How Google and Facebook Are Eating Your Pie

Western voters are screamingly angry at the stagnation of their salaries, but they're not pointing the finger of blame in the right direction

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PieCredit: Tomer Appelbaum

One can only feel pity for the poor statisticians at the Organization for Economic Cooperation and Development. Every time Israel is mentioned in one of their studies, they have to come with an explanatory note that the figures includes data on settlers, even though strictly speaking they live outside the country's borders.

Even worse, Israel is such an outlier that when the OECD’s economists try to tell a good story, Israel is there making a pig’s breakfast out of the whole thing.

Blessedly, we’re too small statistically to ruin lot of their median figures and explanatory graphs. Nevertheless when it comes to economic growth, employment, poverty and education Israel is in many ways as far from the rest of the OECD as the planet Mars.

Missing in action

Over the last decade, the big story in the developed world, which is mainly the OECD, has been that traumatic financial crisis of 2008, followed by slow recovery that has benefitted the rich more than everyone else.

In Israel, on the other hand, there was never a crisis at all, and economic growth has been strong and steady and pretty equal.

Even poverty and income inequality, which have been mostly increasing in OECD countries, is actually starting to trend down in Israel – although it still remains quite high. While the OECD is constantly urging governments to invest more in education to ensure they have a workforce comfortable in a high-tech economy, Israel’s schools stink like a Limburger cheese left out in a sandstorm, yet we’re Startup Nation.

In a report released on Wednesday, the OECD celebrated the fact that a long 10 years after the 2008 financial crisis, more people - as a percentage of the adult population - hold jobs than before the crisis.

But the report devoted much more space to ruing the fact that wage growth is, as the report put it, “missing in action.” Wages in the OECD grew more slowly after the financial crisis (from 2007 to 2016, growth was about 1.5 percentage points lower than in the eight preceding years. Again Israel bucked the trend:  the median wage growth was 1.4% higher.

This probably does a lot to explain the popular anger in the United States and Europe. But they have been lashing out at the political establishment, blaming it for the recession, and for the failure to ensure a rising standard of living since then.

Why business gets a pass on this is a bit of a mystery.

Who's getting richer

in the U.S., Donald Trump gets applause from a wide swathe of voters for accusing Obama and the Washington establishment of giving American jobs to Chinese and Mexicans. But with the recent exception of Harley-Davidson, which peeved some communities, the companies that actually outsource the jobs are regarded as innocent victims of wrong-headed policy.

Be that as it may, the OECD concludes, as have other studies, that globalization can only take part of the blame for stagnant wages. The real culprit is technology that is taking jobs away, especially among the least skilled.

And, as it turns out, technology is also depressing wages and (establishment politicians beware!) it’s going to keep doing so unless something radically changes.

Google Street view, off the beaten path in IsraelCredit: Menahem Reis

What’s happened is that the share of wages in total national income has been declining in 24 OECD countries over the last 18 years – from 71.5% to 68% in 2013.

Whose share is getting bigger? Not just that of gluttonous capitalists, but in particular, that of the companies that are so loved and appreciated by the masses for delivering us shiny new technology – Apple, Google, Facebook & Company.

The reason is this: These companies make piles of money, partly because they dominate their markets, and partly because the employ so few people relative to their size.

They may pay their employees a lot, but they’re capital-intensive businesses and when all the accounting is done, it’s the shareholders who are making the biggest bucks. 

In short: Facebook shareholders profit more than, say, General Motors shareholders did in the heyday of the automobile industry, partly because GM had to pay far more employees than Facebook has to today.

In Israel, labor’s share of national income has dropped more sharply than almost anywhere among the OECD 24: 7.3 percentage points, the fourth-highest in the OECD and close to the U.S.’s 7.8-point decline.  

Why are Israeli workers losing out by so much? We don’t have giant globe-trotting tech companies: nor is the rest of the business sector  particularly technologically advanced by Western standards. Israelis aren’t losing their jobs or seeing wages fall because they are being replaced by robots.

Who’s at fault is our beloved Startup Nation. The most successful tech companies generate huge added value but it goes to their shareholders. These are not companies that employ a lot of people.

In a particularly stark example, Intel paid more than $15 billion to buy the Israeli auto-tech company Mobileye last year. Mobileye employed just a few hundred people, all well-paid but not as well-paid as the shareholders.

Compare that to a more traditional Israeli company, like Bank Hapoalim that employs 11,500 people but has a market cap of $9.2 billion or Teva Pharmaceuticals that had 52,000 employees (before it started massive layoffs) and a market cap of $25.3 billion.

Israelis aren’t looking for a local Donald Trump, because the economy is growing enough that wages are rising and generating jobs. But that can’t continue forever. Unless we can bring more people into the charmed world of high tech where wages are double the national average, the growing imbalance between labor and capital is going to breed the same resentment it has elsewhere.