Israel’s Economy Expected to Shrink 2% as War Sidelines Workers

The Israeli economy is expected to shrink by 2 percent this quarter, according to a leading research center, with hundreds of thousands of workers displaced by the war with Hamas or called up as reservists.

About 20 percent of the Israeli work force was missing from the labor market in October, up from 3 percent before the fighting began, according to a report from the Taub Center for Social Policy Studies, a nonpartisan think tank in Israel.

The spike in unemployment reflects the fact that about 900,000 people were called up to fight, stayed home to take care of children because schools had closed, evacuated from towns near the borders with Lebanon and Gaza or couldn’t work because of physical damage to their industries.

Since October, some students have been able to return to school, and some displaced Israelis have been able to work remotely. Still, the economic implications for such a large disruption could be significant, especially with no end to the war in sight.

Projections for growth next year are lower than previously estimated but the ranges vary, with some analysts saying that the economy could grow by only .5 percent. The Bank of Israel has given probably the most optimistic projection of 2 percent, citing Israel’s quicker-than-expected recovery from previous wars and from the Covid-19 pandemic.

“The wide range of projections that we are seeing comes from some of the different assumptions about how long and how intense the fighting will be,” said Karnit Flug, the vice president of research at the Israel Democracy Institute and a former governor of the Bank of Israel.

As of Sunday, 191,666 people in Israel had filed for unemployment benefits since the war began on Oct. 7, with the vast majority saying they experienced a forced unpaid leave, according to the Taub Center.

Some 360,000 reservists were authorized for duty in October, the largest mobilization since the Arab-Israeli war of 1973, also known as the Yom Kippur War, when 400,000 reservists were tapped to fight off a surprise attack from Egypt and Syria. The actual number of reservists called up for duty this time was between 200,000 and 300,000, according to an estimate from the Taub Center, of whom 139,000 were pulled out of the labor market.

As a result, many Israelis had to drop their lives suddenly to go to war, leaving many employers in the lurch. And while the Israeli government has delivered some financial assistance to many affected individuals and companies, additional grants that were promised have been slow to arrive. Some reservists are self-employed and say that their own businesses are collapsing while they wait.

The Taub Center said up to a fifth of workers at medium-sized and large businesses were on reservist duty as of October, citing data from Israel’s Central Bureau of Statistics. Those companies — defined as having at least 100 workers — employ more than half of the Israeli work force.

The labor shortages have been particularly acute in the tourism, construction and agriculture sectors. The latter two industries rely heavily on Palestinian workers, who have been largely barred from entering Israel since Oct. 7.

With no one to pick fruits and vegetables, many Israelis have volunteered at farms in the center and south of the country.

Isabel Kershner contributed reporting.