Read the full memo   In recent decades, Israeli labor productivity is not closing the gap with more developed countries, and in many respects the gaps are even widening. • A key factor in the widening productivity gap in the past decade are welcome changes in the labor market, in particular tremendous growth in the labor participation rate alongside a decline in the unemployment rate. By comparison, employment growth in other developed countries has been quite modest. We should not fall into the trap of viewing the extraordinary ability of Israeli young people from varied backgrounds to find gainful employment in the local job market as a type of failure. We emphasize that maintaining the economy’s ability to create jobs is no less important than increasing labor productivity. • Highly inflexible employment practices harm productivity in the public sector. The collective agreements in this sector make the proper allocation of the labor force very difficult. For example, it is very complicated to transfer an employee from on position to another, or to implement streamlining plans. Israel’s labor laws are such that the strong labor unions in the public sector – and particularly in the government monopolies – can prevent reforms and arrangements that could increase labor productivity, their employment conditions and the quality of life of all Israel’s citizens. • It is important to improve the elementary and high school education system, especially in the Arab and Haredi (ultra-Orthodox Jewish) sectors. The cholastic achievements in the Arab sector are similar to those in Jordan and Tunisia, while in the Haredi sector male students are not taught at all skills essential in the modern job market. Research indicates that Israel has a dual job market, in which industries with high-end jobs cannot attract workers from low-income sectors. A possible reason for this is likely the exceptionally high number of poorly skilled young people with who cannot compete in industries that demand higher skills. • Israel has significant obstacles to entrepreneurship and establishing businesses. A study by the OECD found that the legal hurdles for fledgling businesses in Israel are among the most daunting of any OECD country. Other comparative studies have shown that an anti-competitive regime tends to hinder the adoption of international improvements that increase labor productivity. There should therefore be efforts to reduce regulation and the protection of existing business, and lower the other barriers to entrepreneurship.