OECD: Weak labor productivity hampering growth of Israeli economy

While GDP per capita in Israel increased annually by 2.3% between 2002 and 2008, according to OECD data, it grew by an average of only 1.7% between 2012 and 2018.

July 15, 2019 04:54
3 minute read.
OECD: Weak labor productivity hampering growth of Israeli economy

A bank employee counts Israeli Shekel notes for the camera at a bank branch in Tel Aviv. (photo credit: REUTERS)


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The wide gap in GDP per capita between Israel and the upper half of OECD countries has not declined in the last decade due to weak labor productivity growth and high income inequality, a new report by the OECD has revealed.

The Going for Growth report, published annually by the Paris-headquartered economic organization, presents the most pressing structural reform priorities in 46 OECD and non-OECD economies to ensure economic growth, and assesses progress made by countries on key reforms in the past years.

While GDP per capita in Israel increased annually by 2.3% between 2002 and 2008, according to OECD data, it grew by an average of only 1.7% between 2012 and 2018.

Facing higher income distribution inequality than most advanced economies, the gap in GDP per capita between Israel and the upper half of OECD countries has remained at approximately 30% for almost a decade.

“Inequalities have edged down since 2007, thanks to higher employment rates among Israeli-Arabs and the haredim (ultra-Orthodox), but poverty remains widespread among these disadvantaged groups,” the authors of the report said. “Enhancing skills of and employment opportunities for disadvantaged groups, better transportation infrastructure and further product market reforms and boosting productivity are crucial for making growth stronger and more inclusive.”

According to the latest OECD Gini coefficient, where 0 represents perfect income equality and 100 represents extreme inequality, Israeli inequality stands at 34.4 compared with the advanced economy median of 29.7, and overall OECD median of 31.7. The poorest 20% of the Israeli population holds approximately 6.2% of the national disposable income, below the OECD average of 7.6%.

While employment performance and labor utilization has continued to improve, albeit at a slower pace than previous years, the report highlighted very low public expenditure on active labor market policies to make good-equality employment attainable for jobseekers and other underemployed groups.

To increase economic growth and make growth more inclusive, thereby boosting GDP per capita, the OECD said Israel must continue to prioritize improving education outcomes for disadvantaged groups. “Student outcomes differ markedly between communities, which contribute to high social and economic segregation,” the report said.

Recommendations included further expanding Hebrew courses in Arab schools, which increased from four to five hours a week for students in third to ninth grade since 2016. Funding for haredi schools should also be conditional on increasing core subjects in the curriculum, and work-based learning should be developed in coordination with industry partners to enhance the quality of vocational and training programs.

Citing low resources for public employment services, the OECD also called on the government to strengthen active labor market policies to boost employment integration.

While the 2019 budget increased earned income tax credit for men to the level of women, thereby providing stronger labor market participation incentives for both spouses, it is necessary to strengthen existing training programs and expand their use.
Programs should focus on low-skilled workers, including those currently employed, especially from disadvantaged groups less likely to receive training.

To further encourage growth, the OECD also recommended increasing foreign trade competition and reducing excessive business bureaucracy, enhancing product market competition to reduce the high cost of living, and developing public transportation.
“Partly due to past under-investment, Israel has a large infrastructure deficit in public transportation, which causes considerable road congestion and poor air quality,” the report said.

The OECD did highlight, however, that more than half of all government investment in transportation has concerned public transportation, and the current construction of the high-speed Tel Aviv-Jerusalem railway and light rail systems in three major Israeli cities.

Further efforts should be focused on promoting toll roads to foster user-funding for infrastructure, shifting car taxes from ownership to vehicle use to reduce pollution, and introducing systematic publication of project cost-benefit analyses with mandatory justification of policy-makers’ choices.

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