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  • 11 - Why Is Labor Productivity in Israel So Low?

  • from Part III - Investment in Human Capital, Productivity, and Inequality
  • Edited by Avi Ben-Bassat, Hebrew University of Jerusalem, Reuben Gronau, Hebrew University of Jerusalem, Asaf Zussman, Hebrew University of Jerusalem
  • Book:
    The Israeli Economy, 1995–2017
    Published online:
    04 February 2021
    Print publication:
    18 February 2021, pp 329-361

  • Summary

    We analyze differences in labor productivity between Israel and a group of small OECD countries. We assume a more general human capital production function and calibrate it using PIAAC surveys, which examine the literacy and numeracy skills of the adult population in the OECD countries. Whereas Israel has more years of schooling, its population has lower measured skills. Using development accounting exercise, we show that once years of schooling and numeracy skills are taken into account, differences in accumulated factors explain more than three-quarters of the gap. This is against a split of 60–40 between accumulated factors and total factor productivity, when these skills are ignored. Additionally, using panel data on 13 OECD countries, we show strong positive correlation between physical and human capital per worker. A causal interpretation of our estimates implies that closing the gap in skills will indirectly close 18 percent of the gap in physical capital.