Israel’s productivity has declined significantly compared to the world’s leading advanced economies, according to a recent report from the Shoresh Institution for Socioeconomic Research. The study highlights concerns that the country’s long-term economic viability is at risk due to challenges in education, demographic shifts, and a shrinking skilled workforce.

Published last Thursday, the report indicates that Israel’s total factor productivity (TFP), which measures how efficiently an economy combines labor and capital to produce goods and services, stood at 15% below the G7 average in 2023. This marks a notable reversal from 1975, when Israel’s TFP was 9% above the G7 benchmark. Historically, Israel’s TFP was 27% below the G7 average in 1954 but improved within two decades before deteriorating again.

In addition to TFP, the report examines output per hour worked, showing that Israel’s productivity per hour, while once leading among G7 nations in 1972, had fallen behind six of the seven countries by 2024. Specifically, Israeli workers produce 34% less output per hour than their counterparts in Germany and 30% less than those in the United States, with Japan as the sole exception among the G7 trailing Israel.

Prof. Dan Ben-David, president of the Shoresh Institution and author of the report, points to a shift starting in the 1970s away from investment in infrastructure, education, and public services toward prioritizing sectoral interests. He noted that defense spending alone does not fully account for the productivity decline, emphasizing that civilian government expenditures relative to GDP have at times matched or exceeded the OECD average.

The report underscores a disparity within Israel’s economy, where the high-tech sector shows robust productivity, generating 22% more economic value per hour worked than the OECD average. However, approximately 90% of Israeli workers employed outside the high-tech industry produce 24% less than the OECD average per hour worked. This uneven performance exposes weaknesses in the broader economy.

Income inequality is another concern raised by the study. In 2024, the highest-earning 20% of Israelis accounted for 93% of income-tax revenues, up from 83% in 2000. Ben-David warned that this concentration increases economic vulnerability, especially if highly skilled workers continue to leave the country.

Demographic trends further complicate the outlook. The report notes that haredi (ultra-Orthodox) children will comprise 25% of first graders in 2026, while Arabic-speaking children will account for 23%. The haredi population represents about 6% of those aged 50-54 but 26% of children aged four and under. The critical issue, Ben-David stresses, is whether the education provided to these groups today will equip them to fill skilled roles in engineering, medicine, and other specialized fields in the future.

Shoresh’s analysis of the 2025 Programme for International Student Assessment (PISA) results reveals low educational attainment: students in state-religious schools scored below 76% of OECD countries, secular Jewish schools below 81%, and Arabic-speaking pupils ranked below all OECD countries and six of the seven participating Arab nations. The Education Ministry highlighted that wartime conditions, including displacement and disrupted schooling, affected student performance during the assessments.

The report concludes that Israel’s next government must prioritize education and budgetary reforms to address these systemic issues to safeguard the country’s economic future.