Above-average fertility rates, lackluster education system and consumer complacency are driving Israel’s soaring cost of living, economists say.
Last week, the Economist Intelligence Unit’s (EIU) Worldwide Cost of Living index ranked Tel Aviv the most expensive city in the world. The coastal city beat the likes of Paris, Zurich, Hong Kong and New York for the first time, after being ranked fifth in last year’s index.
Among the reasons the EIU listed for this unwanted honor was the shekel’s sharp appreciation against the US dollar, which, it said, came on the heels of the country’s successful COVID-19 vaccination campaign. Last month, the shekel reached its highest value against the dollar in 25 years.
Tel Aviv – with its central location, popular beaches and thriving nightlife – has long been a draw for many Israelis, especially those working in the high-tech sector.
But the rankings do not show the full picture, Israeli economists argued.
Prof. Dan Ben-David, president of the Shoresh Institution for Socioeconomic Research and an economist at Tel Aviv University’s Department of Public Policy, told The Media Line that Israeli inflation rates are among the lowest in the world.
“It’s not that the prices here have all of a sudden been skyrocketing; the opposite is true,” Ben-David said. “Prices here have barely risen compared to nearly all the countries in the OECD [Organization for Economic Cooperation and Development].”
Instead, the Israeli economy – bolstered in particular by the high-tech sector – is strong and as a result, the Israeli shekel has risen in value in tandem. According to Ben-David, the shekel has appreciated by 22% relative to the US dollar over the past five years, which means that Israeli prices became 22% more expensive in dollar terms over the same period.
“That alone is what brings us to the top of the list in The Economist,” he explained. “[Prices] are expensive for us because we also don’t earn very much.”
Moreover, productivity is low in Israel in part due to a poor education system. In fact, Ben-David believes that education is one of the most important factors when it comes to the cost of living in Israel.
“Half the kids in Israel are getting what is basically a third-world education and they belong to the fastest-growing parts of the population,” he asserted, referring to the Arab Israeli and ultra-Orthodox sectors. “When they enter the workforce their ability to maintain a modern economy is poor so the lifesaver is the high-tech [arena].”
The education factor is further exacerbated by a rapidly growing population and a lack of space. Israel is already one of the world’s most densely populated countries and is set to become even more congested in the coming decades.
For this reason, Ben-David argued that it is important to lower Israel’s high fertility rate, which stood at 3.1 in 2019. This means that an Israeli woman on average has 3.1 children; by contrast, the OECD average is 1.6.
“We can’t have an exponentially increasing population in a land the size of New Jersey, where in fact half of the land is desert or training areas for the army,” he said.
Other economists said that the Israeli consumer is partly to blame for soaring prices.
Dr. Alex Coman, an economic specialist at the Adelson School of Entrepreneurship at Israel’s Interdisciplinary Center Herzliya, told The Media Line that Tel Aviv is expensive due to a problem of supply and demand.
Because Israel is such a small market, there is much less competition and there are several monopolies controlling the prices for a wide array of consumer goods.
“Tel Aviv is not a gulag; it’s not that people are handcuffed and driven to live there against their will,” Coman said. “Supply is not competitive and Israel also has unique requirements like kashrut [the Jewish dietary rules] and logistics [for the Sabbath], so it’s more expensive. Demand is not competitive because Israelis are complacent. … They’re not shopping around.”
While Coman was surprised by the Economist’s ranking, he admitted that the average Israeli’s purchasing power is markedly lower than their counterparts in most other developed nations.
“Salaries in Israel are generally lower than salaries in Europe and Singapore, which has one of the highest standards of living in the world,” he said. “This makes Tel Aviv even worse because you earn less than in Singapore and you pay more.”
The solution, Coman argued, is that Israelis themselves need to demand better and refuse to pay outrageous prices. In 2014, an online protest was sparked when Israelis discovered that the price of an Israeli chocolate pudding brand called Milky was significantly lower in Berlin.