Israel’s productivity opportunity

| Report

Israel’s economy has grown faster than many other comparable advanced economies, fueled by a strong, globally oriented high-tech sector. However, it has a significant productivity gap that constrains economic potential and has limited growth in GDP per capita. A new report by McKinsey & Company examines contributing factors and what can be done to ensure sustainable and inclusive growth. Key findings:

Israel’s productivity, as measured in GDP per hour worked, is about 40 percent lower than the average of the top half of OECD economies. The differential between Israel's productivity levels and that of peer countries has also slightly increased between 2000 and 2019, from $20 to $23.

Israel’s economy needs to become more competitive and dynamic. Global rankings suggest the business environment is overly regulated, protectionist policies hinder the ability of foreign competitors to enter the Israeli market, digitization is lagging, and both public and private sector could be doing more to modernize.

Gaps in Israel’s public infrastructure and private capital need to be closed. We estimate that closing the public infrastructure gaps will require ramping up public investments from two-point-five to three percent up to about four-to-five percent of GDP annually to 2035, along with improved execution of infrastructure projects.

Israel will need to close a human capital gap. Standardized school test scores are low compared to peer countries. Additionally, inequality in the education system creates a skills gap, especially in areas that are not considered high tech. Medium and longer-term measures to improve productivity will need to focus on improving the quality and equity of Israel’s education system, along with lifting levels of adult skills and continuing education.

While these areas amount to critical challenges for Israel, they also signal a huge opportunity. By increasing competitiveness, closing infrastructure gaps, and raising educational performance and workforce skills, Israel could ensure that its future economic growth will be more vibrant and more inclusive. An aspirational economic scenario suggests that Israel could boost GDP per capita by 2035 by as much as $13,500 per person. This would bring the Israeli economy—in terms of GDP per capita—to the same level as the top echelon of OECD economies and, for the average Israeli employee, mean an average monthly pay increase of nearly ₪7,000 New Israeli Shekels ($2,046) compared with today’s average pay.