High-tech continues to blossom, but the rest of Israel’s economy can’t keep up

“Poor countries don’t have well-developed welfare programs,” said Israeli Finance Minister Avigdor Leiberman during a talk he gave last week at Calcalist’s offices. “A strong welfare program can only function in a wealthy country, and that’s why we need to first and foremost be profitable. The Israeli government prefers to invest in research and development, which will in turn lead to growth,” he said. However, statistics show that investing in R&D doesn’t necessarily contribute to a stronger welfare system, showing that in fact, Lieberman is mistaken.

The State of Israel leads other OECD countries in R&D investments, with 4.9% of the country’s GDP going to R&D in 2019. With that said, Israel is still ranked 29th in national welfare expenditures, and only 16.3% of its GDP goes toward social programs. According to the Israel National Bureau of Statistics, national expenses for welfare programs includes money granted to households, services and payments made to the eldery, children, teenagers, people with disabilities, the unemployed, and toward programs that promote employment.

Tel Aviv skyline. Photo: Shutterstock

Investments in R&D compared to the government expenses on welfare in 35 other OECD countries showed a strong correlation between both denominators. As investments in R&D rise, so do national welfare expenses, and vice versa. The only exceptions to this rule are Israel and South Korea, who are top in government R&D investments but invest less than other countries in the social welfare of their citizens.

However, unlike South Korea - which between 2010-2019 increased its investments in R&D by 1.3% and its social welfare expenses by 2.3%, Israel has increased its R&D investments by 1% but has only increased social welfare spending by 1.65%.

Most countries have seen a decline in national welfare spending (with the exception of South Korea, Norway, and Poland whose R&D and social welfare spending has grown over the years). In 19 countries, including Israel, there has been a decline in social welfare expenses, but a rise in R&D investments. Israel is in a relatively good spot compared to other OECD countries. In comparison, over the corresponding period, there has been a 14% decline in social welfare spending in the Netherlands, and similarly in other countries, such as Ireland (13.2%), the U.S. (11.6%), and the U.K. (9%).

The wage gap is growing

Most R&D investments are in the high tech industry. While the percentage of those engaged in R&D and employed by the high tech industry is unknown; they are consistently in a group that earns the highest salaries in the country. According to a recent report published by the CBS, in 2021 the average wage for those who work in high tech R&D was NIS 30,791 ($9,490) per month, over fivefold more than the minimum wage, and nearly threefold more than the average wage. Over the past decade, statistics have revealed that the minimum wage has risen only by 29% since 2011, while the national average wage has risen 34% and the average high tech salary has skyrocketed by 54%. In Israel, the minimum wage is NIS 5,300 ($1,630) per month, compared to the average wage NIS 11,774 ($3,630), showing a 122% gap. However, the average wage in the high tech industry is NIS 26,494 ($8,160) per month, almost fivefold above the minimum salary.

Over the past decade, the gap between the minimum and average wages has grown by 8%. In comparison, the gap between minimum wage and the average wage in high tech is 80%. Meanwhile, the gap between the average wage in high tech and that of the overall economy has grown to 29% within a decade. By the end of 2021, the average salary in high tech had grown to be nearly threefold (2.25) higher than the average monthly salary.

Lieberman is ignoring the fact that investing in R&D widens the wage gap in Israel, and increases socioeconomic gaps too. In an attempt to invest in growth - which Lieberman insists will produce a strong welfare system - the state is preventing a certain section of the population from earning more, and is now in dire need of a stronger welfare system. According to a November 2021 report published by the National Insurance Institute (also known as Bituach Leumi), 33.1% of the employed and 38.6% of the self-employed earned less than minimum wage. That means 1.55 million employees are being left behind.

The Israeli high tech ecosystem has great importance and significant influence in the Israeli economy. Despite the fact that high tech workers make up only 10% of overall employees, high tech companies produce 15% of Israel’s GDP, 43% of Israeli exports, and its workers provide 25% of all income taxes.

The widening of socioeconomic gaps in Israel as a result of high tech development is more pronounced when minority groups are examined. “The Israeli high tech industry is continuing to preserve its status as a relatively-closed homogenous society, which consists mainly of Jewish males who aren’t ultra-Orthodox,” wrote the Israel Innovation Authority in a 2021 report. CBS findings show that two-thirds of high tech workers are men, 98% are Jewish-Israeli, and only 2% are Arab. In urban settings, 31.5% of Jewish-Israeli workers earn minimum wage, while in urban Arab cities, 44.9% of Arabs earn minimum wage.

In addition, most of the high tech employment centers are concentrated in central Israel, which also dramatically increases wage gaps between cities located in the periphery and those in the center of the country. According to statistics from the Ministry of Labor, Social Affairs and Social Services, some 61% of high tech workers live in central Israel, even though employees in the Tel Aviv metropolitan area make up only 45% of the labor force. In contrast, 11% of high tech employees work in Northern Israel, who make up only 15% of the northern labor force; and 6% in Jerusalem who make up 9% of the Jerusalem-based workforce. According to Bituach Leumi figures, 34.3% of those who reside in the Tel Aviv metropolitan area earn minimum wage, as well as 34.9% of those who live in central Israel. In comparison, 45% of Jerusalem employees earn minimum wage, similar to that in northern (45.3%) and southern Israel (40.9%).

Wage gaps between those who live in central Israel and peripheral towns can also be seen in the high tech industry. According to CBS figures, 2,000 startups were active in the Tel Aviv district in 2019, with employees earning an average wage of NIS 23,231 ($7,160) per month. In comparison, 1,150 were active in central Israel, with employees earning NIS 20,384 ($6,280) per month. However, only 181 startups were active in northern Israel, with employees earning an average salary of NIS 19,538 ($6,020) per month, and a similar number of startups were active in southern Israel (124), with an average employee salary of NIS 17,258 ($5,320) per month. These figures show that high tech employees who work in outlying districts earn 25.7% less than their Tel Aviv and central Israel counterparts.

Investing in training programs

According to the Israel Innovation Authority, 89% of R&D expenses come from the private sector, 8.6% from higher education bodies, 1% from the voluntary sector, and only 1.4% from the public sector. That data seems to indicate that the state's power to control socioeconomic gaps as a result of R&D investment is negligible compared to the influence that the private sector possesses in that respect. However, the private sector neither possesses the ability nor the obligation to take care of the well-being of the state’s citizens. That is the sole responsibility of the state, although it seems to be failing on that end. On one hand, it is encouraging more investments in R&D and the Israeli high tech industry which contribute greatly to the economy, but is also widening socioeconomic gaps in Israel. On the other hand, it is reducing national welfare spending but isn’t doing enough to reduce socioeconomic gaps. In that sense, the state isn’t creating enough employment opportunities for those who reside in geographical peripheral communities.

Lieberman knows firsthand that there’s a “need to disperse employment opportunities, and not every startup should be based out of Tel Aviv.” He even said so himself. Lieberman is proud of the fact that Israel Aerospace Industries is moving one of its centers to Yeruham. But that’s not enough. In wake of the high tech worker shortage, the state needs to cut back on its investments in R&D, and instead invest more funds in professional training (and retraining programs) for the high tech industry.

The minimum wage is expected to rise over the coming year by an extra NIS 100 ($30.80) a month, and by 2026 increase to an extra NIS 700 ($215) a month, but that is a move that is nothing more than background noise. Time will tell how much the high tech salaries will increase during that same period.