The Socioeconomic Threat facing Israel

This page presents an overview of Israel’s root (shoresh in Hebrew) socioeconomic-demographic challenges as a connected story, tracing the country’s shift in national priorities since the 1970s and its consequences for productivity, infrastructure, education, human capital, public expenditures, demographics, and the growing brain drain. It shows how Israel’s developed-world economy increasingly rests on a narrow base of highly skilled people, while the combination of weak education and rapid demographic change threatens the country’s ability to sustain a first world economy, advanced healthcare system, and cutting-edge defense capabilities over the long term. The analysis culminates in the Israel 2.0 roadmap, a four-part framework centered on fundamental reforms in education, national budget priorities, governance, and a constitution.

The Socioeconomic Threat facing Israel1 of 22

The 1970s: When Israel pivoted to its current reality

The road to present-day Israel began in the 70’s, when the country shifted its priorities from the national good to sectoral and personal interests.

Until the 1970s, budgetary emphasis had been primarily on building national infrastructures that enabled Israel to close the productivity gap, and even eclipse the G7 countries by the mid-1970s; to build hospitals at a pace that matched Israel’s rapidly growing population; to expand university faculty sizes at a pace that surpassed the population growth; and to develop a transportation infrastructure yielding road congestion equaling the average of small European countries.

Since the mid-1970s, budgetary emphasis reflected underinvestment in physical infrastructure, healthcare capacity, higher education, and the human capital needed to sustain first-world living standards. The results of this emphasis are reflected in the pivot to the new socioeconomic trajectories that have characterized Israel ever since.

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Since the mid-1970s, budgetary emphasis reflected underinvestment in physical infrastructure, healthcare capacity, higher education, and the human capital needed to sustain first-world living standards. The results of this emphasis are reflected in the pivot to the new socioeconomic trajectories that have characterized Israel ever since.

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The Socioeconomic Threat facing Israel2 of 22

Israel’s labor productivity: Above each G7 country in 1972, below almost all in 2024

Within Israel’s first two and a half decades, the country’s labor productivity – the average amount that Israelis produce per hour of work, which in turn impacts hourly wages –rose to a level above each of the G7 countries.

Following the pivot in Israel’s national priorities in the mid-1970s, Israel’s labor productivity fell below all but one of the G7 countries by 2024.

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The Socioeconomic Threat facing Israel3 of 22

The money was there – national priorities changed

Israel’s unusually high defense expenditures are often mentioned as a reason for shortfalls in the country’s civilian spending. However, in the mid-1970s, when Israel pivoted to its current socioeconomic path, the country’s civilian government expenditures (that is, after deducting defense spending) exceeded the OECD average. For decades – until recent years, when the developed world entered the Great Recession – Israel’s civilian expenditures exceeded or equaled the OECD average.

The problem was never a lack of resources, but a diversion of public funds from national priorities to sectoral and personal ones by the nation’s leaders.

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The Socioeconomic Threat facing Israel4 of 22

Hi-tech might, systemic fragility

The pivot in Israel’s national priorities led to huge domestic imbalances. While productivity of just 10% of the workforce (hi-tech) exceeds the OECD average by 22%, average productivity of the remaining 90% of the Israeli workforce is 24% below the OECD.

Just 20% of the workers fund 93% of all income tax revenue (rising by ten percentage points since 2000) while half of the income earners are so poor that they do not pay any income tax whatsoever.

A developed world nation cannot rest indefinitely on such a narrow productive and fiscal foundation.

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The Socioeconomic Threat facing Israel5 of 22

The gap between what some pay and others receive

Non-Haredi Jewish households, on average, pay more in taxes than they receive in government benefits and services. The picture flips for Arab-Israelis, and especially for Haredim, who receive considerably more than they provide.

As the groups with weak labor-market outcomes become ever larger shares of the population, the burden on the relatively small population grows, threatening future fiscal capacity needed for healthcare, education, infrastructure, and defense.

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The Socioeconomic Threat facing Israel6 of 22

A look in the budgetary mirror – when sectoral priorities eclipse national ones

The value of public subsidies, discounts and benefits received by Haredim exceed total government spending on Israel’s universities and hospitals – with a substantial remainder that could finance the operation of additional hospitals and research universities.

The implication is that resources needed to expand human capital, increase healthcare capacity, and heighten national resilience are being diverted toward non-work incentives and the deprivation of a basic education. The result is a deterioration of Israel’s core economic and national foundations.

This is just one example of the direction that the pivot in national priorities has taken Israel from the 1970s to the present.

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The Socioeconomic Threat facing Israel7 of 22

Keeping Israel in the developed world

Israel’s ability to function as a developed country rests on a very narrow human-capital base. Just 3% of the population – hi-tech workers in hi-tech occupations, physicians, and senior university faculty – underpins the country’s primary economic growth engine, healthcare system, and its ability to remain at the frontiers of human knowledge.

In recent years Israel’s venture-capital investment as a share of GDP was more than twice the level in the United States, and over 15 times the average of all other OECD countries. The country’s foreign-financed R&D share was 13 times the OECD average. Two Israeli universities – Tel Aviv University and the Technion – are among the world’s top ten for producing startup founders.

But this excellence depends on a very small pool of highly skilled people. The primary risk is that the poor-quality basic education provided to the fastest-growing population groups is steadily shrinking the relative size of the foundation needed to replenish this vital pool.

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But this excellence depends on a very small pool of highly skilled people. The primary risk is that the poor-quality basic education provided to the fastest-growing population groups is steadily shrinking the relative size of the foundation needed to replenish this vital pool.

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The Socioeconomic Threat facing Israel8 of 22

Education near the bottom of the developed world – how Israel prepares its children for the future

Israel’s average score in math, science and reading in the most recent (2025) PISA exam is near the bottom of the OECD – as it has been over the past two decades. The national average would be even lower had Haredi boys who do not study the material been included. The Jewish religious (non-Haredi) and non-religious schools rank below the vast majority of OECD countries. The achievements of Israel’s Arabic speakers are below many third world countries – and even below six of the seven Arab countries that participated in the most recent PISA exam.

Though it is near the bottom of the OECD in national averages, Israel has some of the widest gaps in educational achievement in the OECD. These large disparities reflect deep differences in the quality of human capital being developed across population groups and school systems.

These are the tools that each of the developed countries – including Israel – is providing its children for future competition as adults in the increasingly competitive global marketplace. The combination of very low average scores with particularly high levels of educational inequality poses a long-term threat to Israel’s economic growth and fiscal sustainability, while undermining social mobility and deepening social fragmentation within Israel.

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These are the tools that each of the developed countries – including Israel – is providing its children for future competition as adults in the increasingly competitive global marketplace. The combination of very low average scores with particularly high levels of educational inequality poses a long-term threat to Israel’s economic growth and fiscal sustainability, while undermining social mobility and deepening social fragmentation within Israel.

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The Socioeconomic Threat facing Israel9 of 22

Education denied, opportunities lost

Nearly all Haredi schools in Israel are run by political organizations that deny their children a full core curriculum. The fact that they are not subject to the same national standards of oversight, supervision and compliance, as required in the other education streams, makes it difficult to accurately gauge the level of education provided in core subjects, particularly among the boys.

In the case of the Haredi schools run by the Shas political party, an important Bank of Israel study found that the schools have measurable consequences after the pupils reach adulthood. Boys who attended these schools were much less likely to matriculate from high school, to be employed, and to earn higher wages. Evidence from these schools highlights the long-term damage caused when core studies are withheld.

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The Socioeconomic Threat facing Israel10 of 22

The future is already here – in first grade

The merging between Israel’s education system and its rapidly changing demographics has created a national security challenge of existential proportions.

Roughly half of the Israel’s children (including Arab-Israelis, Haredim and pupils in Israel’s geographic and social peripheries) are receiving a third world education – and they belong to the fastest growing population groups. When they become half of the adults, and eventually a majority, they will only be able to maintain a third world economy, which will not be able to support first world healthcare or welfare – or the first world defense necessary for Israel’s physical survival.

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The Socioeconomic Threat facing Israel11 of 22

The employment – and national – cost of limited education and extensive public non-work incentives

As Israel developed, the likelihood of employment among relatively uneducated men plummeted. While the supply of men with just 0-8 years of schooling fell from nearly two-thirds (63%) of prime working age (35-54 year-olds) men in 1970 to just 4% in 2024, labor demand for such men nearly evaporated during this period. The result was a collapse in their employment rates.

Contrary to conventional wisdom in Israel, Haredi men once exhibited fairly high employment rates. Over the years, as the subsidies, benefits and other non-work incentives soared, and as the education that they received (nearly all Haredi boys are deprived of any core education beyond eighth grade, with very little core studies before then) decreasingly fit a modern economy, employment rates among Haredi men fell from over 80% in 1979 (the earliest year for which such data exists) to about 60% in recent years.

The problem is that while Haredi employment rates are similar to those of men with just 0-8 years of schooling, the latter group is becoming extinct while the Haredim are growing exponentially. The Haredi share of 35-54 men in 2024 (8.2%) was three and a half times their share in 1979 (2.3%).

This is not a sustainable trajectory.

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The problem is that while Haredi employment rates are similar to those of men with just 0-8 years of schooling, the latter group is becoming extinct while the Haredim are growing exponentially. The Haredi share of 35-54 men in 2024 (8.2%) was three and a half times their share in 1979 (2.3%).

This is not a sustainable trajectory.

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The Socioeconomic Threat facing Israel12 of 22

The academic consequences of missing a core education – there are no shortcuts

The share of prime working age secular Jews holding academic degrees is both high and rising. And while increasing numbers of Haredim attempt the academic route, few are able to overcome the lack of a core education that they did not receive as children.

Even though they tend to enroll in colleges with academic standards far below Israel’s leading academic institutions, Haredi dropout rates are exceptionally high. Consequently, the share of Haredi men and women with academic degrees is very low – and in the case of the men, nearly unchanged over the past two decades.

There are no shortcuts in education. Only the most gifted adults can overcome what they were denied as children. With the Haredi population growing so rapidly, the consequences are increasingly national in scale: Israel’s future labor-force skills are being shaped – and constrained – decades before these children enter the labor market.

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There are no shortcuts in education. Only the most gifted adults can overcome what they were denied as children. With the Haredi population growing so rapidly, the consequences are increasingly national in scale: Israel’s future labor-force skills are being shaped – and constrained – decades before these children enter the labor market.

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The Socioeconomic Threat facing Israel13 of 22

Not just fertility – high retention and net inflow also reinforcing Haredi population growth

89% of those raised Haredi remain in the community as adults. Just 11% leave. Moreover, while over 50,000 leave the Haredi stream, more than twice as many join it. With Haredi retention rates relatively stable at around 90% for the past two decades, the surplus of joiners over leavers produces annual net increases in the Haredi population. This demographic effect is compounded by huge gaps in fertility. Haredi fertility rates are roughly three times the fertility rates of nearly all other population groups in Israel.

Religious (non-Haredi) and traditional (somewhat religious) Jews have substantially lower retention rates than Haredim and secular Jews. Most of those who leave these two streams become less religious. However, higher fertility rates and movement into these groups largely offset the population declines that would otherwise result.

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The Socioeconomic Threat facing Israel14 of 22

Fertility gaps shaping the Israel of tomorrow

Since the Covid pandemic, fertility rates in all major population groups – except one – fell by double digit percentages. Only Haredi fertility rates have risen during this period. Haredi fertility rates are over 80% higher than those of religious Jews, over double the Muslim rates (which have been falling rapidly for two decades) and three (!) times the fertility rates of the four remaining religious streams.

The implication is not only that Israel’s population composition is changing. The country’s future ability to remain a part of the liberal and developed world increasingly depends on whether Haredi children receive a core education at a level that provides the skills needed to succeed in a competitive global economy and an understanding of the fundamental principles of liberal democracy.

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The Socioeconomic Threat facing Israel15 of 22

The Socioeconomic Threat facing Israel16 of 22

Whither thou goest Jerusalem, goest Israel?

During the years 1995-2019, Jerusalem, Beit Shemesh, Arad and Givat Zeev recorded the largest socioeconomic declines (three classifications) among Israel’s more than 200 municipalities. These drops underscore how changes in population composition, education, employment and income can fundamentally alter a locality’s socioeconomic trajectory.

Jerusalem vividly illustrates the magnitude of the changes. Between 1988 and 2025, the share of primary school pupils in the secular Jewish education stream fell from 33% to just 9%. In 2025, Arabs comprised 37% of the city’s primary school pupils and Haredim another 41%.

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The Socioeconomic Threat facing Israel17 of 22

From majority to minority in one generation – the story of three towns (and Israel’s future?)

The speed of the demographic transformations in the other three municipalities that fell the furthest in the socioeconomic rankings, Beit Shemesh, Arad, and Givat Zeev, has been extraordinary. In just 26 years, secular and religious (non-Haredi) pupils went from a large majority to a negligible minority in each of the towns. By 2026, the overwhelming majority in all three towns were Haredi pupils, most of whom are denied the core education needed for economic self-sufficiency and an understanding of basic civil rights and liberties.

These towns have Israel to support them financially and to defend them. Who will support and defend Israel when the entire country begins to resemble these towns?

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The Socioeconomic Threat facing Israel18 of 22

The danger of a spiral of collapse

The May 2024 warning letter was signed by 130 of Israel’s leading economists, including top university professors, deans, former and current heads of professional bodies, and economists with senior government experience.

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The Socioeconomic Threat facing Israel19 of 22

Physician emigration – no longer a theoretical issue

Emigration of physicians turns the brain drain from Israel into a direct healthcare threat. The ratio of Israeli physicians in OECD countries relative to the number of physicians in Israel has risen nearly three-fold in just two decades. At the same time, the number of foreign physicians who immigrated to Israel has been falling over the past two decades.

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The Socioeconomic Threat facing Israel20 of 22

When hope fades, emigration soars

Aside from 2020, the Covid pandemic year, the number of native-born Israelis who emigrated from Israel, or returned to it, each year remained relatively stable from 2009 through 2022, with the annual number of emigrants exceeding the number of returnees by 43%.

The judicial coup attempt that began in January 2023, followed by multi-front wars that began after Israel was attacked on October 7, was accompanied by a huge leap in the number of native-born Israelis who left the country. The continued judicial coup attempt and war in 2024 contributed to a further increase in emigration, with the number of native-born emigrants exceeding returnees by 160%.

These numbers are a warning about the confidence that many have about Israel’s future, personal opportunities, and national resilience. When more Israelis leave and fewer return, especially amid war and a growing domestic threat to the nation’s liberal democratic underpinnings, Israel risks losing precisely the people needed to rebuild and sustain it.

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These numbers are a warning about the confidence that many have about Israel’s future, personal opportunities, and national resilience. When more Israelis leave and fewer return, especially amid war and a growing domestic threat to the nation’s liberal democratic underpinnings, Israel risks losing precisely the people needed to rebuild and sustain it.

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The Socioeconomic Threat facing Israel21 of 22

Brain drain becoming a strategic threat

Emigration from Israel is concentrated primarily among the people Israel can least afford to lose. Net emigration (emigrants minus returnees) among engineers, STEM graduates, university-educated Israelis, and physicians has risen sharply in recent years. The implication is a compounding danger: Israel loses skilled workers, weakens the tax base, and reduces the human capital needed for high tech, healthcare, academia, and defense.

The brain drain is becoming both an economic and a strategic threat for Israel.

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The Socioeconomic Threat facing Israel22 of 22

Four pillars for a sustainable future

The Israel 2.0 Roadmap follows directly from the preceding evidence. Israel’s socioeconomic threat stems from a weak core education, budgets favoring sectoral and personal interests over the national good, narrow productive capacity and rapid demographic changes that only exacerbate the fundamental problems.

The proposed framework therefore begins with a single education system built around an upgraded, uniform and compulsory core curriculum, alongside a shift from sectoral to national budget priorities. These measures need to be safeguarded through electoral reform and a constitution.

Israel’s future cannot be secured by isolated policy fixes. Moving Israel to a sustainable long-run trajectory requires a comprehensive pivot in national policies.

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Israel’s future cannot be secured by isolated policy fixes. Moving Israel to a sustainable long-run trajectory requires a comprehensive pivot in national policies.

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