Israel’s High-Tech Boom Fails to Boost Overall National Productivity
Despite Israel’s status as a global leader in innovation and its significant investments in research and development, software, and information technology, the country’s overall labor productivity remains below the average of developed nations. According to the latest OECD report released in 2024, Israeli workers produce about 79% of the output per hour compared to their counterparts in developed Western countries, a gap that has barely narrowed over the past 25 years. In 2000, Israel’s productivity was approximately 78% of the OECD average, and in 2024 it stands at 78.7%, despite a 40% increase in productivity per hour from $36.6 to $51.8 during that period.
The OECD data highlights a paradox: Israel ranks among the top countries in investments in knowledge economy sectors, with software and data investments at 3.66% of GDP, higher than the US’s 2.8%, and research and development spending at about 3% of GDP, placing it in the top ten among developed countries. However, these investments have not translated into broad-based productivity gains across the entire economy. The multifactor productivity index, which measures efficiency improvements beyond labor and capital inputs, also shows no significant improvement, indicating that technological advances have not yet led to widespread efficiency gains.
Bank of Israel Governor’s recent remarks underscore this divide, noting that much of recent economic growth is driven by global companies operating in Israel, such as Nvidia, and that excluding these firms, growth is more modest. This suggests that the high-tech sector’s productivity gains are concentrated in a limited number of companies and industries, rather than diffusing throughout the economy.
The key insight from the OECD report and economic analysis is that while Israel’s high-tech core operates at a world-class level, the productivity improvements have not sufficiently permeated traditional sectors like services, commerce, and manufacturing. The longstanding assumption that a strong high-tech sector would automatically elevate the entire economy’s productivity is now being questioned. The challenge for Israel going forward is to ensure that the benefits of innovation and technological investment spread more broadly to raise the overall standard of living for its population. Without this diffusion, Israel risks remaining a high-tech powerhouse without becoming a broadly prosperous economy.
