Bank of Israel Study: Israel’s Worker Productivity Low by OECD Standards

Israeli labor productivity in lower third of developed countries; productivity in the industrial sector, including the high-tech sector, lags behind that of the United States.

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Labor productivity in Israel is low, placing the country in the lower third of the world’s developed countries, a new study released by the Bank of Israel shows. The study noted that the most productive sector, industry, is subject to relatively stiff competition and is a sector in which investment is high.

“An international comparison of labor productivity in 2011 places Israel in the bottom third of the developed countries,” the central bank said. “Productivity in Israel is 37% lower than that of the G7 countries, and 24% lower than that of all the OECD countries. Productivity in Israel more closely resembles that of countries like New Zealand, Greece, and Portugal, and the productivity of a number of Eastern European countries,” the central bank added. ‏(The OECD is the Organization for Economic Cooperation and Development, the grouping of the world’s most developed economies, including Israel. The G7 are the top industrialized countries: United States, Britain, France, Germany, Italy, Japan and Canada.‏)

The central bank researchers tracked the lower productivity in Israel over a period of years − from 1995 through 2011. Its results reinforce findings of a study commissioned by the Office of the Chief Scientist in the Ministry of Industry, Trade and Labor that demonstrated that productivity in the industrial sector in Israel, including the high-tech sector, lags behind that of the United States.

Pace of improvement also lagged

Not only did Israel start out at a lower level of productivity, according to the new study, but the pace at which productivity improved was lower. This means the gap between productivity here and elsewhere grew over the years. The Bank of Israel expressed particular concern about this.

The central bank suggested several explanations for the problem. The average Israeli works longer hours than his average counterpart in other developed countries − 37.1 hours a week compared to 33.6 on average in the OECD countries as a whole, meaning that the Israeli’s marginal output per hour is less.

The Bank of Israel said that competition encourages productivity because it creates pressures on businesses to operate more efficiently and to acquire advanced technology. As a result, a large portion of the blame for lagging productivity must be attributed to a lack of competition, the Bank of Israel said.

“Labor productivity is defined as total output per actual work hour,” the central bank explained in a statement about the study. “It measures the production capacity of the economy, given the labor input at its disposal. From a long-term viewpoint, the level of productivity and the changes in it depend on a number of factors, such the human capital in the economy, the stock of physical capital, the level of technology, and structural factors that affect the efficiency,” the statement said.

A second explanation is that the extent of investment here is significantly lower than is the average among other OECD countries. The rate of annual investment in relation to Israel’s gross domestic product over the past decade was 17% compared to an OECD average of 22%. It was suggested that this lag in investment explains about half of the lag between productivity here and in the developed world as a whole. And the Bank of Israel added that the lower rate of investment can be explained by Israel’s geopolitical situation as a factor dissuading greater investment here.

In examining the situation industry by industry, it was found that the only sector in which the rate of investment was high relative to the rest of the developing world was the industrial sector. Particularly notable therefore is that in the Israeli industrial sector, the rate of growth of productivity was also comparable to the other countries studied. Israeli industry, the central bank said, is highly competitive, including what is produced for export and what competes here with imported products.

The fact is that the industrial sector here is the branch of the economy that enjoys the heaviest investment and is also the most productive. It is also a sector in which the pace of growth of productivity is high. In those other sectors facing minimal competition, investment is low and in turn productivity is low. Low rates of growth in productivity were particularly notable in the construction sector and in the financial sector.

Israel found lagging in productivity, but industrial sector is competitive.Credit: Tomer Appelbaum

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