As the global market downturn and a slowdown in the economy disrupted Israel’s tech ecosystem, demand for workers almost halved in 2022, according to the Israel High-Tech Human Capital report by Start-Up Nation Policy Institute (SNPI) and the Israel Innovation Authority.
The negative trend in the Israeli high-tech job market, which started with the global slowdown last year, has intensified in recent months amid growing uncertainty surrounding the government’s proposed judicial overhaul, according to the Human Capital Report released Monday.
The authors of the report warned that the continued political and social instability may cause a recovery in the global tech industry to bypass the Israeli economy.
At the end of 2022, there were 17,000 open positions in the industry, compared with 32,900 in April of the same year, according to the report. The figure reflects the demand for employees in the high-tech industry. The relatively low number at the end of last year was comparable to the levels seen during the COVID-19 crisis, the report noted.
Overall, the number of employees in the high-tech industry grew by 7.4% in 2022 versus 12% in 2021.
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A breakdown of the 2022 data showed that in the second half of the year, the number of employees in the high-tech industry grew by a mere 1.3%, and in the last quarter, it declined 0.2%.
Last year was rough for Israel’s tech industry, as the uncertainty surrounding borrowing costs and high valuations pushed entrepreneurs and investors into a wait-and-see mode. The financial environment and a slowing global economy saw tech shares take a battering in global markets in the second half of 2022, pushing company valuations down both in the public and private sectors. The market downturn has seen thousands of workers laid off, triggering funding pullbacks and creating a bear market for new tech offerings.
That’s after 2021 saw a flurry of billion-dollar tech companies, known as “unicorns,” raising record amounts of capital and hiring tech talent.
“Beyond the effects of the weak global economy, which have also been weighing on local high-tech companies, over the past four months there is growing political and social uncertainty and instability around the judicial overhaul in Israel,” Start-up Nation Central’s Policy Institute CEO Uri Gabai told The Times of Israel. “The worrisome combination resulted in companies halting recruitment, forego salary updates and a high rate of employees’ layoffs.”
A survey conducted among high-tech companies last month that was cited in the report found that 25% have completely halted hiring, and a similar percentage reported that they plan to continue layoffs, with a third planning to cut over 5% of their workforce. In addition, about a third of the surveyed high-tech companies said they were not planning to make salary updates in 2023.
Earlier this month, the Israel Innovation Authority, a government entity that provides the majority of state grants to local early-stage startups to support disruptive technologies, raised concern about a “splitting” between global and Israeli markets, pointing to a “significant negative gap” between returns of tech stocks traded on the Tel Aviv Stock Exchange and on the Nasdaq in recent months.
Since the beginning of 2023, Israel’s tech index generated zero return, while the Nasdaq 100 index rose by about 20% during the same period, according to the report. Past studies have shown a correlation between the growth of the Nasdaq and the total volume of investments in Israel.
Now that there are initial indications of a global recovery beginning in the high-tech sector, there is concern that the Israeli tech ecosystem will not be part of the rebound if the uncertainty around the judicial overhaul continues to weigh negatively on investor sentiment in the coming months, Gabai said.
“It is out of the ordinary to have a global recovery and Israel will not be part of it,” Gabai said. “However, should this negative trend continue, it will jeopardize the attractiveness and leadership of Israeli high-tech.”
Tech workers protest against the government’s judicial overhaul ‘time is running out for Israeli high-tech,’ in Tel Aviv, on March 23, 2023 (Avshalom Sassoni/Flash90)
In such a scenario, Israeli entrepreneurs and CEOs would need to ask themselves where they could grow their startup or their career, Gabai added.
“Israeli high-tech talent is very high in demand whether in London, Berlin or the US,” Gabai said. “The pessimistic scenario is that we will see companies, CEOs and entrepreneurs leaving Israel in a few months.”
The tech industry, touted as the main growth engine of the economy, generates about 18% of GDP and is responsible for over 50% of exports and about 30% of payroll taxes. In addition, Israel’s high-tech sector employs about 11% of the country’s workforce.
In the first quarter of this year, Israeli tech companies raised $1.7 billion in capital, down 70% from the $5.8 billion in the first three months of 2022, according to a report by IVC Research Center and LeumiTech. The quarter marked the lowest figure in four years. That is after private investments in the local high-tech sector peaked in 2021 with investments of a staggering $26 billion, slumping to around $15 billion in 2022.
“Human capital is the driving force behind Israel’s technological leadership, and unlike other ecosystems that draw talents from around the world, Israeli high-tech relies almost entirely on local talent and educational institutions,” Gabai said.
On the flip side, if the uncertainty would be removed by shelving the judicial overhaul altogether or reaching a compromise that is agreeable to the Israeli public, Gabai sees the Israeli high-tech sector coming out of this crisis in good shape, as it has in the past, since its foundations are solid and companies have buffers from the peak period in 2021.
Another finding of the report showed that during this period of stagnation in the local high-tech industry, companies prioritized preserving their core R&D staff while cutting support and other workers. One out of every three medium-sized companies with 51 to 200 employees, and one out of every five large companies with over 200 employees, only laid off non-R&D employees, according to the report.
The overall slowdown in the high-tech industry presented an opportunity for new employees with junior-level experience to find R&D jobs more easily than in previous years, albeit at a lower salary. During the second half of 2022, there was an increase in the proportion of junior employees in R&D positions both in terms of overall employment and among R&D employees, according to the report. Overall, juniors accounted for 26% of R&D recruitments in the second half of
2022, up from 22% in 2021.
“It seems that many companies chose to continue their development work with less experienced employees, even at the cost of lower productivity,” according to the report.