Israel's Productivity Falls Below G7 Average, Report Warns

Israel's productivity has fallen below the average of G7 nations, according to a report by the Shoresh Institute for Socioeconomic Research. In 2023, Israel's total factor productivity was 15% lower than the G7 average, a significant drop from 1975 when it was 9% higher. Total factor productivity measures how efficiently an economy combines labor and capital to produce goods and services.

The report, authored by Dan Ben-David, president of the Shoresh Institute, highlights that weaknesses in the education system, rapid demographic shifts, and the emigration of skilled workers are creating a mutually reinforcing cycle. This trend, he warns, could lead to the country's economy, healthcare, and defense capabilities becoming increasingly reliant on a shrinking pool of qualified employees.

This decline is also evident in productivity per hour worked. While Israel surpassed all G7 countries in this metric in 1972, by 2024, it lagged behind six of them, with Japan being the only exception. Specifically, output per hour worked in Israel was 34% lower than in Germany and 30% lower than in the United States. The report clarifies this represents a relative decline, meaning Israel's economy has not necessarily produced less, but has grown at a slower pace than its international counterparts.

The booming high-tech sector masks significant disparities within the economy. While Israeli high-tech workers produced 22% more economic value per hour than the OECD average in 2022, workers in other sectors, representing about 90% of the Israeli workforce, produced 24% less value per hour than the OECD average. Ben-David attributes the start of this divergence to the 1970s, citing reduced investments in infrastructure, education, and public services in favor of sectoral interests, and suggests defense spending alone does not explain the observed gaps.

Furthermore, the report points to concerning trends in education and demographics. Israeli students' performance on the 2025 PISA assessments was below the OECD average in various groups, with Arab-speaking students scoring lower than all OECD countries and six participating Arab nations. The report also notes the increasing share of ultra-Orthodox and Arabophone students in early grades, while many ultra-Orthodox boys do not participate in assessments. The Ministry of Education attributed the PISA results to wartime disruptions.

An increase in Israeli doctors practicing abroad, from 0.7% of those working in Israel in 2000 to 1.9% in 2023, is also highlighted as a concern that could exacerbate the workload for remaining professionals. To address these issues, Ben-David proposes "Israel 2.0," a plan advocating for a strengthened core curriculum for all students, public funding tied to adherence to this curriculum, and a revision of budget priorities and institutional operations. He warns that "the window for change is still open, but it is closing."