Causes of the Widening Productivity Gaps Between Israel and the OECD: A Multiyear Industry-Level Comparison

This chapter presents a novel detailed multiyear industry-level comparison of labor productivity growth in Israel and in 12 OECD countries (henceforth OECD12), and reveals the causes for the widening of productivity gaps from 1995 to 2009. The comparison shows that five large industries are responsible for 81 percent of the total widening of the productivity gap. These industries provide products and services mainly to the local market and are mostly dependent on the local business environment. A comparison of industry-level productivity growth rates in Israel and in the OECD12 over time reveals that the most significant factor affecting the ability of the different industries to reduce productivity gaps with the OECD12 is the degree of the industry’s exposure to competitive imports. Differences in the average number of work hours per worker can explain at most half of the gap in productivity per work hour, and cannot explain the widening of this gap over the last two decades. Nor can differences in industry composition explain the widening of the gap; in fact, they narrow it, mainly due to the fact that the relative share of the high-tech and finance sectors in Israel is larger than the average in the OECD12. The study findings point to the non-tradable service industries as the main contributors to the widening of the productivity gap relative to the OECD. This is perhaps indicative of defects and obstacles to competition in the local business environment such as excessive centralization and structural and regulatory barriers.

This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2015, Dov Chernichovsky and Avi Weiss (editors).