Can the Israeli Start-Up Nation Continue to Grow?

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This study will be published in the coming weeks (alongside other new studies) as part of the Taub Center’s State of the Nation Report 2018.

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 payments, and a comprehensive reform was recently approved to encourage further employment in this sector.

A new study conducted by Taub Center Researcher Gilad Brand assesses the potential to expand employment in high-tech through an examination of the OECD Survey of Adult Skills (PIAAC).

The study shows that the potential for increasing high-tech employment within Israel’s adult population is low, at least in the short term. This is because Israel’s share of high-tech workers is already high relative to other countries, and workers outside this industry, especially Arab Israelis and Haredim, are characterized by very low skill levels.

As a result, the gap in Israel between the skills of workers in high-tech and workers in the rest of the economy is the largest gap out of all the countries analyzed in the study. Furthermore, it seems that most Israelis who are capable of working in high-tech are already employed in the industry.

In light of the findings, Brand says: “Policy makers may have to find alternative sources for future economic growth.”

From its inception, Israel’s high-tech sector has gained world renown and has received support and incentives from Israeli policy makers. In fact, in January 2017 a government reform was approved to encourage employment in high-tech, in an attempt to increase the number of Israelis benefiting from the field’s advantageous employment conditions.

Against this backdrop, Taub Center Researcher Gilad Brand analyzes the OECD’s Survey of Adult Skills (PIAAC) and assesses the potential for enlarging the scope of Israel’s high-tech employment. The survey evaluates skill levels in literacy, numeracy, and problem solving in technology-rich environments among those ages 16-65.

The study’s findings show that, despite the success of the high-tech sector, the field does not appear to have much room left to grow due to the mismatch between the skills of most workers in the economy and the skills needed in the high-tech industry. The average skill level among workers in Israel is lower than the OECD average, especially among Haredi and Arab Israeli workers, whose skill levels are particularly low.

In contrast, the skills of Israel’s high-tech workers are quite similar to those of their counterparts in other countries. The gap between the skill level of Israeli high-tech workers and workers in other sectors is among the largest in the OECD.

High-tech employment: those capable of working in the industry are already doing so

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. If so, why has the share of high-tech workers remained unchanged for more than a decade?

The study finds that workers with high cognitive abilities, as reflected in the PIAAC survey results, are already integrated into the high-tech industry at high rates, and that 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 relative to other countries.

skill level gap between workers

The Taub Center study also finds that 22% of the most skilled workers (highest skill quintile on the PIAAC survey) are already employed in high-tech – a much higher share than in all other comparison countries. On the other hand, the probability of working in the high-tech sector among workers who are not in the top quintile of skills is relatively low.

Brand finds that 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 other developed countries). From this we may conclude that offering high-tech retraining to workers whose skill levels are not high is of little value.

top quintile in the PIAAC survey

Mastery of the English language is another important skill needed to work in high-tech, and there is little chance of someone not proficient in English being employed in this industry.

The Taub Center study finds that the language barrier is especially significant for the Arab Israeli and Haredi populations, who are under-represented in high-tech (less than 5% of workers): about 44% of Haredim and 40% of Arab Israelis ages 25-44 reported that they were not proficient in English, compared to 20% and 40% (respectively) who reported that their English was good.

According to Brand: “the data show that improving English instruction in these population groups’ educational institutions is a necessary step toward making the high-tech sector accessible to them.”

Is it possible to expand employment in the high-tech sector in Israel?

As stated, the skills of most workers in the Israeli economy are lower than what is required to work in high-tech. Brand therefore conducts a simulation to examine the employment potential among highly skilled workers who are not currently employed in the industry.

The simulation includes a comparison between the skill levels required for employment in high-tech in OECD countries and the skills of Israeli workers ages 25-44 (among whom career retraining is more feasible). The comparison reveals that the percentage of workers who could potentially integrate into the high-tech sector stands at only about 4% of the working-age population not currently employed in the industry.

Among Haredim, this figure is 3% and, among Arab Israelis, only about half a percent. However, most of the workers in this “potential” group (68%) are already employed in high-paying jobs, and only a small portion (32%) may be expected to substantially improve their employment status by retraining and moving into high-tech – that is, when the motivation to retrain is taken into account, the potential for expanding employment in the high-tech sector is only about 1%.

In addition to the very limited ability to expand employment in high-tech, the study finds that there is a need to reexamine the value of investing in this industry in particular. At first glance, the expansion of high-tech should have a positive effect on the rest of the economy (through, for example, the spread of innovative work methods to other fields).

However, due to differences in required skills, only limited worker migration between high-tech and other industries can be expected, calling into question the extent to which high-tech can have a positive impact on the rest of the economy.

Israeli workers are less skilled than workers in other countries, but the situation is improving

 

Data from the Taub Center’s research show that Israel is characterized by a large presence of low-skilled workers, which results in low earning ability. The share of Israeli workers whose skills are ranked at the lowest level in the OECD (bottom decile) stands at about 16% of the adult population, and only about 7% of Israeli workers are ranked in the highest skill level (top decile).

Within the Arab Israeli population, the picture is particularly worrying: about half of the adult Arab Israeli population can be found at the bottom of the OECD’s skills ranking (the two lowest deciles).

On a positive note, the data indicate an upward trend in the non-Haredi Jewish population’s skill level, and an even more substantial improvement in the skills of the Arab Israeli population; within these populations, the younger age groups outperform the older ones on the PIAAC survey (compared with parallel age groups in OECD countries). Therefore, the potential for increasing the share of those employed in high-wage employment sectors, such as high-tech, will grow over time.

“A large portion of the workers in Israel have low skill levels and therefore have low earning ability. The availability of cheap labor detracts from employers’ willingness to adopt advanced technologies and holds back the economy’s growth potential,” says Brand.

“Focusing on improving the skills of low-skilled workers may yield a higher return than the investment needed to move higher-skilled workers, of which there are not many, into the high-tech industry.”

Prof. Avi Weiss, President of the Taub Center, adds that “the data consistently show high levels of inequality in Israel, which stem from large differences between the abilities of graduates from various streams of Israel’s education system. Therefore, providing incentives to retrain and move workers into the high-tech industry is not in and of itself an adequate response.”

The Taub Center for Social Policy Studies in Israel is an independent, non-partisan socioeconomic research institute. The Center provides decision makers and the public with research and findings on some of the most critical issues facing Israel in the areas of education, health, welfare, labor markets and economic policy in order to impact the decision-making process in Israel and to advance the well-being of all Israelis.  

For details, or to arrange an interview, please contact Anat Sella-Koren, Director of Marketing, Communications and Government Relations at the Taub Center for Social Policy Studies in Israel: 050-690-9749.