Flug calls for more Arabs, haredim in workforce

In her first public speech as Governor of the Bank of Israel, Karnit Flug said current demographic trends would reduce annual growth by 1.3%.

Governor of the Bank of Israel Dr. Karnit Flug is calling for the integration of haredi (ultra-orthodox) men and Arab women into the labor force, otherwise "we will pay a heavy economic and social price in the years to come."

Flug made her first public speech since her nomination as Governor, at the Prime Minister's Conference Partners in Growth - economic development of minority sectors, in Tel Aviv today. "The successful integration of the Arab public into the labor market in particular, and into the economy in general, is a very important, even essential, component of the Israeli economy’s ability to continue to grow, and to support a higher standard of living for all Israelis," said Flug.

Flug said, "The economy is in good shape, particularly compared with other developed countries." However, she warned about Israel's demographic problem and its far-reaching consequences for Israel's economy and labor market. "In the long term, demographics are expected to have far-reaching ramifications on employment, output and the standard of living. While those sectors with low levels of employment are expected to grow as a share of the population, the working age population is expected to decline as a share of the total population.

"If there are no changes in employment patterns, these demographic trends will reduce the annual growth rate by about 1.3%, every year. This is a strategic threat for the Israeli economy and for Israeli society, one that we must not ignore. Even if labor force participation increases, it is vital that we create the conditions required for workers to be absorbed in industries typified by a high level of human capital as well. Otherwise, employment growth will be able to make only a limited contribution to GDP growth, a reduction in poverty and an increase in the standard of living."

The government has set employment targets of 41% for Arab women and 78% for Arab men by 2020. The targets are "ambitious but possible," she said.

As for Israel's low productivity, Flug said, "From a long-term view, the Israeli economy suffers from a low rate of increase in productivity (product per hour of work). The average Israeli worker produces lower output per given work hour than his peers in most OECD countries. Not only is the increase in productivity not closing the gap with the other developed countries, the gap is growing. For instance, the ratio between product per work hour in Israel and that in the US has been declining over the years.

"In the Bank of Israel Annual Report for 2012, the Research Department analyzed the phenomenon and noted a number of reasons for the low productivity. One major reason is a low rate of investment, which leads to lower stock of capital for production available to the Israeli worker than what is available to a worker in other OECD countries. A further issue is bureaucratic impediments, or in broader terms, the business environment, which impede accelerated development of the business sector."

Published by Globes [online], Israel business news - www.globes-online.com - on October 29, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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