Israelis Prosper During War, But Economic Challenges Loom, Expert Warns

Despite ongoing conflict, Israel's economy has shown remarkable resilience, with real wages increasing, unemployment remaining low, and citizens' financial assets reaching historic highs, according to economist Shlomo Maoz. However, Maoz cautions that these successes mask significant underlying issues that the next government must address, including a severe labor shortage, the need to expand labor force participation, and the repatriation of industries previously outsourced to cheaper imports.

Maoz highlights that inflation has slowed to 1.6% over the past year, a significant decrease from 5.3% in 2022. Real wages have risen by 5.1% compared to four years ago, largely driven by a scarcity of workers forcing employers, including government entities, to offer higher salaries. This labor deficit also contributes to low unemployment, averaging 2.9% this year, with much of it being frictional. The war has exacerbated the shortage, with the number of job vacancies increasing by 14.2% in the first nine months of 2026 compared to the same period in 2023, with high demand for engineers, software developers, and drivers.

Several factors contribute to the labor shortage. Approximately 145,000 Israelis have left the country in recent years, taking valuable skills with them, while only about 106,000 have immigrated since 2023, requiring time to integrate into the workforce. Restrictions on Palestinian workers from the West Bank and Gaza have also impacted labor availability, though Maoz notes some unauthorized movement persists. Extended reserve duty, averaging over 130 days per reservist since the war began, further strains the workforce. Additionally, young people entering the labor market later due to the war has skewed the average wage upwards.

Despite rising wages, some Israelis face higher tax burdens due to unindexed tax brackets since early 2025. Nevertheless, the standard of living in the second quarter of 2026 was 5.1% higher than before the war, and citizens' financial assets have grown by 51% over the past four years to a record 7.623 trillion shekels. Israelis are spending more on travel, dining, and vehicles, with car registrations reaching 270,000 by September 2026, nearing the full 2023 total. Spending on credit cards has increased by 8.5% year-on-year, though growth has slowed recently, partly due to increased international travel. Food prices have seen a modest 1.1% increase over the past year, contrary to public perception.

Maoz identifies the ultra-Orthodox (Haredi) sector as a major economic weakness. He advocates for policies that incentivize their participation in the workforce, including mandating general education in Haredi institutions and linking state benefits to military or alternative civilian service. He also calls for the return of traditional and heavy industries, arguing that reliance solely on high-tech is unsustainable, especially during emergencies. Maoz concludes that employment reforms are crucial for continued economic growth and national resilience.