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:

1. 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.
2. 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.
3. 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.

Reference:

OECD (2023), OECD Economic Surveys: Israel 2023, https://doi.org/10.1787/901365a6-en.

by Gabriel Machlica and Oliver Röhn, Economics Department

The coronavirus pandemic has interrupted Israel’s progress in boosting standards of living. Before the pandemic, Israel enjoyed strong employment growth and living standards had risen close to the OECD average. To contain the spread of the pandemic, the government reacted swiftly and introduced stringent confinement measures in March and April. The government and financial authorities deployed emergency measures quickly to support households’ and firms’ incomes and liquidity. After the economy had largely reopened, a second outbreak has given way to a renewed lockdown in September (Figure 1, Panel A).

As in other countries, high uncertainty and the containment measures necessary to limit the spread of the virus have led to a sharp drop in economic activity. The economy is projected to decline by around 6% this year (Figure 1, Panel B). At the height of the crisis, over a million employees were temporarily laid off. Many have returned to work as the economy reopened. However, the unemployment rate, broadly defined to include workers on unpaid leave and workers who have left the labour force due to the pandemic, remains high at 11%. Moreover, the crisis threatens to aggravate Israel’s long-standing challenges of high poverty and wide productivity disparities between its vibrant high-tech sector and lagging sheltered sectors.

The new OECD Economic Survey of Israel (2020) identifies measures that can help Israel navigate this crisis. In the short term, the government and financial authorities should continue to provide fiscal, monetary and financial market support to buttress the recovery, boost confidence and avoid widespread bankruptcies. The government has expanded the eligibility to unemployment benefits to workers on unpaid leave and extended benefits until next year. This should be complemented by stepping up active labour market policies, such as retraining and job search support, to help workers transition to new jobs with better prospects.

The Survey identifies priorities to put Israel on a stronger, sustained and inclusive recovery. Introducing ambitious reforms can improve the standard of living of the average Israeli citizen by some 15% by 2050 and help to reduce the gap in living standards vis-à-vis the upper half of the OECD countries (Figure 2). These measures and reform areas include:

• Upgrading infrastructure. Israel’s core infrastructure stock is almost a third smaller than in other OECD countries. The availability and quality of public transport is also limited. Boosting public infrastructure investment can lift productivity and connect people to job opportunities.
• Improving educational outcomes. The gaps in students’ outcomes between Arab-Israeli students and the rest of the population are significant, amounting to 4 years of schooling on average. Reducing gaps will require improving pre-school education, recruiting high-quality teachers, especially in the poor municipalities, and reducing disparities in students’ outcomes between different school streams.
• Strengthening the fiscal framework for local governments. Poorer municipalities lack resources to finance adequate public services for their residents. This calls for supporting poorer municipalities through higher compensation from wealthier municipalities. Merging municipalities and promoting regional clusters can improve efficiency.
• Supporting the poor. Employment among groups with traditionally low labour market attachment has significantly improved. However, the income received from work was not enough to make a substantial dent in poverty, which remains comparatively high. Further expanding Israel’s earned income tax credit would support the poor while maintaining strong incentives to work.
• Simplifying the tax system and reducing economic distortions. The tax mix is reasonably growth- and employment-friendly with a relatively low tax burden on labour. Nevertheless, ample room exists to simplify the tax system by abolishing inefficient tax expenditures and broadening tax bases, which would support revenues. The business and property tax system should be reviewed to reduce distortions.
• Improving environmental outcomes and reducing health risks. Poor air quality remains a concern for the well-being of Israelis. Introducing congestion charges would reduce traffic flows and air pollution, and can provide additional resources to boost the public transport infrastructure. Pricing fossil fuels according to their carbon content and other pollutants, while protecting the most vulnerable, would further lower carbon emissions, and make renewable energy generation more competitive.

References:

OECD (2020), OECD Economic Surveys: Israel 2020, OECD Publishing, Paris, http://dx.doi.org/10.1787/eco_surveys-isr-2018-en.

By Gabriel Machlica and Claude Giorno, Israel Desk, Economics Department

Inequality and relative poverty in Israel remain high, particularly among Arab-Israelis and Haredim (Ultra-Orthodox). Israel’s social policy follows a “welfare-to-work” approach to tackle poverty in order to avoid measures that may harm work incentives among the Haredi, who value the time dedicated to religious studies, and the Arabs, who have cultural barriers to female employment. The government’s strategy of encouraging employment among previously non-working families has met with substantial success. The Israeli labour market has improved markedly, and more and more Haredim and Israeli-Arabs have been able to find jobs. Moreover, the average real income of poor households has risen by almost 3% annually in the last six years, while the average annual real income of wealthier households has increased by only 2.2%.

However, inequalities remain internationally high, and the current strategy without complementary steps has its limits. Many disadvantaged workers have been able to find jobs, but their families remain poor, since in most cases these jobs are low-paid. Indeed, the share of the working poor has risen in recent years and is comparatively high (Figure 1).

This is particularly true for the Haredim and Israeli-Arabs, who earn on average only 70% and almost 90% of the median hourly wage, respectively, mostly due to the differences in skills and typically have families with only one breadwinner. Given the current tax-transfer system and large number of children in these households, especially in the Haredi community, even two full-time working spouses would not be enough to escape from poverty (Figure 2).

Therefore the current government strategy should be accompanied by additional measures. Extensive poverty in Israeli society is to a significant extent due to the wide dispersion of skills. The government should improve the education outcomes of the disadvantaged groups to boost their future productivity and wages. As the 2018 OECD Survey on Israel argues, the education system needs to become more inclusive by giving all children opportunities for good-quality education to improve their skills. The government should also focus on programmes for adults who have already left initial education without proper skills. In addition, it should further expand in-work benefits to boost take-home pay of the average eligible worker.

References:

OECD (2018), OECD Economic Surveys: Israel 2018, OECD Publishing, Paris, http://dx.doi.org/10.1787/eco_surveys-isr-2018-en.

By Claude Giorno and Gabriel Machlica, Israel Desk, Economics Department

The Israeli economy is strong. The country is enjoying its 15^th consecutive year of growth, with GDP increasing on average by 4.0% annually since 2003, i.e. faster than nearly any other OECD country. Unemployment is at historically low level, and the average standard of living is improving steadily. Rapid population growth, the rise in people with jobs, strong economic fundamentals, good economic policy settings and a dynamic high-tech sector are underpinning these impressive outcomes, which are expected to continue in the short term, according to the 2018 OECD Survey on Israel.

Today’s excellent outlook offers Israel a unique opportunity to prepare for the challenges of the future which require stronger social cohesion.  Israeli society is indeed marked by large inequalities. Almost 18% of the population live in relative poverty (i.e. with a disposable income below 50% of the median), higher than the OECD average (12.5%) and any other advanced economy. This reflects large disparities between different communities. Around half of Israeli-Arabs and Haredim are poor and live separately from the rest of the population. They have different school systems, live mostly in different cities and do not serve in the army. This leads to poor education results followed by worse labour market outcomes, notably in terms of earnings (Table 1). Haredi men have a cultural preference to engage in full-time religious studies, rather than participate in the labour market, and avoid core subjects in their school careers. Furthermore, Haredi women can work only part-time because of their large families. The majority of Israeli-Arab women also do not participate in the labour market due to cultural preferences. The result is that most Haredi and Arab families have only one breadwinner, resulting in significant problems of poverty, notably among children.

Given the high fertility of Haredi women, the share of that community in the total population is predicted to triple in the next 45 to 50 years, with the total share of Israeli-Arabs and Haredim rising from one-third to one-half over this period (Figure 1). This will have a substantial impact on Israeli economic performance, given the poor labour market outcomes and low productivity of these disadvantaged groups.

In the absence of further progress in social cohesion and any further convergence of productivity and labour market outcomes of Haredim and Israeli-Arabs with the rest of the population, average Israeli incomes would fall to nearly 30% below the OECD average, almost double the current gap according to OECD estimates (Figure 2). However, if ambitious structural reforms are launched to further improve the Haredi and Israeli-Arabs’ (youth in particular) integration into society through better education and training, improved work incentives and more business-friendly environment, the gap in Israeli living standards with the OECD average could shrink below 10%.

References:

OECD (2018), OECD Economic Surveys: Israel 2018, OECD Publishing, Paris, http://dx.doi.org/10.1787/eco_surveys-isr-2018-en.

Geva A. (2015), Demographic Changes and their Implications for Fiscal Aggregates in the Years of 2015-2059, http://www.mof.gov.il/ChiefEcon/EconomyAndResearch/ArticlesSet/Article_20150518.pdf