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The Heavy Cost of Israel’s High-tech Success Story

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At the Arad Towels textile factory: Photo shows a worker looking up at an expanse of threads that will become towels. He looks like he's inside a tent made of white threads. The man has short black hair, stubble on his face and is wearing a light-colored T-shirt.
At the Arad Towels factoryCredit: Eliahu Hershkovitz

How could Startup Nation have the highest levels of poverty in the OECD? The Taub Center for Policy Studies has an answer. Israel has become two nations – the startup nation and the nation of all the rest. That is consistent with the conclusions of most socioeconomic studies in Israel in the last 20 years.

Startup Nation and Rest-of-the-Nation share a common language. But in practice, they occupy parallel universes that barely interconnect.

That explains why the success of the Startup Nation hasn’t filtered through to the nation of everybody else. You can't move from one to the other with a passport from the Interior Ministry. It can only be obtained by crossing the gap in skills and innovation.

“Polarization in the Israeli economy is especially acute,” wrote Dr. Gilad Brand of the Taub Center.

What he meant is that while every country has divisions in its workforce but in Israel, the situation is extreme.

Every country has workers who have greater or lesser skills, and all over the world, industrial productivity, especially of export industries, is greater than those of commerce and service workers. That is also why wages in industry are usually higher than wages in commerce and services. Over the years, wages are expected to converge with productivity. But in Israel, these separations have created separate worlds.

In Israel the yield on pay for workers in export industries is among the highest in the world, by a considerable margin over Ireland, the second country in line.

But this is only half the story. The second half is that the yield on overall wages in Israel is mediocre when compared with the rest of the world, because the gap between the yield on export workers’ wages and those of all other workers is the highest in the world. Again, by a significant margin compared with the second in line – Ireland again.

In other words, in Israel, you really want to work in exports, not in anything else. The gap in wages is so great that one would have thought more people would have moved to work in exports over the years, eventually damping pay in exports and boosting it elsewhere. In any case, the gap should have narrowed.

But it isn’t happening. It hasn’t happened over decades. If anything the gap has been widening.

The most depressing thing in Brand’s paper is his demonstration that in the last 40 years, the percentage of workers in commerce and services has doubled, from 30 percent to 60 percent of the labor force. At the same time, the percentage of workers in industry has halved, dropping from 30 percent to 15 percent of the workforce.

The problem is what has happened to the output of those workers. The output of industrial workers decreased from 22 percent to 18 percent; in other words, the percentage of industrial workers dropped by half, but their output dropped only 20 percent, which means that the output per worker (productivity) has improved nicely.

In commerce and services, the exact opposite happened. The percentage of workers doubled, but their output increased by a mere 10 percent.

Thus, twice as many workers are sharing a pie that has barely grown; what’s left for every worker, therefore, is a very small piece.

A nation of extremes indeed

This is the essence of our national tragedy. The workforce is growing in the very sectors where productivity and wages are low. The great mass of workers goes to industries that aren't advanced at all. Why is this happening?

Brand suggests a few reasons. First of all, the structure of Israeli exports is unusual: we have almost no non-tech export industries. While Israeli high-tech is  a global success story, only a tiny fraction of workers gets degrees in software engineering so they can get jobs in advanced research and development.

Far more people might be able to make a decent living in export industries that aren’t high tech, but we Israel never developed a quality intermediate industry. We are at the cutting edge of high technology, or stuck in traditional industries that are backward rather than innovative. We’re missing that middle level that could provide a wide range of jobs at good wages.

Brand suspects that the success of high-tech is actually undercutting the non-tech export industry.

How high-tech depresses non-tech exports can be explained in two ways.

High-tech keeps the shekel high against other currencies, which materially undermines the profitability of non-tech exports. It suffocates them.

The second explanation is the government’s ill-thought policy of giving gigantic grants to multinational companies (notably Intel) which then compete with other export industries for both skilled workers (and through the appreciation of the shekel).

Thus we are left with a handful of thriving multinationals and a white-hot start-up scene, but without less advanced export industries that could be employing many more workers.

Not only have we missed supplying quality workplaces, we also have a serious problem supplying quality workers. Brand uses the adult skills survey, the PIAAC, to examine the gaps in skills between Israeli workers in local industries and those in the export industries.

The OECD average shows a very small gap in the quality of workers in these two sectors, while in Israel there is an enormous gap – the skills of export workers are incomparably higher than the skills of workers in other industries. The reason why should be clear; if our exports are concentrated in high-tech, obviously the skills of export workers in Israel will be far higher than the skills of other workers.

Part of this gap reflects the large gaps in Israeli society, including the ongoing failures of our national education system.

In any case, this chasmic gap in skills means no mobility. The average worker can’t work in high-tech because he doesn’t have the skills. Therefore, wage increases in high-tech have no influence on his salary.

So what can be done? That’s the trillion-dollar question.

Education must be improved, particularly in the ultra-Orthodox and Arab sector; we must improve professional training so that workers can acquire missing skills; government investment in the economy must increase to boost overall productivity, and traditional industry needs investment at the expense of high-tech investments.

In any case, the high-tech sector is short of suitable workers, so investing more there will merely increase the movement of workers from one firm to another without increasing productivity or overall output.

Another important suggestion Brand makes is to simply dump all the import barriers, meaning, the red tape that enables only a handful of exclusive, powerful importers to survive, because import barriers eventually translate into export barriers.

There is a direct link between the volume of imports and the volume of exports, and therefore all the stringent requirements of the Standards Institution, the Health Ministry, or the Communications Ministry, aimed at calming the fears of officials who are afraid to relinquish authority, ultimately stymie Israel’s growth. There is no way to encourage small, weaker exporters, especially those not engaged in high-tech, other than by increasing Israel’s international trade volume.

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