McKinsey’s report (January 2023) focuses on why productivity in Israel is lagging and what can be done to boost it, in order to substantially increase the nation’s standard of living and ensure sustainable and inclusive growth providing broad-based prosperity in the future.
Israel’s economy has grown faster than many peers’, and it benefits from a thriving high-tech sector that accounts for about 15 percent of GDP and attracts very substantial international investment. Viewed as a whole, however, the economy has a significant productivity gap to comparable OECD economies that has widened over the past two decades. That gap constrains the country’s economic potential and has held back growth in GDP per capita. This has created a “two-speed” economy in Israel characterized on one side by highly productive, globally oriented tech companies with well-paid, highly skilled employees and, on the other, by lower-productivity companies in most other sectors that tend to be less competitive and pay lower wages.
This report examines the factors contributing to this productivity gap and what can be done to reduce it. It focuses on three critical areas: the economy’s lower competitiveness; its relatively low levels of public and private capital stock, including critical infrastructure; and the need to improve the performance and inclusivity of schooling and adult training to equip all Israelis with the skills to take on higher productivity jobs, that will enable them to participate in the economy more fully and thrive in an increasingly interconnected and digital world.
This research was led by David Chinn, managing partner of McKinsey in Israel, together with Tera Allas, director of research and economics in McKinsey’s London office, Eliav Pollack, an associate partner based in Tel Aviv & Eyal Hashkes, a consultant from Tel Aviv.
