This study discusses the contribution of human capital to output and long-term growth. For this we built historical time series for Israel's average years of schooling, while correcting individual data in order to account only for effective years of schooling, i.e. those that contribute to labor productivity. We find that in 2011 the average years of schooling among the prime working age (25–64) population was 13.5 years—in the center of the OECD distribution. Combining this data with estimates for the macroeconomic return on schooling allowed us to use Growth Accounting methods in order to estimate how an increase in schooling contributes to growth. We found that the increase in schooling since the mid-1970's contributed 0.6 to 0.8 percentage points to the average annual growth rate, which is equivalent to 33%-45% of the total per-capita growth rate during the period.

However, the contribution of schooling to growth began to abate in the last decade, and it is expected to continue fading out: We conducted forecasts for the average years of schooling in the next 50 years, which point to the contribution to growth further declining, to 0.1 to 0.3 percentage points. The range reflects in part the uncertainty regarding the ultra-Orthodox population's degree of integration in the effective education systems.

When examining additional aspects of human capital beyond that of the quantity of schooling, we find that Israel is behind the OECD countries in the quality of education, mainly at the secondary level. However, it is not out of line in the quality of universities or in the inequality in the distribution of schooling.

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