Israel’s cost of living: The good, the bad and the ugly

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Economist Dan Ben-David has some good news and some bad news for the Israeli consumer. The good news is that local prices aren’t as high compared to other developed countries as has long been thought. The bad news: Even if the gaps aren’t quite so large, prices in Israel are still high.

“Prices in Israel are very high but not nearly as high as the Organization for Economic Cooperation and Development says. In some cases, the situation is totally reversed: Local prices are lower than the OECD average,” says Prof. Ben-David, author of a new study on the subject that was released on Monday.

According to Ben-David and the co-author of the study, Prof. Ayal Kimhi, prices for housing and utilities in the country were a steep 24.3 percent above the OECD average in 2017, but that was half the amount of the disparity the OECD had estimated. The two experts found that food prices were a mere 3.1 percent higher – versus the OECD’s figure of 36 percent.

In some cases, where the OECD reported that Israeli prices were much higher than the average, Ben-David and Kimhi found that they were actually lower. They determined that clothing and footwear prices, for example, were 3 percent under the OECD average, in contrast to the organization’s calculation that they were 21 percent higher.

The high cost of living in Israel has been the source of complaints for years. It is a subject that’s widely covered in the media, used to vault the careers of politicians like former Finance Minister Moshe Kahlon, and is generally thought to have sparked the social justice protests that shook the country during the summer of 2011. Even a decade later, many companies think twice before raising prices on their most popular products.

Daphni Lief speaks at an event commemorating nine years since the 2011 social protests she headed in Tel Aviv, last yearTomer Appelbaum

Seven years ago, the price controversy created a social media storm when one Israeli expat called attention to the fact that the German version of the Israeli dessert product Milky, sold in Berlin, was two-thirds of what it cost in Tel Aviv. No wonder so many Israelis are emigrating, some pundits (falsely) claimed.

The most widely cited and authoritative standard for comparative prices is published by the OECD every three years. What it shows is that back in 2007, Israeli prices were actually lower than the OECD average but then began to rise to 105 percent in 2011, when the local protests erupted. They kept on climbing, so that by 2017, the last year the international organization published its survey, Israeli prices were on average a whopping 120 percent of the OECD average.

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The large disparity between the figures Ben-David and Kimhi cite and the OECD’s estimates is due to methodology. Comparing prices between countries using different currencies is a tricky business. The OECD employs what the Israeli scholars call a “hybrid” system, relying on exchange rates and purchasing power parities, aka PPPs, to arrive at its numbers.

The catch, Ben-David says, is that exchange rates often don’t reflect the real comparative power of different currencies. For instance, even though its local purchasing power didn’t decline, the Israeli shekel plunged during the second intifada, starting in 2000, due to concerns over political stability and security. Over the past year, the shekel has strengthened 5.6 percent, but local prices haven’t fallen: The consumer price index rose 2.2 percent in the 12 months preceding August.

Ben-David and Kimhi did their price analysis using only PPPs, which measure relative prices using a basket of goods and services in a local currency versus a standard, usually the U.S. dollar. The difference that can make is illustrated by looking at the gross domestic product per capita – the benchmark for measuring a country’s relative wealth.

When Benjamin Netanyahu made his final Knesset address as prime minister last June touting his achievements, he boasted that Israel’s per capita GDP was now higher than that in Japan, Britain or France. Based on the exchange rate for the strong shekel, Netanyahu was right: The country’s per capita GDP last year was $43,615, besting second-place Japan’s $40,818.

However, when using a PPP basis, the tables are turned. Israel’s per capita GDP is a respectable $41,859, but that’s the lowest among the four above-mentioned countries (France, which comes out at the bottom using exchange rates, is at the top using PPP calculations, with a GDP per capita of $46,537).

If this isn’t complicated enough, there is another twist, which relates to how Israeli prices compare after taking into account the difference in relative wages among OECD countries. Israeli salaries are lower than the average, so the results are mixed.

The wage factor doesn’t change the gap in terms of housing and utility costs, which in both cases show Israel to be about 23 percent more expensive in 2017. The gap in health care and education costs widen to Israel’s disadvantage, but narrow in terms of food and clothing, according to Ben-David and Kimhi’s analysis.

The figures date to 2017, since that was the last published OECD report. But Ben-David doesn’t think much has changed in the past four years because Israeli inflation has been so low, with the exception of housing prices.

A construction worker in Beer Sheva, this monthEliyahu Hershkovitz

As to why Israeli prices are so high to begin with, the usual answers are monopolies, ineffective regulation, customs and other barriers to competition, and even the cost kashrut places on food, restaurants and hotels.

Ben-David, who is president of the Shoresh Institution for Socioeconomic Research, which published the new study, and teaches in Tel Aviv University’s department of public policy, doesn’t dispute that. But, he says, the main problem is Israel’s very low rate of productivity.

“We [Israeli workers] have much lower skills than in developed countries. We have three guys collecting garbage when in America you have one guy with an automated truck,” he explains. “We have so many people who are unskilled or poorly skilled, you have to use backward technology to do things – we’re still using third world technology to build houses. That carries over: You have to charge high prices if you’re not very efficient.”

To a large degree, Ben-David blames the local school system, which does such a poor job of teaching core skills.

His analysis shows that in 2017 Israelis were paying just 1.7 percent more to educate their children than their OECD peers, on average, much less than the 12 percent the OECD estimated. So, even if the disparity is not so big, Israelis are not only paying more for their schooling – but getting an inferior product back in return.