BoI Report: Israeli Productivity Lags Well Behind OECD Average

Difference is pronounced in lower-skilled industries.

Women working at an Israeli factory.
Yaron Kaminsky

The productivity of the average Israeli worker was 14% below that of the average worker in the developed world during 2011, and on a hourly basis the typical Israeli’s output was 24% lower, according to a Bank of Israel report due out next week.

Productivity of workers who produce goods and services for Israel’s domestic market is lower than in the export sectors, says the central bank’s report. For example, workers at Israeli clothing manufacturers have a 50% lower rate of productivity than the average among countries in the OECD (Organization for Economic Cooperation and Development). Israeli construction workers are 30% less productive.

However, Israelis employed in medical and optical instruments and measurement tools had a 40% higher productivity rate in 2011 than the OECD average. Israelis in the chemical and electronics industries were also more productive than their OECD counterparts. The link between export and productivity is a widespread phenomenon but is particularly pronounced in Israel, Germany and Denmark.

One possible explanation is that export industries face tougher competition than domestic-market businesses, so the latter have less incentive for productivity. Some say this is especially so if they don’t face major competition from imports, but the Bank of Israel report rejects this idea.

“No correlation has been found between disparities in productivity and the rate of competition from imports compared to total output,” the study stated. “The discrepancy in productivity is indeed negative in the food industry, a field in which there is a low rate of competition from imports, but it is also negative in sectors in which Imports constitute more than 50% of the production sold in Israel, such as clothing, leather, wood, paper, printing and publishing. It’s possible that there is no positive correlation between the two variables because these fields also face little competition due to exclusivity on the part of an importer or because high levels of productivity locally does not justify the entry of a competing importer.”

But another possible reason, according to the bank, is that leading Israeli export businesses make use of the country’s wealth of skilled manpower and innovation. Compared to the OECD average, Israelis have more higher education in export industries as well as in finance, insurance, technical and scientific services. Productivity in these sectors is either equal to or above the OECD average. But ironically, in those fields where the education level here is comparable to that of other developed countries, the productivity rate in Israel is below average.

The report describes a two-track economy in which exporters and some service industries have gradually taken fuller advantage of a skilled, innovative Israeli labor force while the rest of the economy has not. The sectors still lagging behind are labor-intensive and reliant on relatively cheap labor, which is available due to Israel’s high birthrate and the presence of low-wage migrant workers.