Bank of Israel detects no local Silicon Valley Syndrome

Is Israel’s technology sector attracting to it talented workers from satellite sectors such as accountancy, law, the universities, and industry, to the extent that it endangers those sectors? According to the Bank of Israel’s annual report, the answer is apparently negative.

The bank explains, for example, that pay rises to key workers in other sectors in order to keep them and stem a drift of talented employees to the tech sector – a phenomenon known as “Baumol’s cost disease” – cannot be detected in the data.

Demand for workers in high-tech has risen very sharply in the past year, but, according to the Bank of Israel, there is no indication of exceptional growth in job vacancies in other industries competing for skilled personnel. Although it can be supposed that highly productive workers are switching to the technology sector from other sectors, there are no available data supporting that supposition.

The Bank of Israel also finds that another economic pathology known as “Dutch disease”, in which the success of one sector, in this case high-tech, causes the currency to appreciate, to the detriment of other sectors, can be identified in Israel, but the sectors affected are mainly small, low-productivity ones. The pressure making the shekel appreciate comes from two directions: high-tech exports increase the current account surplus, and the large amounts of money raised in the form of venture capital increase affect the balance of payments.

Another kind of Dutch disease effect is the fear of a reversal in the global trend of demand for technology services, and Israeli service in particular. Here too, the Bank of Israel sees no danger, since, unlike natural resources, demand for which is liable to be highly volatile for long periods, technology will remain in high demand, even if demand is occasionally volatile.

“The Silicon Valley Syndrome”, as it is termed by Doris Kwon of Yale University and Olav Sorenson of University of California, Los Angeles, describes a situation in which a successful industry drains talented manpower from other industries, causing them to wither. At the same time, concentration in a certain geographical area, as has happened in Silicon Valley in California, causes real estate prices to rise, making high-quality middle-class workers move elsewhere.

According to the Bank of Israel report, Israel’s high-tech sector employs about a tenth of all wage earners in the economy, and about 15% of private sector workers. The average monthly wage in the high-tech industry last year was NIS 26,000, following a steep rise in the number of core technology jobs: roles requiring a high level of scientific, technical or engineering expertise.

Published by Globes, Israel business news – en.globes.co.il – on March 29, 2022.

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