How Much Can the Israeli Start-Up Nation Continue to Grow?

Israel is considered the “Start-Up Nation,” but the high tech sector accounts for only about 8% of total employment. Nonetheless, this sector is of great importance to the economy as the source of one-quarter of Israel’s income tax revenues and a major portion of the added value of Israeli exports.

The sector has received support and incentives from Israeli policy makers since its inception, including a recently approved comprehensive government reform to encourage further employment in the high tech sector.

Despite the fact that high tech workers in Israel earn twice as much as workers in other fields, on average, and the large tech companies have been regularly ranked among Israel’s most desirable workplaces, the share of high tech workers has remained more or less unchanged for more than a decade.

The question is, how much room is there for employment in Israel’s high tech industry to grow? Given a number of trends, it seems that efforts to expand employment in high tech are only relevant for a small percentage of the working-age population, at least in the short term.

Basic worker skills: international comparison

According to an analysis of the OECD’s Basic Skills Survey (PIAAC), Israel is characterized by a large prevalence of workers with low skills.

• The percentage of Israeli workers whose skills are ranked at the lowest skills level in the OECD (the bottom decile) is about 16% of the adult population and only about 7% of Israeli workers rank in the highest skills level (top decile).
• About half of the adult Arab Israeli population ranks at the bottom of the OECD skills distribution (the bottom two deciles).

These data point to the need for substantial improvements in every stage of Israel’s education system in order to improve the skills of future workers and their employment opportunities.

High tech versus the rest of the labor market

The PIAAC survey results point to stark differences between the skill levels of Israeli high tech workers and those of workers in other fields. The gap between the skills of Israeli high tech workers and the skills of employees in other sectors is almost a full standard deviation – an exceptionally large gap among the developed countries.

Another finding that emerges from the survey is that a large portion of the most highly-skilled workers are already working in high tech and it is difficult for others to integrate into the field.

• Of Israeli workers ranked in the highest skills quintile, 22% are already working in the high tech sector. This is the highest percentage of all the comparison countries. Put differently, 60% of Israelis working in the high tech sector are ranked in the highest skills quintile and the probability of working in high tech declines significantly at lower skill levels.
• Even science and engineering graduates who do not have high skill levels find it difficult to integrate into occupations relevant to their areas of study (both in Israel and in other developed countries).
• Individuals who reported low levels of English had almost no likelihood of being employed in the high tech sector, regardless of their skill levels in other areas.
• A high share of the Haredi and Arab Israeli populations report low levels of English proficiency, as opposed to a high level of proficiency reported among high tech employees. As a result of this, and due to low levels of general proficiency among these population groups (as measured by the survey), it seems that there is limited expected benefit from using professional training as a means of integrating them into the high tech industry (thereby narrowing gaps).
• Most of the potential to expand high tech employment is found among non-Haredi Jews, who already comprise the majority of high tech workers.

The potential for expanding employment in Israel’s high tech sector

A simulation conducted as part of the study shows that the combination of the high share of highly skilled workers who are already employed in high tech and the low skill level of workers in the other sectors means that the potential for increasing high tech employment is low relative to that in other countries, at least in the short term.

• The intermediate scenario of the simulation shows the high tech employment growth potential to be about 4% of the working-age population. Among Haredim, this figure is 3% and, among Arab Israelis, only about half a percent.
• The percentage of workers who may expect to substantially improve their employment status by retraining for high tech (a subset of those with the appropriate skills) is small and stands at only about 1% of the working-age population.
• There is a notable shortage of women in high tech, and it seems highly likely that a majority of the potential for employment expansion comes from within this group.

Beyond the question of the extent to which it is possible to grow the high tech sector, there is also room to examine whether this is a worthwhile pursuit.

Due to the large skills gap between high tech and other sectors, it is unlikely that expanding employment in high tech would lead to the spread of advanced knowledge and innovative work methods to other fields to a significant degree. It is also possible that expanding employment in high tech may slow development in other areas of the economy, where the employment profile is more varied.

The availability of cheap labor makes it less feasible that employers will streamline processes and adopt advanced technologies, and is likely one of the causes of low levels of investment and low productivity in non-high tech industries.

Therefore, increasing investment and technology adoption in these industries as well as raising the skill levels of the workers employed in them, through appropriate professional training and by improving the education system (in order to improve the skills of the next generation), may be preferable to efforts to recruit additional highly-skilled workers to move into the high tech field.