Israel is one country that essentially has two economies

22.03.2018

Prof. Avi Weiss - Israel has two economies
Earlier this month, the OECD put out its 2018 Economic Survey of Israel, which included trends that are familiar to us at the Taub Center: data showing Israel’s remarkable improvement in comparison to other OECD countries, on the one hand, and a number of indicators of growing inequalities and concerns in Israeli society on the other.

This leads me to a question I am often asked: how can the Israel that is the “start-up nation” – the country that has produced Waze, Mobileye, and Checkpoint and has a notably high number of patents per billion dollars of GDP – be the same Israel as the one where wages are low and prices are high, inequality is large and growing, and a disposable income poverty rate that is the highest in the OECD?

The answer is that there are basically two Israeli economies that exist in parallel. A unique characteristic of the Israeli economy is the makeup of its exports, which largely rely on high tech companies. Israel’s high-tech sector is indeed characterized by high productivity and high wages, but this sector makes up only about 9% of the Israeli workforce.

Generally, we would expect this high-performing industry to have a positive effect on the entire economy as more workers flock to join it. However, high tech and other advanced technology companies have employees with very high skills, making it difficult for those with lower skills to move into these industries even though there is high demand for more workers.

Because worker mobility between local and export industries is low, efficiency, productivity, and wages are not increasing in the bulk of Israel’s economy, despite the success of high-tech in Israel.

To read more on Israel’s economy, please refer to A Macroeconomic Picture of the Economy in 2017.

 

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