The construction industry has always played an important role in the Israeli economy, especially in providing housing and economic infrastructure for several million immigrants. At times it accounted for almost half of all investment and a tenth of the gross domestic product. The Government, the Histadrut, and private contractors have shared in the task of building housing. But when the Government and Histadrut are involved, efficiency and the wishes of consumers are likely to be the last issues of concern.

Paper No. 1 in this series demonstrated that the Government's control over the supply of land, which it doles out in small quantities, is the most important factor in Israel's exorbitantly high housing prices. In this second paper, Dr. Paul Rivlin identifies those factors in the construction industry that further drive up prices, thereby making housing almost unaffordable to new couples who lack parental assistance:

• Low productivity growth.
• High taxes and monopolies that raise the prices of inputs.
• Low efficiency of construction firms.
• Unprofessional management in many construction firms.
• Use of cheap Arab labor from the territories, which retards capital investment in construction.
• Slow building times, which require as long as two years, sometimes more, to complete an apartment. (Construction times were cut in half during 1991-1992 when the Government paid bonuses, a bribe of sorts, to reward speedy comple- tion.)

How does the Government respond to public demands to relieve the high price of housing? By increasing mortgage subsidies, which further props up demand, and by putting more land onto the market in outlying areas, unfortunately where few Israelis want to live.

Some easy remedies to cure the high cost of construction are reducing or eliminating import taxes on construction materials, bringing in more foreign construction personnel, and, encouraging foreign construction firms to operate freely in order to increase competition in the domestic construction market.