Should Israel continue to invest in short-term hi-tech growth?

Despite its benefits, employment in hi-tech remains small and the industry is quite isolated from the rest of Israel’s economy.

A woman walks near high-rise buildings in the hi-tech business area of Tel Aviv (photo credit: REUTERS/AMIR COHEN)
A woman walks near high-rise buildings in the hi-tech business area of Tel Aviv
(photo credit: REUTERS/AMIR COHEN)
Israel’s labor market is doing well: employment rates have increased for both men and women and across all population groups in the past decade and a half, and unemployment has reached a historic low. However, there is still a lot of room to improve “quality of employment,” including employment in industries with high wages and high productivity. In particular, the hi-tech sector attracts the greatest attention in Israel both because of its high wages and its disproportional contribution to Israel’s GDP, tax revenues, and exports. For these reasons, the industry has enjoyed support and incentives from policy makers since its inception, and the government recently approved a program to encourage further employment in hi-tech.
Yet, despite its benefits, employment in hi-tech remains small and the industry is quite isolated from the rest of Israel’s economy. The authors of a recent report by the Israel Innovation Authority question whether Israel can even be considered the “Start-Up Nation” given that more than three-quarters of start-ups are concentrated in a very small part of the country – in and around Tel Aviv – and that it is a “closed club” that only employs a small portion of Israelis who come from not very diverse backgrounds.
So how much room is there for hi-tech to grow? The share of Israeli workers already employed in high tech is the highest of all the developed countries, yet still comprises only 8% of the labor market. Hi-tech employees in Israel, as in the rest of the world, are disproportionately male. They are also disproportionately non-haredi Jews, concentrated in the center of the country, and highly-skilled.
The fact that Israeli hi-tech workers have high skill levels is not surprising in and of itself, but the degree to which this sector “uses up” Israel’s highly-skilled talent is exceptional in international comparison: more than 20% of the highest-skilled workers in Israel are already working in hi-tech, compared to only 9% in the OECD. Perhaps even more importantly, the gap between the skills of high tech and non-hi-tech workers in Israel is the largest in the developed countries.
What all of this means is that, to a large extent, we’ve already used up the talent that is available, and efforts to expand employment in hi-tech seem to only be relevant for the small percentage of the working-age population who have both the skills and the motivation to work in high tech, and aren’t already doing so (about 1%).
Furthermore, given that about half of the adult Arab Israeli population ranks in the lowest skill levels, and that a large portion of haredim and Arab Israelis report low levels of English proficiency (a necessary skill in the hi-tech world), most of the potential for expanding the hi-tech workforce comes from the non-haredi Jewish population – those who are already working in hi-tech at very high rates.
These findings leave us with two options. One is to continue promoting the hi-tech sector by (1) encouraging women to study STEM subjects and incentivizing them to work in hi-tech (there is a notable shortage of women in the field, and it’s likely that a majority of workers who already have the suitable skills to move into hi-tech are women) and (2) strengthening the human capital within the haredi and Arab Israeli populations through education and training programs. However, it is likely to take a long time for the latter to have an impact on a large scale, and we need to seriously consider whether Israel can maintain its global edge in the field of hi-tech with such a limited ability to grow in the short term.
The second option is not to rely so heavily on hi-tech, and to focus on strengthening other sectors in the Israeli economy. There is evidence that the huge skill differences between hi-tech and other workers in the economy limits the economic benefits (in terms of improved efficiency, technological advancement, and increased wages) that growth in the hi-tech industry has on other segments of the economy. Given this finding, along with the limited ability to expand the hi-tech industry in the short term, it might make more sense for government policy to focus on raising the skill levels of workers in non-hi-tech industries, through appropriate professional training and by improving the education system, than to spend its efforts recruiting workers from the small pool of already highly-skilled workers to integrate into the hi-tech industry.
The writer is a researcher at the Taub Center for Social Policy Studies in Israel.