Demographic trends, particularly the increase of low-employment groups and the aging populace, are a central challenge to Israel’s long-term growth, Bank of Israel Governor Karnit Flug said on Monday.

“The decline of the share of the population that is working age and the increased weight of sectors whose employment level is relatively low is expected to cut 1.3 percent from the annual growth rate,” Flug told a conference organized by the Central Bureau of Statistics in Jerusalem.

If low levels of employment among ultra-Orthodox men and Arab women persist, she added, it would knock 7% off the national employment rate in the long-run.

While there have been improvements in both groups’ labor participation, there is still a long way to go.

“It is important that we will continue to invest in increasing participation and increasing productivity in the Arab and haredi sectors,” she said.

The country’s aging populace also presented a challenge.

By 2050, the ratio of working age people to elderly will drop down from the current 5.5 to 3.

“This means there will be a need to increase the provisions for elderly allotments and services.”

Both issues would contribute to Israel’s flagging productivity, which is consistently among the lowest in the OECD. But that, she said, is because of the poor business environment, low levels of competition in certain sectors and low levels of capital investments.

Another long-term issue Israel must address is poverty.

Even working families, she said, have seen an increase in poverty.

“The picture is in effect one of workers whose earning capacity does not allow them to make a decent living, so there is an increase in the number of poor families with one or two workers,” she said.

Though further infrastructure and education would ultimately be necessary, in the short term, an increase in negative income tax (known in some places as earned income tax credit) helped incentivize work and reduce poverty.

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