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Business Environment in Israel (by Raveh Ravid & Co.)

Introduction

Israel has a technologically advanced market economy.

Cut diamonds, high-technology equipment and pharmaceuticals are among the leading exports of the country. Its major imports include crude oil, grains and raw materials. Israeli GDP growth averaged nearly 5% per year between 2004 and 2011, led by exports.

The global financial crisis of 2008-09 spurred a brief recession in Israel, but the country entered the crisis with solid fundamentals, following years of prudent fiscal policy and a resilient banking sector.

In 2010, Israel formally acceded to the OECD. Israel’s economy also has weathered the Arab Spring due to strong trade ties outside the Middle East, which have insulated the economy from spillover effects. The economy has recovered better than most advanced economies of similar size, but slowing demand (both domestically and internationally) and a strong Shekel have reduced forecasts of Israel’s GDP growth for the next decade to a 3% level.

Natural gas fields discovered off Israel’s coast have brightened Israel’s energy security outlook. The Tamar and Leviathan fields were some of the world’s largest offshore natural gas finds this past decade. The massive Leviathan field is not due to come online until 2018, but production from Tamar provided a one percentage point boost to Israel’s GDP in 2013 and 0.3% growth in 2014.

Israel’s progressive, globally competitive, knowledge-based technology sector employs only 9% of the workforce, with the rest employed in manufacturing and services sectors, which both face downward wage pressures from global competition.

Labor market

The early foundations of Israel’s economy were formed on a socialistic base: for the first decades of its existence, the Government of Israel was dominated by parties with social or socialist overtones. Israeli society has adopted these

foundations, including a well-developed system of labor laws aimed at protecting the rights of workers, both during their employment and after retiring.

The Israeli employee is entitled to at least 10 days of annual vacation, and this number increases with seniority at the workplace. The employee is also entitled to payment during sick leave. The number of days and hours of work during the working week are limited (a working week usually lasts 42.5 hours). An Israeli employee is entitled to monthly provision by his employer into savings funds

that are intended for use after retirement, to a rate that may reach 20% of his pay, and is entitled to early notice of termination from his employer.

Every Israeli is entitled to comprehensive healthcare within the healthcare organizations, in exchange for health insurance payments that are partly deducted from his salary, while most of the payments are made by his employer.

A number of labor organizations, headed by the New General Labor Federation, unionize workers in many sectors, primarily those in the government sector. Many employees in Israel are entitled to special safeguards in the form of ‘collective agreements’, providing them with a set of social and other benefits.

Israel has a highly educated and innovative workforce. High-school education is routine, and almost every Israeli adult is capable of conducting a conversation in English and possibly in another language besides Hebrew. Dozens of academic institutions provide a large percentage of

Israelis with academic education: the rate of Israelis holding undergraduate and graduate academic degrees is one of the world’s highest, and in certain fields such as medicine, the academic institutions in Israel are unable to supply the enormous demand. As a result, many young people acquire education outside of Israel.

 Israel’s unemployment rate, which currently stands at 5.4%, is one of the lowest in the developed world.

Population trends

Israel’s population growth rate, which was 2.01% in 2015, is one of the highest in OECD countries.

The average Israeli family usually has three children, and in ultra-orthodox and Arab families one can easily find families with seven or more.

Education

Mandatory education is practiced in Israel pursuant to and with the funding of state law, from the age of 3 to 18. At the age of 6, children in Israel start to study at primary school, then they spend three years at middle school, and the last three mandatory years are spent at high schools, in various study tracks to which children are assigned according to their talents. Some vocational high schools continue their training for an additional year, at the end of which the graduate is awarded a ‘practical engineer’ degree.

Following completion of 12 years of studying, students take final examinations. Those who pass them all successfully will be granted a ‘matriculation certificate’. In recent years, the national rate of eligibility for matriculation certificates has been 53.4%.

Studies are usually interrupted by mandatory military service, which lasts three years for men and roughly two years for women. Soldiers who either are trained as officers or go through highly specialized training, such as aircrew and ship crew, will serve for longer periods of time, during which the officer gains academic training and usually completes his long service with an undergraduate or a graduate degree.

The rate of Israelis who gain academic education is one of the highest in the world. Israel has six universities and dozens of colleges that are qualified to award academic degrees under state supervision.

In recent years, researchers and scientists produced by the Technion Institute of Technology in Haifa, the Hebrew University in Jerusalem and the Weizmann Institute of Science in Rehovot have made some major breakthroughs in economics, physics and chemistry. Some of them have received Nobel prizes for their contribution to global society. These academic institutes produce tens of thousands of graduates in social science and technology fields each year. They also train nearly 4,000 new lawyers and roughly 1,500 accountants per year: an unprecedented rate relative to the size of the population compared to other developed countries.

Language skills

Hebrew is spoken by all sectors of the population, including the Arab population. Arabic and Russian are common mother tongues in the country. Israeli students acquire basic English skills and usually learn an additional, third language. Besides Hebrew, an enormous range of languages are spoken on Israel’s street, as a reflection of Israel having attracted immigrants originating from all over the world.

Labor costs

Israel’s labor laws as well as quality of education and training are reflected in the cost of labor in Israel, which is not altogether low, but the cost of employment of a skilled worker in Israel is still lower than that of his counterparts in North America or Europe.

In Israel, a minimum wage of about $1,200 per month is applied.  Correspondingly, the minimum cost of employment per hour of work is approximately $7.5, considering the mandatory payments applying to wages in Israel. The cost of employment of a skilled engineer graduated from computer science and electronics faculties, may easily reach $50 per hour. The compensation of senior management workers is basically the same as the compensation paid to equivalent executives in Europe and North America, and some members of the senior executive class in Israel earn tens of millions of New Israeli Shekels per year.