This work finds for the first time an almost continuous trend, as of the mid- 1990s, in which the income gap between households of the two major ethnic groups in Israel (European/American versus Asian/African descent) has been reduced. In 2011 the net income gap was 27 percent, whereas in the mid- 1990s it was around 40 percent. Paradoxically, it seems that increased inequality between educated individuals and uneducated individuals accounts for the economic rise of those of Asian/African descent. The increase in return on higher education has promoted less-educated people (of Asian/African descent) to increase their investment in education. This hypothesis is in line with the rise of education levels among those of Asian/African descent, which was faster than the rise among native Israelis of European/American descent. This work also reveals a significant improvement in representation of the Asian/African ethnic group in the past three decades. This improvement is manifest in a sharp decline in the proportion of households of Asian/African descent in the two bottom deciles, as well as a significant rise in their representation in the upper deciles. In the last two years of the studied period, the share of the Asian/African ethnic group in the upper decile was for the first time proportional to its share in the general population. Furthermore, this study shows that the wage gap between employees of both ethnic groups is larger than expected as per the measured differences in education level. The continent of origin can explain approximately 10 percent of the wage gap among men and 5 percent among women. However, these two estimates have fluctuated greatly over the years.

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