Slowdown in growth of tech workforce is bad for tax revenue, report warns
Israel Innovation Authority says despite the war, the local tech ecosystem is 3rd-largest global hub for capital raising, but notes that investments flowing largely to cyber firms
Sharon Wrobel is a tech reporter for The Times of Israel.
Nearly a year into the war with the Hamas terror group, Israel’s tech sector still ranks third as a global hub for investments, attesting to its resiliency. But one of the country’s most important sources of tax income is plagued by serious challenges including a slowdown in the growth of employees and a lack of diversity, according to a report released Monday by the Israel Innovation Authority.
These issues, combined with insufficient government spending as the tech industry faces increased risks during the wartime period, could hamper its ability to compete in the coming years and continue to be a massive driver of economic growth, the Israel Innovation Authority, which is in charge of directing the nation’s tech policies, warned in the report.
The tech sector accounts for about fifth of Israel’s gross domestic product (GDP), more than half of exports, and about a quarter of total state revenues generated from salaried employee income taxes and company taxation.
Israeli startups have been grappling with the ongoing callup of employees to perform reserve duty and continued uncertainty about the duration and extent of the war, which broke out after Hamas terrorists invaded Israeli southern communities near the Gaza border on October 7, massacring some 1,200 people and kidnapping 251.
“The war and its accompanying challenges have led to a halt in employment growth, particularly in business and product roles. This is a clear warning sign,” said Israel Innovation Authority chairman Alon Stopel. “The high-tech industry is becoming more focused on technological roles, indicating that business growth is happening outside of Israel.”
“If this continues, it will harm economic growth and limit opportunities for individuals in supporting roles to enter the high-tech sector,” Stopel cautioned.
Stopel called on the government and policymakers to “create mechanisms to balance and incentivize growth to maintain the global competitiveness of the Israeli tech hub.”
The economy’s dependence on state revenues from the tech sector has significantly grown in the past decade driven by a rapid growth in the number of the sector’s employees and rising salaries.
Over the past decade until 2022, tech employees almost doubled in number to about 400,000, and make up about 11 percent of the country’s workforce. However, since the second half of 2022, the total number of employees working in tech has remained almost unchanged, leading to stagnation in the sector’s relative share of employment in Israel.
“Because high-tech employees contribute significantly to state revenues from income tax, this stagnation may affect state revenues in the years to come – this, during a period in which the state budget is already contending with a deepening deficit, raising the need for growth-stimulating measures,” the Israel Innovation Authority said in the report.
In comparison with other global innovation hubs, the growth rate of tech employment in Israel is similar to that in the US but lower than that in Europe. In 2023, the number of tech employees in Europe grew by 5%, in the US by 2.8%, and in Israel by 2.6%, close to the population’s natural growth rate.
A breakdown of the employment mix within the tech industry found that during the past six months more than half of employees were working in R&D positions as jobs in tech-savvy development roles are increasing, while product and administrative jobs that don’t require technology training and have lower entry barriers are gradually declining. Meanwhile, during the challenging war period, many startups have been forced to reduce headcount or halt projects to streamline operations and cut costs.
The shift “creates an industry primarily focused on research and development, limiting opportunities for those in non-technical roles and constraining the sector’s ability to grow as an employer in Israel,” the Israel Innovation Authority said.
While growth in tech employment has stalled, salaries in the sector have continued to rise, even during the war period. Since the beginning of the war, tech salaries have increased by an average of 5.5%, whereas salaries in the rest of the economy rose by only 2%. During the second quarter of 2024, the average monthly tech salary stood at NIS 31,500 ($8,326), close to three times the economy’s average salary of NIS 11,300.
Despite the uncertain security situation during the ongoing war, Israel has maintained its position as the third-largest global hub for capital raising, behind Silicon Valley and New York, and ahead of other tech hubs such as London and Paris.
Between October 7 and mid-August this year, total capital raised by Israeli startups and tech companies to hire new employees and expand business operations stood at almost $9 billion, similar to the sums raised during parallel periods in recent years, except for the record years of 2020 to 2022, according to data compiled by the Israel Innovation Authority.
Total investments in Israeli tech companies since October 7 are 4.7% lower than during the same period last year. In other tech hubs, including San Diego, Paris, Los Angeles, and Berlin, which have raised lower sums than Israel since October 7, the year-on-year growth rate was higher.
While investments remained stable, the report raised concerns that since October 7 close to 60% of the capital was raised by mature and established tech companies. About 35% of the total funds secured since the beginning of the war was by cyber companies. In previous years, cyber companies made up only 13% to 20% of total capital raised.
“The report demonstrates the significant appeal of Israeli tech companies for investors, even during times of crises,” said Israel Innovation Authority CEO Dror Bin. “However, it also reveals a notable slowdown in employment growth, early-stage investments, and other indicators.”
“To ensure that high-tech returns to rapid growth after the crisis, we must direct investments into young startups, early-growth stage companies, and various technology fields, not just large firms and cybersecurity,” Bin urged.
Bin reiterated his plea to increase spending on tech, as the government is preparing the framework for the passage of the 2025 state budget.
As part of the 2024 budget, the government bolstered the Israel Innovation Authority’s base budget by an additional NIS 1 billion to help fund a stimulus package to aid young startups that have been struggling to get critical funding in the face of geopolitical uncertainty during the wartime period.
