Israel is currently facing a significant decline in its productivity levels, according to a recent report from the Shoresh Institution. This decline from previously outperforming leading advanced economies signifies urgent challenges that the next government must confront to secure the nation’s economic future.
Declining Productivity: A Comparative Analysis
The Shoresh Institution’s report highlights a concerning trend: as of 2023, Israel’s total factor productivity stands 15% below the G7 average, a drastic shift from 9% above the average in 1975. This productivity metric assesses how effectively an economy employs labor and capital to produce goods and services, raising questions about Israel’s long-term economic stability.
Author Prof. Dan Ben-David notes that factors such as inadequate educational systems, rapid demographic changes, and the emigration of skilled workers are converging to diminish Israel’s workforce quality. The country now relies heavily on a limited segment of its labor force to support essential sectors including the economy, healthcare, and defense.
The Shifting Workforce and Education Challenges
As the nation prepares for upcoming elections, the pivotal question remains: what kind of country will the government lead in the future? The historical data presented in the report illustrates a troubling trajectory for Israel’s productivity growth since the mid-20th century, as productivity levels fell below the G7 average again after having surpassed it.
Notably, a measure called output per hour worked reveals a similar story. In 1972, Israel led all G7 countries in productivity metrics but finds itself trailing behind six of them by 2024. At present, its output per hour is 34% lower than Germany’s and 30% lower than that of the United States.
Consequences of High Taxation on Skilled Labor
The report additionally reveals a worrisome concentration of wealth in Israel, with the highest-earning fifth of the population contributing 93% of income-tax revenue—a significant increase from 83% in 2000. This trend makes Israel especially vulnerable to the loss of highly skilled workers, as they are increasingly incentivized to seek opportunities abroad.
Fostering a skilled workforce relies heavily on the education currently provided to Israel’s youth. The report indicates that a notable percentage of first graders will come from ultra-Orthodox and Arabic-speaking backgrounds in the near future. The pressing question is whether these students will receive the quality of education required to become the engineers and physicians of tomorrow.
Future Directions: Education and Policy Reform Needed
Ben-David argues that the educational outcomes for current students must improve to counteract the negative trends. According to analysis from the Shoresh report, students in state-religious schools are performing below 76% of their OECD peers, while Arabic-speaking students are faring even worse.
Moreover, there is a growing exodus of Israeli doctors to other countries, with the ratio of physicians working abroad increasing. This brain drain could place an additional strain on a healthcare system already under pressure.
To address these pressing issues, Ben-David proposes the “Israel 2.0” initiative, which advocates for an upgraded curriculum across all schools, targeted public funding for compliant educational institutions, and a reallocation of national spending priorities. With the window for impactful change closing, it becomes crucial for the next government to prioritize these initiatives for a more sustainable future.