DP14011 Why is Labor Productivity in Israel so Low?

Author(s): Moshe Hazan, Shay Tsur
Publication Date: September 2019
Keyword(s): Development accounting, Human Capital, labor productivity, Physical Capital, PIAAC
JEL(s):
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14011

We analyze differences in labor productivity between Israel and a group of small OECD countries. We assume a more general human capital production function and calibrate it using PIAAC surveys, which examine the literacy and numeracy skills of the adult population in the OECD countries. Whereas Israel has more years of schooling, its population has lower measured skills. Using development accounting exercise, we show that once years of schooling and numeracy skills are taken into account, differences in accumulated factors explain more than three-quarters of the gap. This is against a split of 60-40 between accumulated factors and total factor productivity, when these skills are ignored. Additionally, using panel data on 13 OECD countries we show strong positive correlation between physical and human capital per worker at the industry level. A causal interpretation of our estimates implies that closing the gap in skills will indirectly close 18 percent of the gap in physical capital.