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Excerpt from the "Recent Economic Developments" to be published shortly:

- The average number of years of schooling among the population in the principal working age range (25–64), which is an indicator of the stock of human capital in the economy, grew in Israel from 10.1 years in 1974 to 13.4 years in 2011. This year, Israel is 16
^{th}among advanced economies. - Between 1974 and 2011, per capita GDP grew at an average annual rate of 1.8 percent. Based on estimates of the contribution made by the level of education to the economy’s production capability (returns to schooling), growth in human capital contributed about 0.7 percentage points to growth. This means that over these years, the increase in human capital was responsible for 40 percent of the increase in the standard of living.
- The contribution of human capital to growth has declined over the years, and totaled just 0.4 percentage points per year in the last decade.
- A simulation that was conducted showed that in the next 50 years, the contribution of human capital to growth is expected to moderate to just 0.1–0.2 percentage points. This contribution is dependent mainly on the extent to which the ultra-Orthodox population integrates into higher education in parallel with its integration into the labor force.

Long-term growth forecasts show that the demographic changes currently taking place in Israel are expected to slow the growth rate of the economy compared to previous decades. This box focuses on one of the important components in determining the long-term growth rate: the development of the stock of human capital. An accepted and practical way to measure the stock of human capital in the economy involves looking at the average years of schooling among the population and combining it with estimates of the returns to schooling—the extent to which the number of years of schooling affects human capital and income in the economy.

We can measure the average number of years of schooling in the population from the Central Bureau of Statistics Labor Force Survey. As part of the analysis, a number of adjustments were made to the data in order to reflect an effective average of the number of years of schooling in the labor force. In particular, the number of years of schooling of individuals identified as ultra-Orthodox was revised downwards based on findings that yeshiva[1] study, appearing in the survey as regular years of schooling, is less effective from the standpoint of their economic contribution to the human capital in the labor market. Beyond the historical calculation, a forecast was prepared for the average years of schooling among the population in the next 50 years, while distinguishing between various scenarios regarding the extent of convergence of effective education of the ultra-Orthodox population with that of the Jewish non-ultra-Orthodox population (Figure 1).

The analysis found that the average number of years of schooling among the population in the principal working age range (25–64) increased from 10.1 years in 1974 to 13.4 years in 2011. However, over the years, and particularly during the first decade of this century, the rate of increase has moderated. The forecast for the average number of years of schooling indicates that, with no connection to the path of convergence of education for the ultra-Orthodox with that of the rest of the population, the rate of increase in the average number of years of schooling is expected to continue moderating in the next 50 years. The moderation is the result of four main factors: (1) the long-term increase in the number of years of schooling has been partially spent; (2) the assumption that waves of educated immigrants, like those who came in Israel in recent decades, will not arrive in Israel; (3) the increase in the weight of the ultra-Orthodox and Arab population groups, which are characterized by relatively fewer years of schooling; and (4) the aging of the population. Another interesting finding from the analysis concerns the question of how important it is that the education of the ultra-Orthodox converges with that of the rest of the population. Without such convergence, the average number of years of schooling will stop increasing in the second half of the projection period. However, the more the characteristics of obtaining an education among the ultra-Orthodox become similar to those of the general population, the growth in the average number of years of schooling will continue even at the end of the projection period, and the aggregate level of education will increase by almost a full year.

The combination of these findings with the forecast by the OECD indicates that without the convergence of education among the ultra-Orthodox, Israel is expected to fall from 16^{th} to 26^{th} place among OECD member countries in the average number of years of schooling among the population. In contrast, the convergence of education among the ultra-Orthodox as outlined in our scenario is expected to keep Israel close to its current position.

The calculation of the contribution of increased education to growth in Israel relies on estimates of the yield on education from macroeconomic studies that found positive correlations in cross-country panel data between the average number of years of schooling in the population and income in the economy—an increase of one year in the average number of years of schooling raises income in the economy by approximately 10 percent. The analysis shows that between 1974 and 2011, the growth in human capital contributed about 0.7 percentage points to annual growth of per capita GDP, which grew at an average annual rate of 1.8 percent. In other words, over these years, the growth in human capital was responsible for 40 percent of the increase in the standard of living.

In the past decade, the contribution of increased education to long-term growth declined to 0.4 percentage points. According to our projection, this contribution is expected to continue declining, to just 0.1–0.2 percentage points, if the convergence of education characteristics among the ultra-Orthodox with the general population’s characteristics as described above does not take place. In other words, the human capital factor in and of itself is expected to lead to a significant slowdown of up to 0.6 percentage points in the growth rate in the economy, compared to what we have seen in the last 40 years. If the education of the ultra-Orthodox population converges toward that of the Jewish non-ultra-Orthodox population, the contribution of the increase in education to economic growth will increase by about 0.1 percentage point over the scenario with no convergence, such that the level of GDP in 50 years is expected to be 5 percent higher than the level expected in the scenario without convergence. In current terms, it is the equivalent of NIS 50 billion of the economy’s annual income, or NIS 6,300 per capita. In other words, there is considerable economic importance to the integration of the ultra-Orthodox population in higher education (increasing the total number of years of effective education in the labor market) alongside its integration in the labor market.

In order to maintain the contribution of human capital to growth as we have seen in the past decade (and to improve Israel’s relative position in the index of the average number of years of schooling among the population), we must also act to expand the realm and quality of higher education among non-ultra-Orthodox young people, at a higher rate than we have seen in the past few years, particularly in view of the aging of the population and in view of the declining yield on education on an aggregate level. As such, we must strengthen the secondary education system so that the rate of those completing high school who pass the admissions benchmark to universities increases, and we must improve the study programs at colleges so that their yields will become equal to that of the universities. By way of illustration, if by 2059 Israel manages to catch South Korea as the leader in the average number of years of schooling among developed economies by increasing the average number of years by two additional years, the average growth rate during those years will increase by 0.4 percentage points compared to the scenarios presented.