) makes it difficult for them to find jobs. However, approximately 61.2 percent of Haredi women are employed (Bank of Israel Annual
Report 2012), and some are even helping to close the gender gap in the Israeli high- tech industry. In an article published in the newspaper Haaretz on January 15th
2013, several ultra-orthodox businesswomen are interviewed, and several Haredi high-tech business forums and advocacy groups are mentioned. Nonetheless, the women interviewed address the difficulties of doing business as members of the typically insulated ultra-orthodox community, and especially as women. The difficulties described include seeking out technical educations, independently developing networks that they would have developed had they served in the IDF and managing the difficulties of maintaining modesty in the workplace. For Haredim who acquire the skills necessary to find employment, there arises the issue of compatibility with the secular working world, which can be a deterrent to employment. For example, many ultra-orthodox women will only work in an all- female environment, and likewise some men will not work alongside women. In addition, many Haredim find themselves in unfamiliar work environments if they have grown up disconnected from Western culture and secular life. Tremendous suspicion of the secular world coupled with differing value systems, hierarchies and communication norms often make ultra-orthodox people who enter mainstream work environments uncomfortable. A relatively recent issue that has arisen in Israel is that of city planning with respect to Haredi employment. Many new housing areas
11 were developed alongside the ultra-orthodox population increasewithout any thought as to local employment prospects. Between the lack of opportunity for employment and the choice of many men to remain unemployed, standards of living in these areas have fallen. However, there is hope for improvement in ultra- orthodox male employment. The Bank of Israel issued a report on March 7th, 2012 on the issue, which found that there was a sharp increase in the employment rate among ultra-orthodox men from about 38 percent in 2009 to about 45 percent in
2011. Despite the increase, this is still significantly below the target rate of 63 percent employment by 2020 set by the government for the ultra-orthodox male population. The findings of this report are particularly interesting because they seem to reflect a true change, and one that is not a temporary market effect. This is because the “core group” of Haredi men – those who graduated from a yeshiva over a year before the survey was conducted – have entered the labor market at even higher rates than Haredi men who graduated from a yeshiva in the same year that the survey was conducted. In 2009, about 31 percent of the “core group” were employed, and this number increased to 38 percent in 2011. This indicates that there has been a genuine change, as these are the men who had previously remained unemployed after graduating from a yeshiva. Furthermore, this “core group” became more employed in the business sector in capacities excluding religiously- oriented professions (such as kosher food supervisors and ritual slaughterers). It is promising that a genuine increase in Haredi male employment seems to have taken place, but this population generally works fewer hours than employees who are not
12 ultra-orthodox. Additionally, Haredi men are still underrepresented in the business sector, while overrepresented in public services, including religious services.
Figure 1
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62.1 62.1 60 59.1 57 50.7 50 49.7 44.7 41.5 42.5 40 39.4 39.1 36.1 Ultra-Orthodox Jews, Male 30 Ultra-Orthodox Jews,
Employment Rate Female 20
10
0 1997 2003 2008 2009 2010 2011 Year
Source: Bank of Israel 2012
Fertility
A discussion of high fertility rates in conjunction with significant unemployment among Haredi men cannot avoid addressing questions about the effects of subsidies. Fertility rates of orthodox Jews in Israel steadily rose until the early 1990’s and have since tapered off. The National Insurance Institute reports ultra-orthodox fertility rates of 6.5 births per woman in the 1980’s, 7.50 in 1996-
1997, and a slight decrease to 6.74 in 2007. This poses a clear demographic issue, as
13 the ultra-orthodox have high take-up rates of government transfers. 64 percent of eligible orthodox Jews received the Earned Income Tax Credit (EITC) in 2011, the highest percentage among demographic groups. This credit is available only to employed workers with children, and is intended to act as a negative income tax to incentivize employment. According to the Bank of Israel, the average annual grant was around NIS 2,800 ($8004), and was increased by 50 percent for working mothers in 2013. The increasing fertility rates of the ultra-orthodox are clearly unsustainable given the population’s dire financial situation. So, what incentivizes them to continue having large families while they live in poverty? Many cite the
Biblical commandment from Genesis that reads “Be fruitful and multiply” as encouragement to have large families. The need to make up for the millions of Jews murdered in the Holocaust is another incentive. However, there are clearly additional economic forces at play. Child allowances have a significant effect on the fertility decisions of the ultra-orthodox. In the Israel Economic Review’s 2011 paper entitled The Effect of Child Allowances on Fertility, the authors demonstrate that ultra-orthodox women’s fertility is significantly affected by changes in child allowances. The November 2000 amendment to the National Insurance Law – called the “Halpert Law” – went into effect in January 2001, and increased the child allowance for the 5th,6th and 7th child by 47 percent, 33 percent and 43 percent, respectively. But in June 2003, child allowances for children born after that date were gradually reduced to the amount originally paid for the first child. In effect, this meant that the child allowance for a family with seven children increased from
4 January 26, 2014 exchange rate of 3.50 US Dollars to 1.00 New Israeli Shekel
14 NIS 3,558 ($1,017.97) in December 2000 to NIS 4,415 ($1,263.16) in January 2001, and was then drastically reduced in 2003. It is not surprising that this change in the law disproportionately affected ultra-orthodox women, who saw a decrease from an average of 7.24 births per woman in 2001 to 6.74 by 2006 (Israel Economic Review
Vol.9, No. 1 2011). The effects of the reduction in child allowances on fertility are greater among low-income families since the child allowance accounts for a larger proportion of their yearly income.
The growth of the ultra-orthodox population in Israel is a complex cultural, religious, and economic phenomenon. It presents three major puzzles to economists: (1) why men choose to continue to study at a yeshiva after receiving a deferment from the draft; (2) why fertility rates remain high; (3) and how it is that the population of the ultra-orthodox increased in the first place.
15 Historical Background
Before the first major wave of Zionist immigration in 1881, there were about
25,000 Jews living in Palestine who had immigrated largely from Europe, Yemen, and other parts of the Arab World for religious reasons (Brenner 2002). The first and second waves of immigration to Palestine consisted of Jews who were fleeing increasing persecution in their countries of origin. However, their Zionist-socialist ideologies divided them from those Jews who were already there, known as the “Old
Yishuv.” Explaining the opposition of the ultra-orthodox to Zionism is difficult. It is doctrinally complicated, because the Torah states that it is the duty of the faithful to settle in the Holy Land. The spiritual leader of German Jewish orthodoxy stated in the nineteenth century that Jews were commanded to hope and pray for their return to Zion, but that accelerating the redemption “contradicted the messianic promise of the Bible and the other sources of the Jewish religion” (Laqueur 1972). It was felt by the ultra-orthodox that the Jewish nation was spiritual, and that the establishment of a Jewish state was to debase its spirituality by borrowing modern secular nationalism from Europe. They believed that establishing a state was inconsistent with the spiritual emphasis in Judaism, and would remove its universalist character
(Laqueur 1972).
An example of the consequences of the major split between Zionist and non-
Zionist Jews in Palestine originated over an agricultural disagreement. In the Bible, it is referenced that every seventh year one should cease agricultural work and allow the crops to continue growing (Exodus 23:10). 1888 was to be a sabbatical year, and a disagreement arose between the Zionist settlers and orthodox groups
16 surrounding whether or not to harvest the crops, with the secular Zionists in support of harvesting, and the orthodox against it. This rift between the groups grew deeper after the Holocaust, when Zionist Jews perceived an urgent need for a
Jewish homeland, whereas orthodox anti-Zionist groups believed that the catastrophe had arisen because of the abandonment of traditional Judaism. Nearly
80 percent of religious European Jewry was killed in the Holocaust, and world Jewry lost about one third of its total population. This deep wound caused the ultra- rthodox to become deeply protective of what they saw as “correct” Judaism, and remains anti-Zionist, in opposition to a movement they view as materialistic and modern.
The term Haredim means “those who fear God,” and originates in the Bible
(for example, in Isaiah 66:5 and Ezra 10:3). However, modern political usage of the term can be traced back to the 1920’s. In 1912, the Agudat Yisrael party was formed in Poland in reaction to political Zionism.
Early on in the founding of the state of Israel in 1948, David Ben-Gurion made a pact with the leaders of Agudat Yisrael known as the “Status Quo Letter”5. In this letter, a variety of elements were agreed upon with the purpose of maintaining the Jewish character of the state. These agreements included the establishment of an independent rabbinate, deferring national service for students at yeshivas, and declaring Saturday the official Sabbath. The ultra-orthodox did not gain major political influence, however, until 1977 when the same Agudat Yisrael party was included in the coalition government under Prime Minister Menachem Begin.
17 Agudat Yisrael changed its tune in joining the coalition, seeing the potential economic and social benefits of being included in the government. It is important to highlight the long-lasting political effects of having ultra-orthodox political groups with significant political power. Because of the coalition structure of the Israeli government, religious parties have the potential to keep a tight grip over issues that they deem important, such as kashrut laws6, and maintaining funding for yeshiva education. The growth in the Haredi population has also meant that it yields more power in numbers, as more voters mean greater representation. In the political wrangling that goes on when forming a coalition government, positions of particular importance to certain parties (for example, the Minister of Education) are offered to the ultra-orthodox members of Knesset as an incentive for them to join the coalition.
In the most recent election in 2012 (the 19th Knesset), the largest ultra-orthodox parties, Shas and United Torah Judaism, received 8.75 percent and 5.16 percent of the vote, respectively. (Knesset.gov.il). The total of 13.91 percent of the vote that went to ultra-orthodox parties is obviously correlated with the fact that the ultra- orthodox currently make up about 13 percent of the population. However, this points to extremely high voter turnout amongst the Haredim, or over- representation by receiving votes from citizens who are not necessarily ultra- orthodox. Either way, the religious parties wield tremendous political power and influence. For many years, a member of an ultra-orthodox party has chaired the finance committee. Previous chairmen include Moshe Gafni (18th Knesset, 2009-
2013) and Yaakov Litzman (15th and 16th Knessets, 1999-2006), both of United
6 Kashrut laws govern what foods are considered fit for eating and drinking according to Jewish Law (Merriam Webster)
18 Torah Judaism. It is hard to track the allocation of money to institutions that primarily benefit Haredim, because they are often labeled as “coalition transfers7” in the budget.
Although the Haredim often take a stance in opposition to the policies of the state with regard to the role of religion, it is clear that they benefit from the state financially. Nonetheless, the Haredim see themselves as the religious and moral backbone of the state, which to some is viewed as an equal contribution to those who are employed. Some feel that they are in fact working in a sense, in the name of
Judaism and Torah. In her 2002 paper, Stradler offers three explanations for men’s withdrawal from the workplace. The first explanation suggests that miraculous events are to be expected by those who study Torah seriously. “Cast your burden on
Yahweh, and he will sustain you” (Psalms 55:22) is often cited as support for this viewpoint. The ultra-orthodox see the history of economic maintenance of the yeshiva student as evidence for its continued support, despite the huge increase in the number of yeshiva students. Many do not see their increasing numbers as ever causing this situation to become unfeasible, as they believe that God will provide for them so long as they continue to study Torah full-time. The second explanation
Stradler suggests is that there exists a strong belief in preordination with regard to income—that God is the exclusive provider of earthly needs. This rationalization reduces the perceived need to work. This essentially results in the belief that earning money through secular work will not improve one’s economic status, because it is already preordained. The third explanation is that work is considered a
7 Transfers between parties’ budgets within the government coalition
19 distraction from the higher calling of studying Torah. This view places academic and vocational study in direct conflict with religious study, rendering the former inferior and incompatible with the latter. In fact, when Knesset member and Rabbi Chaim
Amsellem asserted in an interview in 2010 that full-time, state-financed Torah study should be reserved for only a select few, members of his own ultra-orthodox party
Shas printed a special supplement in their newspaper labeling the rabbi as an
“amalek”—the biblical embodiment of all evil. Rabbi Amsellem felt so threatened by these accusations that he hired a bodyguard. Because of the intense debate and rhetoric that surrounds the issue of employment, Rabbi Amsellem suggested that a
“revolution” was needed to change popular sentiments towards work among the
Haredim.
There are many explanations for why the ultra-orthodox have large families despite the economic burden they incur. Some cite the Biblical commandment from
Genesis “be fruitful and multiply” as an indication that Jews are to fulfill their destiny by creating the many descendants who are so often referenced as being as numerous as sand, the stars, and the dust of the Earth.
To a large degree, the ultra-orthodox Jews of today preserve the lifestyle of
19th century central and eastern European shtetls8. Men typically grow beards, and wear long black coats and black wide-brimmed hats. Women dress modestly, and cover their hair with wigs or a scarves. The ultra-orthodox population uniformly observes kosher laws, keeps the Sabbath, and places emphasis on maintaining the laws of family purity. There is an immense amount of what Berman calls “mutual
8 Small Jewish towns or villages formerly found in Eastern Europe (Merriam Webster).
20 insurance,” which are benefits derived from being part of the group. Ultra-orthodox communities are typically extremely supportive of their members, providing them with all kinds of assistance including organizing meals for couples that recently gave birth, arranging hospital visits and offering interest-free loans.
21 Theoretical Background
The economic study of religion is relatively new. The subject of religion was generally left to other disciplines, as religion is not a normal market good. There are many religious groups that pose seemingly counterproductive restrictions on their members, such as the Jehovah’s Witnesses who refuse transfusions, the monks who take vows of poverty and celibacy, the Mormons who abstain from caffeine and tobacco and the orthodox Jews who submit to distinctive dress codes, dietary restrictions and Sabbath observance laws. Perhaps the first to address the issue of religion from an economic standpoint was Adam Smith, who argued in An Inquiry
Into The Nature and Causes of The Wealth of Nations (Smith 1952) that market forces apply to religious activity as they do to any other kind of market. The market for religion is complex because the goods are often intangible, demand for religious goods is generally high, supply is nearly infinite and there are very low barriers to entry to be able to ‘supply’ religious goods (such as holding a service). Probably because of these difficulties, it was not until the 1970’s that economists revisited
Smith’s thoughts, and began to seek ways to rationalize and model religious behavior. The first economic model of religious behavior comes from Azzi and
Ehrenberg’s (1975) paper titled Household Allocation of Time and Church Attendance, in which they suggest that the main goal of religious participation is an intangible good that they label ‘afterlife consumption’. In its essence, Azzi and Ehrenberg’s model is a major departure from sociology into economics, because it asserts that religious activities do yield utility, and are therefore rational. However, Ulbrich and
Wallace’s (1983) survey found that afterlife expectations do not seem to predict
22 religiosity. More recent literature on the economics of religion has shifted its focus away from the individual and has instead concentrated on group behavior (Berman
1998, Iannaccone 1992, Lechner 2006). Religious groups can be thought of as analogous to firms, and can then be analyzed as such. However, here lies the most significant distinction between normal markets and religious markets. Traditional rational choice theory begins with the assumption that our satisfaction is dependent upon our actions alone. Consider an experience at a religious congregation: If the members are generally unenthusiastic and not participatory, the service will not be enjoyable for anyone. But if a majority of the members are enthusiastic and satisfied with the service, other participants will be too. And if the congregation organizes other social activities, as many do, then members are all the more satisfied and have more reason to become more involved. In this way, the satisfaction of the other members has great influence on the current satisfaction of the individual.
This is where club models are useful: They view religious groups as mutual- benefit organizations that produce positive externalities for the group members.
The mutual insurance provided by the ultra-orthodox community (or “club”) is therefore a club good, in that it is excludable (only available to the members of the club), and greatly influenced by the quality of the club itself. In this way, the actions of the club members enter each other’s utility functions, and produce excludable externalities. Iannaccone’s (1992) model of efficient religious prohibitions and sacrifices can be modeled according to the following utility function, where Ui is a club member’s utility, derived from time spent on religious activities labeled R, secular goods S, and group quality Q. Q is equal to the average amount of time that
23 the other group members spend on R, therefore each individual’s satisfaction from participating in the club is influenced by all of the other member’s levels of satisfaction.
Ui = U(Si,Ri,Q), U1, U2, U3 > 0
Q = ∑ Rj/N-1
However, a utility function that is influenced by the quality of the other members of the group poses an intrinsic problem. Because people seek to maximize their personal welfare, this model will lead to an inefficient equilibrium where people will ignore the external benefits of their own behavior (which in turn influence the other members’ utility functions). To internalize these externalities, efficient clubs will impose prohibitions upon activities that compete for members’ resources. This helps to solve the free rider problem by discouraging less- committed members from remaining in the group. This ‘tax’ on alternative (namely secular) activities serves to increase their price, and causes members to substitute toward religious activities (Berman 1998). The two most poignant examples of prohibitions in Jewish orthodoxy include kosher laws and Sabbath laws, which severely restrict interaction with non-members. The following section will illustrate how the theory of club goods can help explain the phenomena of Haredi male unemployment and high fertility rates, and the birth of ultra-orthodoxy.
24 Applications of the Club Goods Model
1. Yeshiva Studies and Employment
The choice of many ultra-orthodox men to remain in yeshiva is puzzling. It completely defies price theory, because these men could instead choose to pursue a type of education that would allow them to amass greater human capital and earn greater income for their large families. It seems obvious to point fingers at the law enabling ultra-orthodox men to defer military service as the culprit. This is not the complete picture, however, as yeshiva attendance typically continues at least five years past the time that deferment becomes an exception—exemptions are achieved at age 35 for men with at least five children, or at age 41. It also does not seem to be the case that ultra-orthodox men simply have a preference for many years of Torah study over work, due to the fact that ultra-orthodox men in other countries typically do not remain in yeshiva past the age of 25. Practically speaking, this means that many 36-year old men in Israel are choosing to remain in yeshiva for 5 more years with a $400 monthly stipend, instead of earning at least twice that amount by working. It is clear that other forces are at work, then, if these men are to make choices that seem to invalidate conventional labor supply theory. A club goods approach helps to explain this phenomenon.
Iannaccone’s model of efficient religious prohibitions and sacrifices can be extended to explain the bizarre labor supply effects within the Israeli ultra-orthodox.
The ultra-orthodox have a variety of prohibitions, requiring strict dress codes,
Sabbath observance, restrictions on sexual behavior, etc. In addition, the group makes sacrifices in the form of circumcision, as well as through a lengthy devotion
25 to study in a yeshiva. In this model, yeshiva study can be viewed as a sacrifice, because it limits the choices of the individual by not endowing him with useful human capital. Iannaccone’s model shows members of the group deriving utility from time spent in religious activities (R), secular goods (S) and group quality (Q). which is equal to the average amount of time that the other group members spend doing R. In this way, the devotion of each member to the group influences other members’ utilities. In this model, members seek to maximize welfare. Welfare of the group can be improved by increasing time spent on religious activities (R). Time spent on secular activities (S) is taxed in the form of religious prohibitions, incentivizing R. Examples of this tax include observing the Sabbath and adhering to dietary restrictions, which increase activity within the group. This form of taxation is easily seen in a larger context, where it can even extend beyond the group, seeking to involve more members. This is clear in the Israeli context, where ultra- orthodox groups lobby the government to enforce more stringent kosher laws, continue to outlaw civil marriage and restrict retail trade and travel according to
Sabbath laws. If more people were to be subject to the sacrifices and prohibitions of the club enforced by the government, this would increase the efficiency of the club because they would no longer have costs incurred by enforcement. Nonetheless, the general population is obviously opposed to taxes on secular activity (S), because they do not benefit from the club’s mutual insurance.
Yeshiva attendance can be viewed as a sacrifice, as it forces club members to forgo secular education. An important element of club efficiency is the quality of the members, which in the case of the ultra-orthodox, means members who devote an
26 amount of time deemed sufficient by the club to religious and club-only activities.
Increased subsidies, principally in the form of child allowances, increases the likelihood of a free rider problem, which in turn lowers the utility derived by the other members.
It is notable that the percentage of the average ultra-orthodox household’s income that is made up of a sum of transfers from outside institutions more than doubled between 1980 and 1990, while yeshiva attendance increased by half. This indicates that increased subsidies increase the number of free riders in the community. Communities then must make more stringent demands of their members to signal loyalty to the club, and thus men continue their yeshiva studies until an average age of 40 to benefit from the communities’ mutual insurance
(Berman 1998).
2. Fertility
The total fertility rate of Sephardi and Ashkenazi ultra-orthodox women peaked at approximately 7.5 children per woman in the mid-1990s, while it decreased for all other Jews, Muslims, and Christians in Israel, a major increase from an average of 6.28 between 1980-1984 (Berman 1998). Their fertility rates of the ultra-orthodox have declined as a result of severe cuts to child allowances, but nonetheless now hover at around 6.74 births per woman (National Insurance
Institute 2012).
Standard theories regarding fertility suggest that fertility decreases in accordance with an increase in women’s wages, due to the increased shadow cost of raising children. Fertility rates for all groups in Israel align with this theory, except
27 for the ultra-orthodox who have instead increased their fertility rates. Why would the ultra-orthodox population be such a major demographic exception? Attrition is a serious concern for groups whose main positive externality is mutual insurance.
Returns to scale are crucial to the efficiency of a club; decreasing returns to scale (in this case, an increasing number of club members who are of lower quality) decrease the utility derived from club membership. Positive returns to scale (increasing numbers of high-quality members) will increase utility. In the case of religious sects, there are generally positive returns to scale, as each member’s participation benefits the other members. When applied to the ultra-orthodox, this may explain why high fertility rates persist. If many high quality (i.e. religiously observant) members are being produced, then the club benefits from increased mutual insurance and a larger network. It is also possible to rationalize increased fertility within the context of the theory of club goods by introducing transfers from the government into the model, which allows for an efficient increase in prohibitions. With increased prohibitions, attrition is less of a concern because those free riders will leave the group, and those who remain will bear the cost by having more children.
It is important to note other forces that influence the fertility of the Israeli ultra-orthodox. Many ultra-orthodox point to the need to increase their numbers after so many of them were decimated by the Holocaust, and for this reason also frequently name their children after deceased family members. This concern is undoubtedly prevalent, but cannot explain the huge increase of fertility rates of
Sephardi ultra-orthodox Jews, who generally did not directly experience the
Holocaust. Similarly, increases in child allowances alone cannot explain the numbers
28 because they have been shown by Toledano (2009) to affect ultra-orthodox women disproportionately. Therefore, viewing this phenomenon in the context of the theory of club goods has the most explanatory power, where fertility rises as a response to the threat of decreased mutual insurance.
3. The Paradoxical Rise of Ultra-Orthodoxy
The term retrenchment accurately characterizes the development of ultra- orthodox religious practice in 18th and 19th century Europe. Ultra-orthodox sects in
Hungary in the mid-19th century were among the first to exhibit extreme self- segregation and radical religious stances. In 1865, a religious pronouncement called the Pesach Din prohibited followers from participating in the activities of any synagogue that had adopted modern innovations within German Orthodoxy, especially the use of German during the service (Silber 1992). As 19th century Jews increasingly moved into urban areas and experienced economic emancipation, ultra-orthodoxy simultaneously developed as a distinct group. This phenomenon introduces an economic paradox of opportunity cost. It appears counter-intuitive to practice a more time-intensive form of religion while the value of time increases, due to greater economic opportunity. Here again, time-intensive religious practice can be viewed as an efficient prohibition, which defends the quality of the community. As the shadow price of club members’ time increases, so do the prohibitions demanded by the club in order to maintain group quality. The development of less time-intensive forms of Judaism can be rationalized in this way as well. It is not surprising that increased prohibitions cause an acceleration of
29 attrition, especially of high-wage individuals whose opportunity cost causes them to choose a less time-intensive religious practice. These individuals then choose market alternatives to the mutual insurance scheme provided by the ultra-orthodox community.
30
Conclusion
In a press release from December 2nd, 2013, the Bank Of Israel reported in a press release that if the ultra-orthodox population in Israel did not increase their rates of employment, Israel would fall from 16th to 26th among OECD countries in the average number of years of schooling (Knesset 2013). This grim projection is concerning for Israel, and could have potentially detrimental effects on the quality of the labor force. Nonetheless, there appear to be winds of change within the ultra- orthodox community. In the summer of 2013, the Israeli government established the Special Committee for the Equal Sharing of the Burden Bill to review the Tal Law, which was enacted in 2002. The Tal Law had allowed men to defer enlistment until the age of 22 provided that they were studying full time in a yeshiva, and then decide whether to enlist or continue studying. The legality of the law was being contested on the grounds that it violated Israel’s Basic Law for Human Dignity and
Freedom because it contradicted the principle of equality. The violation of the Basic
Law was affirmed by a 6-3 vote in the High Court, and it was concluded that the law had created a situation of inequality. However, because conscription occurs in
August and the draft-reform bill was not passed until the end of July, the Defense
Minister Moshe Ya’alon decided to defer the conscription of yeshiva students (who had already received draft notices) until November 2013. The new bill that has been introduced stipulates that ultra-orthodox men will be conscripted at the age of 18 without exception by 2020. They will be granted a deferment until the age of 21, after which they will be required to complete some national service, the details of which are currently being drafted in the Knesset. A Haaretz article from July 2013
31 reported that Haredi lawmakers were tearing their clothes as a sign of mourning after the approval of the Perry Committee’s draft reform bill, yet all Haredim do not have such a negative view of military service. Member of Knesset Rabbi Dov Lipman stated in his inaugural speech in 2013 that “everyone, including yeshiva students, is obligated to contribute to the state through military or civil service,” and that “the time has come to restore the true Jewish tradition, which combines Torah with work.” The Times of Israel also reported some of these changes in an October 16th,
2013 article titled “New Haredi movement is pro-work, military service.” When a vicious anti-military service campaign broke out in the Haredi city of Beit Shemesh, the new, yet-unregistered party ‘Tov’ launched a counter-campaign. The movement’s founder, Chanoch Verdiger, stated that while it opposes “drafting by force”, the party supports the choice to serve.
Tov also supports the choice to seek full-time employment, and Verdiger emphasizes that Torah study is still “a tremendously important and valuable endeavor.” However, Verdiger feels that there is a growing segment of the Haredi population that wants to integrate into the Israeli economy while remaining fully
Haredi. Tov is not the only group pushing for better integration of Haredim into the workforce. Yitzik Crombie—himself an ultra-orthodox entrepreneur—recently established the Haredi Hi-Tech forum, which aims to recruit investors to help fund an incubator for ideas conceived by Haredim. The main issues faced by Haredi entrepreneurs are securing funding and acquiring skills that are not commonly taught to Haredi students. One entrepreneur at the conference explained, “People in the high-tech world here just don’t know us. We don’t serve in 8200 [the Israel
32 Defense Forces’ prestigious military intelligence unit] and we’re not graduates of the
Technion” (Haredi Women Closing the High-Tech Gender Gap in Israel January 2013).
Another Haredi entrepreneur recalls his first face-to-face interaction with a client, when the client said, “We’ve already made our contribution this year,” assuming that the entrepreneur was there to ask for donations.
Also notable is the way in which ultra-orthodox women are helping to close the high-tech gender gap in Israel. Five years ago Racheli Ganot founded Rachip, a semiconductor development firm, and the company now employs 100 ultra- orthodox women. In an interview in the January 15th, 2013 article from Haaretz appropriately titled “Haredi women closing the high-tech gender gap in Israel,”
Ganot says, “You know, high-tech is actually a perfect career for a Haredi woman.
She gets to sit in front of a computer, she doesn’t have to mingle with men, and she can bring her work home on a flash-drive.” Matrix Global, based in Modi’in, is another high-tech company that employs mostly Haredi women. The business aims to provide women with the practical training and experience that they miss out on by not serving in the army. The Jerusalem Post published an article titled “Haredi women may be solution to outsourcing jobs” in March 2013, detailing why employing ultra-orthodox is a good business decision. They work at lower wages, driven down by the difficulty of finding a suitable job. “They prefer to have their specific needs met than higher wages,” says Maya Hetzroni of Experis, another high- tech company that hires many Haredim (women?). She also says that the experience of intense religious study gives them an outstanding learning capacity.
33 Not all Haredi men are cut out for intense religious study, however, which is one of the most compelling arguments against its enforcement by the community.
Yehuda Miller, the CEO of an ad company that targets the Haredi market, says “most of my workers are young guys between the ages of 18 and 25, who aren’t cut out for the yeshiva life or a similar framework” (“Haredim Who Swap Talmud For
Technology”, July 16th, 2012).
Although change is underway within the Haredi community, there are still many changes needed to make government spending on welfare more equitable. A press release from the Knesset on June 12th, 2013, stated that the welfare budget had been increased by 300 million NIS (about 90 million US dollars) annually since
2006, but that the budget for 2013 had been increased by 600 million NIS (about
$180 million). This allocation to welfare represents a 20 percent increase in the total net budget. The report vaguely stated that the extra 300 million NIS in 2013 would be used to upgrade the existing service baskets, with improved “community services”, and “dealing with violence” (Knesset 2013).
However, child allowances are receiving further cuts as expenditure on child allowances in 2013 will total 1.1 million NIS (US$330,000), and in 2014 only amount to 700,000 NIS (US$210,000). This is likely to lead to a reduction in fertility rates over time. If current trends continue, the ultra-orthodox population is expected to reach approximately 25 percent of the total population of Israel by the late 2050’s (IMF Special Issues Report 2012). The International Monetary Fund suggests that if more Arabs and Haredim worked, the GDP of Israel would increase by 15 percent (IMF Special Issues Report 2012). Furthermore, the Taub Center for
34 Social Policy Studies in Israel showed that Haredi participation in the labor force currently accounts for just two percent of Israel's GDP. The Bank Of Israel’s paper
“Growth in Haredi Male Employment” cites the government’s target rate for male
Haredi employment in 2020 at 63 percent. However, the IMF estimates that the male employment rate will only grow at 0.1 percent annually, which will therefore result in an employment rate of approximately 49 percent in 2020, well below the target rate.
The fiscal and growth implications of these issues need urgent attention. The variety of recent reports and press releases by the Central Bank of Israel and the
International Monetary Fund (IMF Country Report 2012) make it clear that the low employment rates and high fertility rates of the ultra-orthodox are unsustainable, and that action must be taken. In the summer of 2011, Prime Minister Benjamin
Netanyahu founded the Public Committee of Social and Finance Change (the
Tratjenberg Committee), which is committed to reducing the marginal tax on employment. He plans to achieve this through modifying the Tal Law, increasing access to low-cost childcare, supporting human capital acquisition through vocational schools and reducing entrance barriers through improvements in the education system.
It is evident that Haredi attitudes towards employment are changing, but it is impossible to tell at what rate, and what the impact will be on the economy. Further austerity may indeed force more ultra-orthodox to seek employment, but the social cost of such policy changes may be high. Long-term research on the effects of the negative income tax and child allowances will be valuable in making policy decisions.
35 Also crucial to implementing policy decisions aimed at modifying the outcomes of a group is an understanding of their economics within the group. The theory of club goods best models the choices of the Israeli ultra-orthodox, and it is through this lens that their behaviors are best understood.
36 Works Cited
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