Israel built a world-class tech industry. Why hasn’t productivity followed?
Despite record investment in innovation, Israeli workers still produce less per hour than their counterparts in leading developed economies.
How is it possible that Israel is one of the world's leading countries in investment in research and development, software and information technology, yet its labor productivity remains below the average of developed economies?
This may be one of the most important economic questions facing Israel today.
Ultimately, productivity measures how much economic value each worker generates per hour worked. Higher productivity allows companies to pay higher wages, produce more goods and services without expanding the workforce, and raise living standards over time. This is why economists often argue that, in the long run, almost all improvements in a country's standard of living come from productivity growth. Nobel Prize-winning economist Paul Krugman famously described productivity as “almost everything.” It is also why the Organization for Economic Cooperation and Development (OECD) devotes a comprehensive annual report to the issue.
This year's report, published last weekend, highlights a striking paradox. On the one hand, Israel continues to strengthen its position as one of the world's leading innovation economies. On the other hand, when measuring the final outcome, overall economic productivity, the gap between Israel and other developed countries has barely narrowed for more than two decades.
The starting point is the bottom line. In 2024, each hour worked by an Israeli employee generated economic output of $51.8, compared with an average of $65.8 in Western economies. In other words, an Israeli worker produces roughly 79% of the output generated by the average worker in developed countries during each hour worked.
But the longer-term trend is even more revealing. In the early 2000s, Israeli productivity stood at roughly 78% of the OECD average. In 2024, the figure was 78.7%, meaning that after nearly a quarter-century of economic growth, a high-tech revolution and unprecedented technology investments, Israel has barely reduced its relative productivity gap.
It is important to emphasize that this does not mean Israeli productivity has failed to improve. Quite the opposite: productivity per hour worked increased from approximately $36.6 in 2000 to $51.8 in 2024, representing growth of more than 40%. However, other developed economies also continued to improve, meaning Israel did not significantly close the gap.
Annual productivity figures tell a similar story. In 2024, labor productivity in Israel increased by only 0.45%, compared with an average increase of 0.86% across Western economies and 2.24% in the United States. It is difficult to draw firm conclusions from a single year, especially given the impact of the war, widespread reserve mobilization and disruptions in the labor market. But the broader trend remains clear: Israel is progressing, but it is not catching up with the world's most productive economies.
The high-tech paradox
The most striking part of the OECD report is the contrast between Israel's technology investments and its economy-wide productivity performance.
According to the report, Israel ranks among the world's leaders in investment in the knowledge economy. Spending on software and databases amounts to 3.66% of GDP, among the highest rates in the developed world and above the United States, where the figure stands at 2.8%. Investment in research and development is also among the highest globally, reaching approximately 3% of GDP and placing Israel among the top developed economies.
In other words, Israel invests like a global technology powerhouse. The problem is that the overall productivity figures do not yet reflect the performance expected from such an innovation leader.
The same pattern appears in another key measurement: multifactor productivity (MFP).
MFP measures the portion of economic growth that cannot be explained simply by adding more workers or more capital. Economists often view it as the closest measure of improvements in efficiency, technology adoption and the way resources are used.
Here too, Israel does not stand out positively. The data provides no clear evidence that the country's massive investments in technology have already translated into a broad improvement in economy-wide efficiency.
High-tech success is not enough
This is where the OECD data connects with recent comments by the Governor of the Bank of Israel during a press conference discussing the decision to lower interest rates to 3.5%.
The governor noted that a significant share of Israel's recent economic growth has been driven by multinational companies operating in the country, such as Nvidia. Excluding these companies, he said, overall economic growth would be lower.
The message is that headline economic figures no longer tell the entire story. The same may explain the productivity paradox highlighted by the OECD.
Israel's investments in software, artificial intelligence and research and development are creating enormous value, but that value is concentrated in a relatively small number of companies and industries. The country's high-tech sector operates at a global level, but the productivity gains have not yet fully spread across the broader economy.
This may be the most important conclusion from the report. For years, policymakers assumed that a successful high-tech sector would naturally lift productivity across the entire economy. The data suggests the relationship is far more complicated.
Innovation does not automatically spread to every industry, and investments in advanced technology do not necessarily translate immediately into higher productivity among all workers.
This does not mean Israel's economic model has failed. The country has built one of the world's strongest innovation ecosystems. But the next challenge is different: ensuring that the benefits of technology reach traditional industries, services, commerce and manufacturing.
Without that broader diffusion, Israel risks remaining a high-tech powerhouse without becoming a fully productive economy.
The distinction matters because the standard of living of most Israelis will ultimately depend not only on the success of global companies such as Nvidia, but on the productivity of the entire economy.
Israeli high-tech is not the cause of Israel's productivity problem. It is one of the country's greatest strengths. But it cannot become a screen that hides the deeper challenge: transforming innovation concentrated among a few companies into growth and efficiency across the economy as a whole.
