Macroeconomic Trends in Israel: An Overview

Executive Summary

Prof. Benjamin Bental and Dr. Labib Shami from the Taub Center present an optimistic picture of the Israeli economy, which has stabilized and returned to its pre-pandemic state. At the same time, the research points to structural problems that are hindering labor productivity and examines the cost of living in Israel relative to other countries.

Less unemployment and more job vacancies

During the initial months of 2020, and with the spread of the COVID-19 pandemic, the rate of unemployment in Israel increased while the rate of job vacancies remained unchanged. When the rate of unemployment began to stabilize at a higher rate, the number of job vacancies began to rise significantly. However, in mid-2021 there was no change in job vacancies even though unemployment began to return to its pre-pandemic level. The rate of job vacancies relative to the rate of unemployment remains high relative to the pre-pandemic period.

Workhours are longer in Israel and labor productivity is lower, except in the high tech sector

Relative to European countries whose population sizes are similar to Israel’s (Austria, Ireland, Belgium, Denmark, Finland, the Netherlands, Sweden, and Switzerland), Israeli workers spend more time at work. In 2019, Israelis worked an average of 1,900 hours a year while in most other countries, the average was about one-quarter less than that.

In terms of productivity, Israel is doing less well than these countries: in 2021, labor productivity in Israel was about $48 per workhour (in 2017 prices), while in the reference countries it was higher by about one-quarter.

In contrast, Ireland, whose number of work hours is similar to Israel’s, has seen an impressive jump in labor productivity. In 1995, it was higher than Israel’s by 40% while today it is more than 160% higher. One of the explanations for the gap is the low levels of public capital per capita and private capital per capita in Israel, which have not grown since 1980 and which remain very low relative to the reference countries.

The high tech sector

In 2021, the high tech sector in Israel employed about 10% of the workers in the economy and contributed about 15% of GDP. A bit more than two-thirds of high tech jobs are in services and the rest in manufacturing. In the service industries, particularly notable is the rapid growth in the number of programmers and the decline in the number of jobs in information services. The number of work hours in high tech manufacturing has risen by about 20% since 2004 while its output has grown by about 170%.

The large gap in food and energy prices between Israel, and Europe and the US

The Taub Center study indicates that the increase in prices is much lower in Israel than in the US and the Euro area. Thus, while food prices in the US and Europe rose faster than the CPI, in Israel they rose almost identically. The gaps in energy prices between Israel and the reference countries is even larger: in the US and Europe energy prices rose by about 40% while in Israel they rose by half that rate.

The cost of living primarily harms the poor

The Taub Center researchers point to the large variation in consumption patterns between different income groups. For example, households in the top quintile (in which income per capita is the highest) spend relatively more on average on home maintenance, healthcare, transportation, and communication than those in the lower quintiles. The differences in consumption patterns create differences in the effect of inflation on the various income quintiles. The housing component of the CPI rose at a higher rate for the top quintile than for the bottom quintile. In contrast, the situation was the opposite for furniture and home appliances: households in the bottom quintile spend 3.6 times more than households in the top quintile on the repair of kitchen appliances and 30% more on disposable plates, cups, and cutlery, which became much more expensive as a result of the imposition of a tax on these items.

A comparison of expenditures in July 2022 with the average in 2020, shows that the expenditure of households in the top quintile rose by 8%, that of the middle quintile by 7% and that of the bottom quintile by 6.4%.

The optimistic forecast for the debt-to-GDP ratio

In 2020, governments adopted measures to mitigate the effect of the pandemic and they increased their deficits and their debt levels significantly. As a result, Israel’s debt-to-GDP ratio rose at a similar rate to that of the OECD average, namely about 12 percentage points. In the Euro area, the average increase was even larger — about 14 percentage points.

In Israel, the Ministry of Finance’s forecast for the deficit — made at the time when the 2021–2022 budget was passed — was 6.7% of GDP for 2021 and 3.9% for 2022. The actual deficit for 2021 was 4.6% of GDP while during the first three quarters of 2022, there was a budget surplus of 2.6% of GDP. These figures had a dramatic effect on the debt-to-GDP ratio.

According to the latest forecasts, the IMF expects that by the end of 2022 the debt-to-GDP ratio in Israel will be 61.5%, which is very close to its pre-pandemic level, and that it will continue to decline to about 55% toward the end of the decade. This will place Israel’s ratio at a similar level to that of the median of the OECD countries.