Arab Employment Key to Growth, Says New Bank of Israel Governor

In her first public appearance since being appointed to head Israel's central bank, Karnit Flug tackles issues of Israel's productivity gap and employment discrimination against Arabs.

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Israel's new central bank governor, Karnit Flug, addressed the issues of discrimination against Israeli Arabs in the labor market and the productivity gap between Israel and other developed countries during her first public appearance as governor on Tuesday.

Israeli employment rates have substantially improved in recent years and are no longer low by international standards, Flug said. However, she pointed to ultra-Orthodox Jewish men and Arab men as two groups still affected by low employment rates. Even those who are employed, she said, often receive relatively low salaries, in part reflecting how inferior education and training lead to low work productivity.

"There is no ignoring the phenomena of discrimination and we know that the Arab public has difficulty entering specific industries, even if they have the appropriate training," Flug said. The exclusion of Arabs from the high-tech industry, for example, has had far-reaching effects on Arab-Israeli living standards, because it is one of the most productive and highest paying sectors in the Israeli economy, Flug said..

"Our ability to continue to exist as a diverse society, but also one with social cohesion, depends, among other things, on the development of employment among Arab society in the coming years," Flug said. "If we find a way to utilize the potential to increase growth and reduce gaps we, Jews and Arabs, can enjoy the fruits of this process. If we don't figure out how to do this, we will pay, in my estimate, a heavy economic and social price in the coming years."

The central bank governor also mentioned that Israel suffers a long-term problem with productivity growth. "The average Israeli workers produces in a given hour less output than his counterpart in most OECD countries," she said. She added that the productivity gap between Israel and other developed countries, including the United States, has been growing over the years, instead of closing.

A 2012 report compiled by the Bank of Israel's research department found that the primary reason for low productivity was the relatively low investment rate in the Israeli economy. As a result, the average Israeli worker has relatively low productive capital to utilize compared to workers in other OECD countries. Another reason, according to the report, was bureaucratic hurdles - or, more broadly, a business environment that presents an obstacle to accelerated development of the country's business sector.

Karnit Flug after her appointment to the post of governor of the Bank of Israel.Credit: Emile Salman

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