Religious Schooling, Secular Schooling, and Household Income Inequality in Israel

The important role of education in the process of economic development is well known. Less known is the effect of education on inequality. This is an important issue, since economic policies that promote growth often lead to higher income inequality. A policy that promotes growth and at the same time reduces inequality would be preferred. The question is whether promoting education is such a policy. In this paper, the determinants of income inequality in Israel are analyzed using regression-based inequality decomposition techniques, focusing on the role of years of schooling and type of education. In particular, we differentiate between general schooling and ultra-orthodox schooling, following the common belief that ultra-orthodox schooling is not as valuable as general schooling for labor market outcomes. Indeed, we find that years of general schooling of the household head have a positive effect on per-capita household income, while the effect of years of ultra-orthodox schooling is negative. Years of general schooling are positively correlated with income, while years of ultra-orthodox schooling are negatively correlated with income. This implies that a policy that closes the schooling gaps in the secular sector is equalizing, while a policy that closes the schooling gaps in the ultra-orthodox sector is disequalizing. In addition, a uniform percentage increase in years of general schooling reduces per-capita income inequality, while a similar increase in ultra-orthodox years of schooling increases inequality. These results are robust to the type of regression used (OLS versus Gini regression), the use of equivalence scales, and do not change qualitatively even when we allow all regression coefficients to be different in the ultra-orthodox subsample. We conclude that policies directed at general schooling can potentially promote development and reduce inequality at the same time. However, when policy makers consider public funding of ultra-orthodox schools, they should take into account the adverse effects of this type of schooling on income inequality. In particular, we suggest that such funding will be conditioned on aligning the curriculum with the requirements of modern labor markets