8.7% of the workers pay 24% of the taxes

High-tech office / Photo: Shutterstock, Shutterstock.com

Resentment at the high earnings of technology sector employees overlooks their outsize contribution to Israel's economy.

The boom in Israel's high-tech sector is channeling unprecedented wealth to entrepreneurs, senior managers, and tens of thousands of staffers in the industry. The money comes from the sale of shares and options in the long series of IPOs of Israeli technology companies in the US, and from sales of holdings on the private market (secondary).

In recent weeks, a heated discussion has developed, partly on the pages of "Globes", about the damaging effects that this money could have on the economy as a whole, for example by inflating home prices. The debate about widening inequality between tech workers and the rest is important, certainly when the coronavirus pandemic has hit other industries hard but has actually strengthened much of the technology sector. But the debate is also liable to obscure the big picture.

While hypotheses such as that home prices are rising in Israel as a result of the money flowing to high-tech are unproven, there are facts that require no further demonstration. By every possible measure, the success of the technology sector is vital to the Israeli economy, especially during a crisis such as the economy is going through at present, along with the rest of the world.

Employing more Israelis

The past eighteen months have seen an explosion of the tech sector in Israel, but the years before that were very successful and led to some 60,000 people joining the sector, and they are now enjoying the fruits of its success. In 2016, Israel's technology sector employed some 270,000 salaried workers, 8.3% of the country's total workforce. By 2020, the figure was 334,000, or 9.8% of the workforce.

The period of the coronavirus pandemic has shown that technology industry jobs are more stable than jobs in other sectors. According to surveys by the Central Bureau of Statistics, in March-April last year, the period of the first lockdown in Israel, only 2.6% of high tech employers reported that they had placed employees on unpaid leave, versus 11% of employers in the economy as a whole. Similarly, during the first lockdown, the proportion of workers in the high tech sector receiving unemployment benefit was 14%, versus 28% in the economy as a whole.

Employee mix has changed

Along with the growth in the number of employees, the mix of employees has also changed in recent years. The local tech industry used to be based on exits in which startups were sold to foreign corporations, but the number of such deals has declined considerably. As a result, more Israeli startups have continued to develop and grow independently. When a startup is sold, the acquiring company usually absorbs the technology workers in its R&D center in Israel, but most of the support workers, in administration, sales and marketing, are laid off. But when a startup grows independently, and certainly after it holds an IPO and goes public, the need for support workers actually grows, providing opportunities for more people who do not have technological training to join the industry. According to the Innovation Authority, at present, for every two people employed in core technological professions, Israeli technology companies employ another 2.92 support workers.

A policy paper published by the Aaron Institute for Economic Policy in the Interdisciplinary Center Herzliya argues that absorbing more support workers in technology companies could be the key to coping with the employment crisis caused by the coronavirus pandemic. According to the Institute's estimates, among those made unemployed because of the pandemic, there are between 43,000 and 103,000 with the potential to replace support workers in positions that Israeli companies currently man overseas. The Aaron Institute recommends training in communication in English, digital skills, and improved sales and service skills, to enable unemployed people to switch to jobs in the technology industry.

It's not all perfect of course. Although the industry has expanded, it remains largely homogeneous. 95% of the people who work in high tech are non-haredi Jews. Only 3% are haredim (ultra-Orthodox Jews), and only 2% are Arabs. From the point of view of geographical distribution too, the technology industry is far from being representative of Israeli society. Most technology workers, 61%, live in the center of the country, and the representation of the periphery is lower than in the workforce in general. 11% of high-tech workers live in the North, even though 15% of the total workforce live in that region, and just 6% are from Jerusalem, where 9% of the workforce live.

Not just big salaries

In the reporting on the Israeli technology industry in recent months, employees earning NIS 80,000 and even NIS 100,000 monthly have starred time and again. The fuss over these sums perhaps attracts ratings, but in reality those who work in the industry know that such enormous salaries are confined to a small group of talented people with outstanding experience, and are not representative of the salaries of most of the employees.

According to Central Bureau of Statistics figures, the average gross monthly salary in the technology sector in May was NIS 26,500. The average rises to NIS 30,100 if it is based on research and development workers only. These numbers are a long way from the huge salaries talked about in the media, but they are still high in relation to the rest of the Israeli economy. The national average salary in April was NIS 11,300.

Paying much more tax

The high earnings of high-tech workers perhaps makes them objects of envy, but they also mean that they pay much more tax, which in the end contributes to the economy in general. According to the Innovation Authority's latest report, in 2018, workers in the technology sector paid 24% of the total income tax collected, even though they represented just 8.7% of the workforce.

The ratio becomes even more extreme if you look only at research and development workers employed in R&D centers of foreign companies in Israel. Their pay is particularly high, averaging NIS 32,500 gross monthly in 2018, and the income tax they paid was 8.3% of the total collected that year, almost six times their proportion in the workforce of 1.47%.

Pandemic effect waning

Over the past decade, the importance of the technology sector to Israel's economy has grown considerably, and this is manifest in any statistic you may care to look at. According to the Bank of Israel's latest report, the proportion of GDP accounted for by the sector rose from 11.1% in 2010 to 12.6% in 2019, and as a proportion of private sector product it grew from 15.1% in 2010 to 17% in 2019.

The sector's contribution is also evident from the export figures. In 2010, technology exports totaled $27.4 billion, 34% of Israel's total exports that year. By 2019, these figures had grown to $45.7 billion and 40%.

How vital the technology sector is to Israel's economy was brought home very clearly in 2020. Unlike most industries, high tech grew faster during the coronavirus pandemic than in previous years. According to analysis by the Bank of Israel, the sector grew by 5.8% last year, more than its average annual growth in the previous decade (4%). Looking specifically at software, we find that growth was even higher last year, at 8.6%, which compensated for other sub-sectors that weakened, such as drugs manufacture (-12.&%) and aircraft manufacture (-4.2%).

Bottom line, the technology sectors strong figures meant that the economy as a whole shrank by a fairly moderate 2.5%, a small decline in comparison with other OECD countries. According to the Bank of Israel, Israel is one of four high-tech oriented countries, together with South Korea, Ireland, and Switzerland, in which the technology sector accounts for more than 10% of GDP. All four countries coped better with the pandemic on an economic level than other developed countries did. While the average for the OECD was 4.7% negative growth last year, Ireland posted positive growth of 3.4%, South Korea had negative growth of 1%, Switzerland had negative growth of 2.9%, and, as mentioned, Israel had negative growth of 2.5%.

The state profits from the rally

The technology sector's recent success is manifest not only in economic growth but also in tax collection. The Ministry of Finance recently reported that revenues from taxes and fees in the first half of this year were NIS 15.9 billion higher than the forecast made in March. Much of the surplus is attributed to the boom in technology stock prices on US stock exchanges.

According to the Ministry of Finance, in 2015-2019, the rise in the Nasdaq Composite Index, on which many Israeli companies are listed, contributed NIS 6.5 billion to tax collection each year. In 2020, this grew to NIS 14.3 billion, and this year the rise in the index is expected to contribute NIS 18 billion to tax collection. A rising Nasdaq index leads to equity offerings by more Israeli technology companies, and hence to more sales of shares by entrepreneurs and employees at higher prices. All this has created many new millionaires, but it also added almost NIS 20 million to state tax revenues in the past two years.

Published by Globes, Israel business news - en.globes.co.il - on August 10, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

High-tech office / Photo: Shutterstock, Shutterstock.com
High-tech office / Photo: Shutterstock, Shutterstock.com
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