Israel: Lack of Competition, Outdated Skills Blamed for Low Israeli Productivity

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By Jenny David

Oct. 26— Israel's low worker productivity is concentrated in a handful of sectors, and high productivity in the electronics and high tech industries is not enough to offset the shortfall, according to a recent Bank of Israel report on labor skills.

Labor productivity in Israel is an average 14 percent lower than that in advanced economies, the study found, blaming lack of competition and cognitive skills for the gap.

Industries that must compete in international markets tend to step up to the task, while those that sell mostly to the domestic market have no reason to follow suit, the report said, noting that productivity is lowest in the food and accommodation services, construction and trade industries. In addition, the report found that “the basic cognitive skills of workers in Israel are lower than the OECD average, even though the share of Israeli workers with an academic degree is higher than the OECD average.”

Competition Is Key

Clearly, education is not the key to improvement.

“Competency is especially low in construction and trade and is also inferior in manufacturing industries with a low share of exports,” the report found, “even though the share of college degree-holders in these industries is high compared with the share in the OECD.”

Nor can the problem be attributed to the erosion of skills over time, since new and veteran workers show similarly low skill levels.

“The low quality of employees is in line with non-complex and low technology work methods,” the report said. For example, construction workers in Israel do more physical work than those in other OECD countries and use computers less frequently, while the opposite is true in exporting industries.

MNCs Improve Productivity

The high productivity in the tech sector is spurred by the presence in Israel of multinational corporations (MNCs) such as Apple, Microsoft and Intel, according to a separate Finance Ministry report.

Labor productivity is an average 40 percent higher in MNCs than in their domestic counterparts, the study found, and while highest in high tech, the trend is also clear in the agriculture, wholesale and service sectors.

There is also a clear difference in salaries, the Finance Ministry said. Two-year veterans of MNCs earn 4 percent more than their industry peers and 10 percent more than their domestic competitors. In high tech, the gap is even greater, MNC employees earning an average 56 percent more than their counterparts in domestic companies.

According to data from the Central Bureau of Statistics, 190,000 Israelis—5.8 percent of the Israeli workforce—were employed by MNCs in 2011, and the OECD places total employment in Israel-based MNCs at 8 percent, both estimates low compared to a 19 percent average in OECD countries.

To contact the reporter on this story: Jenny David in Jerusalem at correspondents@bna.com

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For More Information

The Bank of Israel report is available here, the Finance Ministry report here, both in Hebrew.

For more information on Israeli HR law and regulation, see the Israel primer.

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