The Dual Labor Market: Trends in Productivity, Wages and Human Capital in the Economy

The Israeli economy is characterized by a severe duality. At one end are the advanced high-tech industries, with high and quickly rising labor productivity. At the other end are industries characterized by low-productivity and minimal growth. This chapter examines the characteristics of this polarization in the labor market, which began in the second half of the previous century. The chapter examines why the success of the high-tech sector has not led to an improvement and streamlining in the rest of the economy, and shows that, over the years, the two sectors have further diverged in terms of worker traits, college wage premiums and labor productivity. At the same time as employment mobility between sectors declined, the relationship between the wages in the high-productivity and low-productivity sectors also diminished. The chapter raises the possibility that by diversifying the Israeli export market, it may be possible to apply pressure on wages in industries with low-productivity and to encourage them to streamline their processes, ultimately leading to a narrowing of gaps within the Israeli labor market. The authors also recommend encouraging research and development in low-technology industries and creating avenues for vocational training that will enable better employment mobility between the various sectors.

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