The public debate over tax benefits that the country grants to exporters under the Law for the Encouragement of Capital Investment touches on a particularly sensitive point: Just how much does Israel have to do to lure investors from overseas (and at home, too) without tempting them with giant tax breaks?
The answer, it appears, is less flattering that we would like to believe. An analysis recently conducted by one of the most important institutions in the economy again examined the productivity of the Israeli worker that is, how well does the average Israeli work, how smartly and how hard.
The bottom line is that Israeli labor productivity is low 77% the average level of countries belonging to the Organization for Economic Cooperation and Development and 56% the level of an American worker. Moreover, productivity is on a downward trend: In 1990, Israel’s per-worker productivity was 68.5% of America’s.
Nevertheless, these figures should be qualified because they are highly problematic. Measuring productivity generally is very difficult. However, when you measure manufacturing productivity alone, where the data are more reliable, Israel is 40% behind the United States.
Why so low?
An interesting question is why our productivity is so low. The instinctive answer that the Israeli simply doesn’t work that hard is not true: The number of hours the average Israeli works is significantly higher than the OECD average. The average Israeli puts in 1,929 hours on the job every year, a level that is so high as to be worrying. Only in six other developed countries do workers put in longer hours (Poland, Hungary, Greece, Chile, South Korea and Mexico) and none of them are countries Israel likes to be measured up to.
It is likely that workers in these countries are expected to work long hours to compensate for their lack of efficiency and/or quality. Perhaps local culture makes them accustomed to long hours at the workplace to the point where they have forgotten about the law of diminishing returns: The longer you work, the less you produce.
In any case, Israel doesn’t have a problem of laziness. It does have a problem with the quality of work, but any attempt to trace the source of our quality problem has never succeeded. It appears there are many factors that hurt the quality of labor in Israel, and all make their own special contribution.
One is how much we invest in national security. Defense is not an industry characterized by high levels of productivity, to say the least. It is not at all clear how to measure defense productivity, but in Israel clearly many workers are employed in the industry and are not producing sophisticated semiconductors and diminish Israel’s productivity levels.
Another reason is that workers have less experience, a result of the years they spend in the army, which provides no direct employment skills, as well as Israel’s relatively young populace. You can argue that military service provides Israel’s labor force with other important qualities that compensate for the lost years of normal work experience, but on balance the contribution is negative.
If the burden of army service is unavoidable for Israel, the other reasons for our low level of productivity are innately our fault. They start with the low level of productivity of the Haredim and Arab Israelis meaning those among them who have jobs because of their poor education.
The cause of Israel’s low productivity can be traced back to two other especially painful problems that affect quality of labor. The first is the educational system, which lags behind most other developed countries (Israel ranks 40th in the international PISA exams of student performance). The second is the quality of the government and business sectors.
Comparisons of the efficiency of government sectors from country to country barely exist because it is difficult to measure the performance of a sector that provides public services, but what we can see usually reflects badly on Israel. For instance, in the red tape index the World Bank’s Doing Business index Israel ranks 23rd among 34 developed countries.
Public transportation infrastructure in Israel is one generation behind the world, with crowded roads, an underdeveloped rail network and, of course, the shocking inefficiency of the ports, all of which detract from manufacturing productivity. Israel’s failing schools are certainly also a factor in the low level of public-sector productivity.
Vis-a-vis the business sector, we enjoy excellent quality in research and development but fail in everything connected with competition and competitiveness. Most Israeli workers are accustomed to working in a small domestic market, where business concentration is the norm and is closed to competition. The minority of exporters, who compete in global markets, is excellent.
What can we learn from all this? One is that there are no magic solutions, that in order for Israel to become a modern and successful state we have to change much of what happens here. Many of these change require spending that is, from taxes. For now, however, it means we have to offer investors incentives in the form of low taxes subject to checks and balances that don’t turn benefits into a boondoggle.