An average of 30,000 Israelis served in the IDF reserves at any given time last year and were absent from the workforce. This is an improvement compared with the first year of the “Iron Swords” war, but it was still one of the main factors in the damage to GDP, which has totaled NIS 177 billion since the start of the war.
In the coming years, a major mobilization of reservists is expected, compared with the period before the war, and the Bank of Israel recommends that the government take action to recruit haredim to reduce damage to the economy. This was also raised by the Nagel Committee for the Examination of the Defense Budget, which also recommended additional solutions. The current scale of reserve recruitment is 120,000.
“The economy is showing resilience and strength, but on the other hand, there is still a cumulative gap in GDP, and the question arises – beyond that first month of the war, when there were rockets from Gaza, and two weeks in the Iran operation in June – why did we still not close the gap?”, asked Bank of Israel Governor Prof. Amir Yaron this week at a press conference to present the Bank of Israel annual report.
“As an economist, I would certainly answer that it could be a result of a lack of credit in the economy, a shortage of raw materials and a shortage of workers. But we examined these three factors, and the focus is on the shortage of workers, and that is the main issue of the gap that we are unable to close.” In contrast, the Governor stressed, there was no problem with credit or raw materials.
In 2025, GDP grew by 2.9%, lower than the growth rate in the past, and during the war years the cumulative gap in GDP was more than 8%, which amounted to NIS 177 billion. “This deviation from the trend reflects damage to the economy’s productive capacity, and in particular to the labor supply, due to extensive recruitment into the reserves and prolonged absences, alongside disruptions in activity in various industries,” the report states.
Postponing entering the job market
Last year, the intensity of the war did moderate, and a ceasefire was even achieved in October, and this year the decline in the supply of workers moderated. Still, the damage in 2025 as a result of the war is attributed to the mobilization of the reserves, a shortage of foreign workers, and a decline in labor force participation. The damage to the labor supply was about 3.6% of the labor force. 55% of the decrease is explained by the decline in the labor force participation rate, and the absence from civilian work of reserve service members and their spouses. An additional 35% is explained by the absence of foreign workers, and the rest by negative migration from Israel.
The impact of reserve service goes beyond those 30,000 soldiers serving in the reserves at any one time. The decline in job market participation also characterized the war years, and according to the report, a significant part of the decline was due to young people in their early 20s, postponing entry into the job market, due to the widespread mobilization of reserves. “Frequent reserve service may also reduce the motivation and ability of young people to seek long-term employment, even when they are not actually drafted. The decline in participation is particularly noticeable among non-Orthodox Jews, and particularly among men,” the Bank of Israel added. In addition, another decline is attributed to war casualties. Since the outbreak of the war, about 22,000 have been injured in the IDF and about 24,000 civilians have been injured.
Although reservists are included in the statistics as participants in the job force, in practice they are not available for work for their civilian employer. Who are these missing people? Mostly young people aged 20-34. The monthly salary of reservists has changed over time – from high-wage earners to lower-wage earners, although still higher than the average salary of workers. The bank notes that this is explained by the fact that there are fewer reservists from the high-tech sector compared with the beginning of the war.
Inflationary push
The proportion of reservists in the private sector is greater than in the public sector, due to the low proportion of men in the public sector. Some of the wives of reservists also reduced their employment: about 20% of them (compared with 10% among other employed women) worked less than usual in 2025, and about 13% on average were temporarily absent from their job, compared with about 8% among other employed women.
The share of reservists taken from the job market not only hurt GDP, but due to the tight labor market, also pushed up inflation. The moderation of inflation in 2025 is attributed, among other things, to a slowdown in reserve mobilization, which has now risen again due to the war with Iran and the campaign in Lebanon.
Alongside the shortage of workers, demand for workers increased in a way that contributed to wage increases in the business sector. Real wages have increased by 18% since 2019, while in the public sector they have not increased at all since then.
The extensive mobilization of reservists not only affects the economy, it also costs the state treasury a lot of money. In 2025, reserve benefits of NIS 21 billion were paid, down from NIS 26 billion in 2024. The bank stresses that the fall in payments to reservists in 2025 was more moderate than the fall in the number of reserve days served, which can be estimated using the rate of absence from work due to reserve service. Therefore, the bank concludes that there was an expansion in the use of payments to reservists even when they are not actually serving. In addition to this spending, the government also approved a budget of NIS 6 billion to finance grants to reservists.
“In the absence of a decision to increase the daily allowance, part of the response was provided through payment for days without actual service – a non-transparent mechanism that makes it difficult to plan a reliable budget. In the medium term, reducing the extraordinary burden on existing reservists, and the need for extraordinary allowances to compensate them, require an expansion of the regular army, alongside a transparent regulation of the compensation mechanisms for reservists,” the report said.
In 2026, the reserve duty is not expected to be much less. The government approved recruitment of 40,000 reservists at any given moment, even before the outbreak of the war with Iran, during which recruitment has expanded significantly.
The Bank of Israel did not suffice with just hints about “expanding the regular army,” and called for the recruitment of haredim. According to the report, this will help reduce distortions in the labor market. Thus, increasing recruitment cycles by 7,500 haredim annually will result in the addition of 20,000 conscripts, which will reduce the annual economic cost by NIS 9 billion, or 0.4% of GDP.
The Ministry of Finance also recently addressed mobilization of reserves, estimating it results in a loss of about NIS 50,000 per month for each reservist.
Published by Globes, Israel business news – en.globes.co.il – on March 25, 2026.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2026.
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