The growth in GDP per capita in Israel fell in recent years, and this chapter attempts to examine if this figure indicates a decline in the long-term potential growth of the economy.
Of the components underlying GDP growth in recent years, the increase due to employment rates was the largest, and accounted for about half of all growth in the past five years. This increase was largely due to the rise in labor market participation among women and population groups who generally have low participation rates. Expansion in higher education was a key component of growth in the past, but estimates show that the contribution of human capital to growth is gradually decreasing alongside a slowdown in the rise of educational attainment.
Capital stock per hour worked was on the rise in recent years, yet came to a standstill in 2014-2015. Increased investment in the Israeli economy is essential so that it can enjoy stable growth from competitive advantages based on technological advancements, rather than on the low cost of labor. However, these developments are interrelated, and the steep rise in the supply of low wage workers detracts from the incentive to invest in capital and advanced technologies.
In the short term, economic growth depends on the global environment. The slowdown in international trade in recent years weakened demand in tradable industries, weighing down overall growth. The sharp rise in labor market participation rates in recent years has supported economic growth thus far, but signs indicate that this channel is nearly exhausted and, without any changes in existing conditions, the probability of a further slowdown increases. Long-term growth is possible even under these conditions, but it depends on active policies and the implementation of reforms that will support such growth.
This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2016, edited by Prof. Avi Weiss.