The annual report of the Bank of Israel, released today, paints a fairly optimistic picture of Israel’s economic performance. One of the most important features is a rise in labor productivity. Governor of the Bank of Israel Amir Yaron writes in his introduction to the report: "The growth in labor productivity in Israel, which is a vital component in ensuring sustainable economic growth, has accelerated in the past decade, and has even begun a process of closing the gap in relation to the OECD countries. Nevertheless, labor productivity in Israel is still low in comparison with these countries, and raising it is one of the main challenges that the economy faces." Dr. Eyal Argov, head of the Macroeconomics and Policy Division in the Bank of Israel's Research Department, told "Globes", "Raising labor productivity is the key to a continual rise in the standard of living, because as far as the level of employment is concerned there is no general problem in the economy."

In 2012, product per worker in Israel was 86% of the OECD average. According to a Bank of Israel study, the percentage is now 94%. In comparison with the average of small, wealthy countries (Austria, Belgium, Denmark, the Netherlands, Sweden, and Finland) the jump is even greater: from 70% in 2012, to 81% in 2021. Labor productivity rose in all these countries in that decade, but it rose in Israel by more, and the gap has narrowed.

"In the first decade of the twenty-first century, participation in the workforce grew, mainly in the services sector. At first, people who entered the workforce at low pay and with low qualifications tilted the average downwards," says Dr. Edith Sand, a senior researcher in the Macroeconomics and Policy Division in the Bank of Israel's Research Department, who was one of the authors of the study. The reference is partly to the haredi community, which joined the workforce in large numbers. Between 2003 and 2012, the rate of participation of haredi men in the workforce rose from 40.9% to 50%, and that of haredi women rose form 55.2% to 70.6%. People entering the workforce for the first time naturally do so with low qualifications and pay, and average labor productivity falls accordingly. The end of the process itself leads to a rise in average productivity.

Nevertheless, Dr. Sand says, "The effect is small in comparison with other factors that dramatically raised labor productivity in Israel relative to the West. One is reforms that opened markets to competition, such as in banking, mobile telephony, and imports." The reforms, the main purpose of which was to lower the cost of living, led to positive outcomes elsewhere, forcing companies to become more productive, and raising productivity per worker.

"The second cause of the rise in labor productivity in Israel," says Dr. Sand, "is streamlining of existing industries and use of new technologies. If at one time we had to submit forms to the bank, now it’s possible to do almost everything online. You can order goods from Israel and abroad without leaving home. Businesses in Israel are implementing technology and new capital, and that makes a significant contribution to worker productivity. The improvement in productivity in high tech also contributed to the general improvement."

Published by Globes, Israel business news - en.globes.co.il - on March 28, 2023.

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