Israeli Finance Minister Seeks Policy to Boost Labor Productivity

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Finance Minister Moshe Kahlon, May 18, 2015.Credit: Gil Cohen-Magen

Labor productivity — the amount of value each worker produces — is low in Israel by Western standards. Finance Minister Moshe Kahlon vowed Monday to address the problem and appointed a committee to make recommendations.

Israel’s economic growth has outpaced most of the developed world, and new jobs are being created at a rapid pace. But as the Organization for Economic Cooperation and Development said in a recent report, Israel needs to raise its productivity if it wants to ensure future economic growth.

“The Israeli economy is an island of stability in the global economy,” Kahlon said. “Raising productivity and increasing the rate of growth are strategic goals for the Israeli economy. ... Achieving these goals will bring about a major improvement in the welfare of Israel’s citizens and a prosperous economy.”

Kahlon appointed Finance Ministry Director General Shai Babad to chair the panel and gave it until April to report back. The other members of the committee are Finance Ministry chief economist Yoel Naveh, Economy Ministry Director General Amit Lang, deputy Finance Ministry budget director Shira Greenberg; Adi Brander, a senior economist at the Bank of Israel and Shmuel Abramson of the National Economic Council.

A study by Naveh found that as of April, Israeli labor productivity was 24% below the OECD average for 2013, at around $37 an hour, compared to the average of $48.20. The highest rates were in the tiny country of Luxembourg (about $90) and in Norway ($85).

Underdeveloped OECD economies such as Chile and Mexico have rates of $30 and $20, respectively.

Moreover, it found that the productivity gap between Israel and in the United States has widened over the past two decades. In the early 1990s, Israeli productivity was about 70% of the U.S. rate; by 2012, it has fallen to less than 60%. This contradicts economic theory, which holds that faster-growing economies will eventually close the productivity gap with slower-growth economies.

The problem of low productivity in Israel “is of critical economic importance, as productivity has a direct and major influence on the standard of living, whether through take-home pay or through public service given to the broad public,” Naveh concluded.

Several factors have contributed to low productivity in Israel, Naveh said, among them the uncertain security situation, a relatively young (and inexperienced) workforce, trends in the labor market that have brought more inexperienced people into jobs and the so-called black economy.

Some of these factors, such as bringing new entrants into the labor force, need to be encouraged even if they come at the cost of higher productivity, he added. He recommended that Israel focus on bringing more Israeli Arabs and ultra-Orthodox Jews into the labor force.

One factor impeding Israeli productivity growth is low levels of capital stock, that is, machinery and equipment, factories and the like. Naveh estimated that if Israel’s level equaled the OECD average, productivity would be $5 an hour higher.

Bank of Israel Governor Karnit Flug highlighted the importance of productivity at a conference in June, calling it one of the country’s top economic challenges. Israel’s gross domestic product per capita is only $32,400, much less than the OECD average of $38,000 and the U.S. figure of $53,000. “That is a significant gap and it is evidenced by the fact the labor inputs have grown since 1995 relatively quickly, contributing a lot to growth in GDP per capita, while product per hour worked, which is productivity, grew much more slowly.”

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