Underqualified Workers Costing Israeli Economy $11 Billion a Year, Central Bank Says

Report places blame mainly on poor quality of schools, estimates wages could rise just by boosting Israeli skills to OECD average

FILE PHOTO: Haredi students in the Jerusalem Technology Park, Jerusalem, Israel, 2013.
Emil Salman

The low level of skills Israeli workers have, compared to those in other developed countries, is costing the economy 40 billion shekels ($11 billion) a year, or 3% of gross domestic product, the Bank of Israel said in its annual report on Sunday.

Among other things, it said that if the average Israeli worker were to improve math skills to the average of 17 Organization for Economic Cooperation and Development, his or her wage would go up by 2.8% or 1.60 shekels an hour. If their reading skills met the average, hourly pay would be 3% higher.

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In terms of GDP per capita, that would add between 4,000 and 4,500 shekels a year, the Bank of Israel estimated.

The bank was direct in pointing the blame at the poor quality of Israeli schools. “The basic skills in Israel are characterized by a low level, and this plays a significant role in explaining the fact that labor productivity (GDP per worker) in the country is low compared with other developed countries,” it said. “This low productivity serves as the main explanation for the level of wages in Israel.”

The report said Israelis were getting a good education in terms of quantity, with Israelis getting an average of 13 years of schooling compared to 12 for citizens of countries belonging to the OECD.

Israel also scores well in higher education: 50.9% of Israelis in the prime working ages of 25-64 hold a degree, far higher than the 36.5% average for OECD countries.

But those years in educational frameworks aren’t always well spent, the Bank of Israel said. Israeli students score poorly next to their OECD peers on international exams and Israeli adults do badly on the OECD’s Program for the International Assessment of Adult Competencies.

The latter tests cognitive skills relevant to the labor market in three areas – the ability to read a written text in your native language, access and interpret mathematical information and ideas and use computers to perform tasks and solve problems. In Israel, the average score was lower than the OECD average in all three areas.

The Bank of Israel said the low scores helped explain Israel’s low level of labor productivity, which in turn means that pay for Israelis is also lower than it could be.

For the 25-64 age group, the average hourly salary measured in purchasing power parity (which adjusts the value of local money to its actual buying power) is 58.40 shekels in Israel. For 17 OECD countries chosen because the appropriate data were available the rate was 13.3% higher.

The low rate of labor productivity is a fundamental problem for the Israeli economy. In recent years it has been growing slowly in other developed economies but, as the report said, “Israel still has to go a long way even to reach their level.”

On a PPP basis, Israel labor productivity, which is calculated by total GDP divided by the number of hours worked by employed people, came to $42.70 in 2017, compared with $56 on average for OECD countries, That gap of 31% hasn’t narrowed in recent years, the report noted.

The central bank said there were other, macroeconomic factors, that explained Israel’s glaring productivity gap. Among other things Israel’s business capital stocks – its machinery, equipment, factory buildings and intangible assets – is about 40% less than the average for OECD countries. In the government sector, civilian capital stock, which includes things like transportation infrastructure, is also low.

Another factor is that sectors characterized by low productivity worldwide, such as hotels and restaurant service, commerce and construction, account for a large share of employment in Israel, the central bank said.

Israel remains a relatively difficult place to do business in, according to the World Bank’s Doing Business index.

But the Bank of Israel’s study focused on the micro-economic factors, which deals with worker skills.

The public sector productivity gap with the rest of the developed world is even wider than the private sector’s. However, because public sector productivity is lower in the other countries, the gains from increasing skills to the 17 country OECD average would only bring about a 2.4% increase in hourly pay, the Bank of Israel estimated.

Not all Israelis are lagging in productivity. In some sectors, Israelis either match or slightly exceed the rates in other developed economies. But at the lowest end of the skills ladder, Israeli levels are very poor.

In the top decile of the adult competencies tests, Israelis on average score 0.7% higher than the OECD average. But in all the other deciles, Israelis perform worse and the gap widens further down the ladder. At the third decile Israelis score 9.8% below the average and 27% below at the bottom decile.

The report ascribed that to huge socioeconomic gaps, especially vis a vis Israeli Arabs and ultra-Orthodox Jews. If their work skills reached the level of non-Haredi Israeli Jews, the average pay in Israel would rise as much as 0.9% annually and add 10 billion shekels to the economy.