Macroeconomic Trends in Israel: An Overview

Executive Summary

The work by Prof.  Benjamin Bental and Dr. Labib Shami presents an optimistic picture of the Israeli economy, which stabilized and returned to its pre-COVID trends. The study reviews the state of the Israeli economy in 2022 and describes the positive developments that began while indicating the structural problems that harm labor productivity and impact the cost of living in Israel relative to other countries.

The government and debt in Israel

In 2020, many government took steps to ease the economic impact of the COVID crisis and significantly increased their deficits and debts. As a result, the ratio of debt-to-GDP in Israel rose similar to that of the OECD average, about 12 percentage points, and reached about 71%. In the Euro Area, the average increase was sharper with an average of 14 percentage points.

The rapid growth in GDP in 2022 and the commensurate increase in government revenues in the first three quarters of 2022 created a surplus of 2.6% in the GDP. By the end of 2022, the debt-to-GDP ratio fell to about 61% — close to its pre-crisis level, and according to estimates by the IMF, by the end of the decade, it should reach about 55%. In this way, Israel will reach the median level of the OECD countries.

The labor market and productivity

The picture of the Israeli labor market is optimistic. In the first few months of 2020 with the advance of the COVID crisis, the unemployment rate in Israel rose with no change in the share of job vacancies. As the unemployment rate began to stabilize at a higher level, there was a parallel and significant rise in the number of job vacancies. By mid-2021, the unemployment rate returned to its pre-crisis level, although there was no similar decrease in the share of job vacancies in the labor market. The ratio between job vacancies and unemployment continued to rise in 2022, and despite a slight decline towards the end of the year, it remained quite high relative to the pre-crisis period.

On the structural side, the review highlights the long work hours in Israel alongside low productivity. In 2019 (pre-COVID), the average number of work hours for an Israeli worker was about 1,900 hours per annum — 25% more than the average in European countries of a similar population size to Israel (Austria, Bulgaria, Denmark, Finland, Ireland, the Netherlands, Sweden, and Switzerland). In terms of labor output, the situation is reversed: in 2021, labor productivity in Israel was about $48 per work hour (in 2017 prices), and in the comparison countries, productivity was higher by about 25%. One of the explanations for these disparities is connected to the levels of public and private capital per employee in Israel, which have not grown since 1980 and remain very low relative to the comparison countries.

The high tech sector

In 2021, the high tech industry sector employed about 10% of the labor market employees, and contributed about 15% to GDP. A little over two-thirds of the job positions in the sector are in the areas of service and the rest are in manufacturing. Within the service branch, the rapid increase in the number of positions in programming and the decline in the number of positions in information services stands out. In terms of labor productivity, in the traditional technology industries, from 2004 to 2022, the average number of work hours decreased by about 20% and productivity grew by about a quarter. In contrast, in the high tech industry, outputs rose by about 170% while the number of work hours increased by only about 20%. The rise in productivity is seen in the wages in this sector which are, on average, about twice that of workers in other industries.

Price

The study indicates the price rises in Israel were far lower than those in the US or the Euro Area. In Europe and the US, food prices rose more rapidly than the CPI, while in Israel, food prices and the CPI rose at about the same rate. The gap between Israel and comparable countries in energy prices is greater, though; in the US and Europe, energy prices rose by about 40%, while in Israel, the increase was about half of that rate.