Addressing labour market challenges for sustainable and inclusive growth in Israel
By Michael Koelle, OECD Economics Department
Strong employment growth in Israel has accounted for about two-thirds of GDP growth in the last three decades. The population has doubled since 1990 due to high fertility and immigration. Migrants, many from the former Soviet Union, were successfully integrated into the labour market. Women’s labour force participation rose strongly and is now significantly above the OECD average (Figure 1). These gains are even more impressive considering the still high fertility rate of three children per woman, almost double the OECD average. The COVID-19 pandemic did not leave a lasting trace in the labour market thanks to decisive policy support and the strength of Israel’s high-tech sector.
Figure 1. Women’s labour force participation increased strongly
Demographic change will imply a rising share of population groups with weaker labour market outcomes. Some groups, such as Arab-Israeli women and Haredi (Ultra-Orthodox) men, still have significantly lower employment rates (Figure 2). Moreover, women as well as Arab-Israelis and Haredim of both genders often work in lower productivity sectors and face sizeable wage gaps. If these disparities are unaddressed, future productivity growth, progress in living standards and fiscal sustainability will be at risk.
Figure 2. Labour market and wage disparities are high
To sustain broad-based progress in living standards, Israel needs to find ways to improve labour market outcomes along both participation and quality of employment. The 2023 OECD Economic Survey of Israel suggests reforms in three broad areas:
- Improving skills. Employment and wage gaps are partly a reflection of skills gaps. The fragmentation of the education system is reflected in learning outcomes. The school a student attends matters more for test scores than in most other OECD countries. As a result, some young Israelis have outstanding skills, while the majority lag behind their peers in other OECD countries. At the level of secondary schools, better aligning public funding with teaching needs and core subject instruction would help those with the weakest learning outcomes to catch up. At the post-secondary level, work-based vocational education and training (VET) could be strengthened. A national qualifications framework that maps and relates the skills content of different VET, college, and university degrees, would help improve modular learning and pathways for educational mobility at different stages in life.
- Fostering labour market participation. The tax and benefit system plays an important role in incentivising or – if it is poorly designed – disincentivising labour market participation. The Israeli tax and benefit system in general sets strong pro-work incentives. Some elements, however, could be strengthened to improve its effectiveness in encouraging labour force participation. For example, the successful Earned Income Tax Credit (EITC) scheme could provide greater support for second earners, to lift low-income families out of poverty. Women’s opportunities to participate in all parts of the economy could be improved. More childcare offers are needed in Arab towns and villages. Introducing paid paternity leave, like most other OECD countries have done by now, would encourage fathers to take on a more equal share of care tasks at home.
- Increasing job mobility. Pay differences may be also the result of the lack of mobility into high-paying jobs and firms. Wage differences across sectors are larger in Israel than in other countries, reflecting limited labour mobility and reallocation into higher productivity sectors. Despite progress in education, some population groups are still massively underrepresented in the well-paying high-tech sector. For example, Arab men are 80% less likely to work in high-tech than the general population, despite majoring in STEM at similar rates. A comprehensive strategy to broaden the high-tech talent pool could include expanding foundational skills in middle school, coding bootcamps, and internship and mentoring programmes. This would expand opportunities to Israelis from all backgrounds. Reforms to ease housing and transport infrastructure development would increase geographical mobility. Better broadband coverage would ease remote working even in rural areas.
OECD (2023), OECD Economic Surveys: Israel 2023, https://doi.org/10.1787/901365a6-en.