Excerpt from the Fiscal Survey and collection of research issues: Basic skills of workers in Israel and industry productivity
Labor productivity in Israel is 14 percent lower than the average in advanced economies. In contrast, labor productivity in the electronics industry is greater than the OECD average.
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· The basic cognitive skills of workers in Israel are lower than the OECD average, even though the share of Israeli workers with an academic degree is greater than the OECD average.
· Compared with other advanced economies, the share of unskilled workers in Israel is high, particularly in nontradable industries or in tradable industries that sell most of their output to the domestic market.
· The low skill of workers in those industries is in line with low labor productivity, and is reflected in low-cost, labor-intensive work methods that involve low technology.
· According to the economic literature, the most effective investment in basic cognitive skills is through early childhood education, and it is recommended to adopt this approach. At the same time, it is recommended to improve the basic skills of adults through designated programs for specific population groups which had especially low achievements in the survey.
· Improving the basic skills of workers is likely to provide an incentive for companies in industries with low productivity to increase automation and equipment over the long term, and to increase efficiency through technological innovation.
Labor productivity (output per worker) in Israel is 14 percent lower than the average in advanced economies, and is particularly low in manufacturing industries that sell to the domestic market and in nontradable industries. The productivity gaps in food and accommodation services, in the construction industry, and in trade industries make the greatest negative contribution to the overall productivity gap. In contrast, labor productivity in the electronics industry is greater than the OECD average and reduces the productivity gaps between Israel and other advanced economies.
In the three areas examined in the PIAAC Survey of Adult Skills—the initial findings of which were recently published by the Central Bureau of Statistics—the competency of workers in Israel is low compared with other countries, This is despite the share of academic degree holders in Israel being higher. This finding indicates that workers’ skills, and particularly their cognitive abilities, are not derived from years of schooling only, but also from the quality of education and from other personal and environmental variables.
An analysis of the link between basic skills and labor productivity by industry indicates a positive correlation between the lag in skills vis-à-vis the OECD and a lag in labor productivity. That is, in general, the productivity gap to Israel’s detriment is greater in industries in which the disadvantage in skills is more significant. This finding stands out in a focused comparison between industries with a positive contribution to productivity—manufacturing industries with high share of exports—and industries whose contribution to productivity is especially negative. Competency is especially lower in construction and trade, and is also inferior in manufacturing industries with a low share of exports, even though the share of college degree holders in these industries is high compared with the share in the OECD. Skills in Israel are similar to those in the OECD in those manufacturing industries in which the share of exports is high—industries with relatively high productivity compared to the OECD, and in the food and accommodation services industry. In the food and accommodation services industry, the composition of workers in Israel is different than in most OECD countries—it includes more young workers in temporary positions, among other things during academic studies. These workers have high cognitive skills, but their specialization and salaries are low, and their relative productivity during their temporary employment is low.
Thus, most of the findings indicate that the competency of workers is relatively low in industries in which the productivity is relatively low. These results stand out when examining the results of tests of workers aged 25–35: in industries in which there is a problem of productivity, the same gap in skills exists among employees starting out in the labor market—that is, the inferiority in skills does not derive only from possible erosion of skills due to the type of activity and the low labor productivity. Furthermore, the findings indicate that it is not reasonable to expect that the relative productivity will improve due to integration of workers with higher skills, since the flow of new workers in Israel is not of greater quality than preceding ones to the extent that the flow of new workers in the OECD is of greater quality than its predecessors; the inferiority in productivity is expected to persist if there is not a marked change in worker proficiency.
The skills survey also examines the use of the skills in the workplace by the survey population. The responses of survey participants to these questions indicate that the low quality of employees is in line with non-complex and low technology work methods. For example, in the construction industry there is a high share of workers required to carry out physical labor compared with usual levels in the OECD, while in exporting industries their share is low compared to the same countries. Workers in construction and trade use a computer at their work relatively little compared to workers in other countries. In all industries—excluding exporting industries—there is less demand for reading instructions and dealing with complex problems.
The overall findings indicate that real improvement is needed in the quality of education in Israel, in order to increase the supply of skilled workers. According to the approach widely held in the economic literature, the most effective investment in basic cognitive skills is through early childhood education (preschool and elementary school education), and it is recommended to adopt this approach. In this regard, the Committee for Social and Economic Change (the Trajtenberg Committee) recommended strengthening the educational component of childcare facilities. Among other ways, this was to be accomplished by establishing a professional entity that would include top-tier experts in the field. Childcare facilities have an educational development function in addition to simply supervising the children during the day. It is also recommended to increase the scope of affirmative action in education, particularly in early ages. This recommendation is bolstered by the Central Bureau of Statistics finding that inequality in grades in Israel is especially high relative to other advanced economies, and researchers thus found that closing the gaps in older ages usually involves much higher cost. Additionally, it is recommended to improve the basic proficiency of adults through designated programs for population groups for which the survey found especially low achievements—Arabs and to some extent ultra-Orthodox.
Improving basic skills of workers will contribute to their ability to adjust to a changing economic environment, will increase the range of their employment possibilities, and will increase the wage they can receive. Policy striving to do so will provide a long-term incentive for firms to increase the stock of physical capital (buildings, machinery and equipment) per worker and to increase efficiency through technological innovation, and will do so on a basic level—that is, it will deal with one of the main problems regarding productivity and not with a symptom of the problem. In contrast, directly subsidizing investments in automation and innovation will contribute to removing other barriers but its success will be limited to dealing with symptoms, and on its own it can even lead to, over time, distortions in the economy’s structure. For illustration, it is liable to cause companies to prefer investment in machinery rather than hiring of workers even if the economic situation justifies the hiring of workers.
The tools utilized by the government over the years to support industries were focused on the tradable industries, and particularly on high technology, an industry that employs highly skilled workers. However, nontradable industries, such as construction, trade, and services, which by their nature sell only to the domestic market, employ workers with low skill levels and receive only little support. A general policy to improve the skills of children and adults from the lowest rung, alongside steps to increase competition and innovation in industries that have been left behind, are likely to contribute to utilizing a considerable portion of the growth potential inherent in industries that sell to the domestic market and to increase economic welfare in the long term.