Israel : Selected Issues

This Selected Issues paper examines labor productivity in Israel. Israel's GDP per capita is low relative to the United States despite high labor input, as labor productivity is low. Catch-up of labor productivity to the United States stopped in the 1980s and relative labor productivity has since declined. Low labor productivity is the result of a low capital-to-labor ratio-kept low by high employment growth-and low total factor productivity growth. The latter may reflect lack of competition and product market restrictions, which are among the highest in advanced economies. Boosting competition, lowering product-market restrictions, and improving the quality of education and infrastructure would help boost productivity.