Immigration and Labor Market Mobility in Israel, 1990 to 2009

1. Introduction

1 1.1 Introduction The unexpected collapse of the Soviet regime in 1989 led to a dramatic change in the country’s emigration policy, which now permitted its citizens to emigrate freely. In particular, Jews in the former Soviet Union (FSU) were now able to immigrate to Israel without restriction. On arrival, they automatically became Israeli citizens with access to a generous package of benefits, including subsidized mortgages or rental assistance , language courses, and vocational training. They also gained access to a labor market characterized by much higher wages than those in the FSU. Over the next ten years, Israel absorbed approximately 900,000 immigrants from the FSU (which constituted about 20 percent of the Israeli population), with about 40 percent of them arriving during the first three years. The change in emigration policy was exogenous to the economic conditions in Israel and to the pre-emigration accumulation of human capital by the immigrants. As such, it provides a unique platform for evaluating basic issues in the economics of immigration. The economic analysis of immigration (see Borjas 1999) starts with two simple questions: Why do some people immigrate? And what happens when they do? The answer to the first question is relatively clear in the case of Israel: the opportunity for higher income and the social and emotional ties of FSU Jews to Israel.The answer to the second question is more complicated and constitutes the main focus of the book.The book’s main methodological innovation is the use of empirical stochastic dynamic micro models that combine search with investment in human capital. The focus of the research is on the labor market performance of immigrants in Israel. We also discuss their impact on the wages and employment of native Israelis. Introduction 2 Chapter 1 The chapter begins by providing a description of the massive wave of immigration to Israel in the 1990s, which is followed by a summary of the analysis and the findings of each chapter. We conclude with some general lessons for immigration policy and research. 1.2 Background Israel’s population stood at 4.56 million at the end of 1989 and had grown at annual rates of between 1.4 and 1.8 percent during the previous ten years. The wave of immigration in 1990–91 increased the population by 7.6 percent. The most notable characteristic of this wave of FSU immigrants was the high level of education they brought with them.About 60 percent of the working-age immigrants were college educated, compared with only 30 percent of native Israeli Jews in 1990. This is also reflected in the high proportion of immigrants who had worked in scientific, academic , or white-collar occupations in the FSU (table 2.1). Upon arrival, immigrants were entitled to a package of benefits that included a rental subsidy for a limited period and eligibility to attend a six-month Hebrew course (called an “Ulpan”). During these six months, they also received a stipend to cover living expenses, which enabled them to attend the Ulpan.At the end of the six months, immigrants could take advantage of the welfare and unemployment benefits available to natives, including access to government-sponsored vocational training programs. These programs were in part designed to modify immigrants’ skills so as to more closely match those demanded by the Israeli labor market. In general, there was minimal intervention by the government in the immigrants’ choices in Israel. Thus residential location and whether to participate in the Ulpan and in government-provided vocational training courses were left to the discretion of the immigrant with minimal restrictions imposed by the government. The fact that the option of immigrating to Israel was not readily available to FSU Jews prior to 1989 is important to our analysis since it allows us to treat the immigrant’s human capital investment decision in the FSU as exogenous. In other words, an immigrant’s human capital on arrival was determined in the FSU before the option of moving to Israel was even considered to be a possibility and is therefore appropriate to the labor market there. As a result there was a complete mismatch between the skill distribution of immigrants and the demand for skills in the Israeli labor market. Therefore it is not surprising that, on arrival, there was a substantial occupational downgrading of immigrants and the local Introduction 3 labor market provided a low return on...