Government Policies, Investment in Education and Educational Attainment : The Case of the Jewish and Arab Sectors in Israel

The Jewish and the Arab sectors in Israel differ widely in every aspect of their respective socio-economic status. In particular, investment in education is much lower in the Arab sector and so is the educational attainment. To explain these differences, we construct a simple model which allows a representative household to optimally allocate its time between labor and leisure, and it income between consumption and investment in aducation. We utilize municipal level data in Israel to estimate the preference and technology parameters in the Jewish and Arab sectors. The estimated parameters are used to examine in each sector the typical household labor participation and education investment responses to various government intervention schemes. Specifically, we find that due to strong income effects, the disadvantaged group (Arabs) investment in education responds positively to direct transfer payments but negatively to increases in the return to education, while the advantaged group (Jews) reacts in exactly the opposite way