Remarks by Bank of Israel Governor Dr. Karnit Flug at the “New Horizons for the Welfare State” conference
At the beginning of her remarks, the Governor reviewed the economic environment in which the Israeli economy is functioning, and noted that the macroeconomic situation is good, given the external conditions. The positive situation reflects continued growth and strong labor market data, including a decline in unemployment rates and an increase in real wages. Looking forward, inclusive and sustainable growth is a necessary condition for continued increase in the living standards of all Israeli citizens. The Governor explained that the more inclusive growth is, the greater direct effect it will have on welfare policy. Inclusive growth improves the living standards of the entire population by improving the level and narrowing the gaps in economic income, thereby decreasing the burden on welfare policy and allowing it to focus on a relatively small target population and to be more generous. Under such conditions, there is less risk from the welfare system’s negative incentives, in view of the relative attractiveness of the labor market.
The Governor presented various indices examining inclusive growth that were recently published by the World Economic Forum. Weighting these indices shows that, Israel is ranked lower than most other advanced economies in terms of the extent of inclusive growth, although in recent years, the ranking has improved as a result of declines in the debt to GDP ratio and in inequality, and the increase in the employment rate. The Governor noted the main challenges facing the Israeli economy in achieving inclusive and sustainable growth: demographic and global trends, the relatively low level of cognitive skill among Israeli workers, and the low productivity rate per worker, a rate which is key to continued growth and an increase in the standard of living.
The Governor reviewed the main areas on which the government must focus in order to improve productivity, chiefly:
- Improving human capital: Action must be taken to increase the level of basic cognitive skills and the scope of technological content by streamlining and increasing investment in the education and professional training systems, including an expansion of affirmative action.
- Improving physical capital: Encouraging investment in infrastructure. Investment in physical capital that is complementary to private sector investment.
- Measures to improve the business activity environment; continued improvement of regulation and reduction of bureaucracy.
The Governor indicated that the education and professional training systems do not sufficiently provide the skills required for successful integration of all parts of the population in the labor market. These skills are low by international comparison, despite the relative wealth of highly-educated workers.
In summation, the Governor noted that government policy has incentivized joining the labor market, thereby contributing to an increase in employment rates in all population groups, and a decline in economic inequality. However, the education and training systems do not provide parts of the population with the skills required to ensure a successful integration in the labor market.