While Israel’s economy has rebounded strongly from the Covid-19 pandemic and has proven resilient to the economic impact of Russia’s war of aggression against Ukraine, reforms to reduce labour market disparities and boost productivity would help to sustain, broaden and further boost gains in living standards, according to research from the Organisation for Economic Co-operation and Development.

The OECD found that more needs to be done to reduce labour market disparities. Israel’s rise in living standards since the 1990s has been driven by steady growth in employment which is now tapering off due to an ageing workforce and a rising share in the population of groups with lower levels of employment and wages such as Arab-Israelis, where female participation in the labour market is low, and Haredim (the strictest group within Orthodox Judaism), where male participation is low, it added.

Stepping up efforts to integrate these groups into the labour market, raising their labour productivity, and removing barriers for women to fully participate in the labour market, would support future growth in living standards, ensure fiscal sustainability and help to reduce socio-economic divides.

“These efforts should focus on raising educational outcomes among groups that are lagging behind, providing vocational and digital skills training, improving work incentives, including support for working parents, and removing barriers to job mobility to foster participation in high-productivity jobs,” the OECD stated.

Meanwhile, the latest OECD Economic Survey of Israel projects GDP growth at a pace of 3.0% in 2023 and 3.4% in 2024 following growth of 6.4% in 2022. Inflation is projected to remain elevated in 2023 at an average 3.8%, but is expected to gradually fall within the target range, averaging 2.2% in 2024.  

However, global and domestic uncertainty remain high. The OECD recommends maintaining tight monetary policy along with prudent fiscal policy until inflation is durably back within the target range. Ongoing support to vulnerable households and firms affected by higher costs of living should be targeted and temporary and maintain energy saving incentives.

“Sustaining and strengthening growth will require efforts to tackle underlying structural challenges such as Israel’s dual-speed economy, which exacerbates labour market disparities with a highly productive tech sector providing well-paid jobs and low-productivity traditional sectors employing the majority of the workforce in generally lower-paid jobs,” the OECD stated.

It recommends speeding up the adoption of digital technologies in traditional sectors and lowering barriers to competition, investment and foreign trade across the economy, for example through less restrictive business regulations and more streamlined trade procedures.