AI is splitting Israel’s high-tech industry in two
Software companies are cutting jobs and slowing hiring while demand for chips, computing infrastructure and deep tech is driving expansion elsewhere in the sector.
The wave of layoff reports from Israel’s high-tech sector in recent weeks has created the impression of a deepening crisis. But new data covering the first half of 2026 paints a more complicated picture: At the macro level, employment in the sector remains remarkably stable, even as a historic shift is taking place beneath the surface.
A comprehensive survey by the Israel Innovation Authority and Zviran, conducted in the second half of June among 210 companies employing approximately 130,000 people, shows that the technology sector is increasingly fragmenting. Software companies are undergoing a wave of efficiency measures and workforce reductions amid the rapid adoption of artificial intelligence, while hardware, chip and deep-tech companies continue to expand and hire at a rapid pace.
The companies surveyed represent more than 80% of employees at Israeli technology companies with more than 50 workers. During the first half of the year, they hired an average of 8% of their workforce. At the same time, the layoff rate was 2.8%, while 4.3% of employees left voluntarily. Taken together, the figures point to a relatively stable overall workforce, despite considerable movement within it.
The findings are broadly consistent with the wider labor market. Some 18,000 vacancies were recorded in the technology sector, compared with approximately 15,000 job seekers, while the number of people employed in high-tech increased by about 7% in the first quarter of 2026, according to the Central Bureau of Statistics.
But the overall figures obscure a growing divide between different parts of the industry.
The most striking gap in the survey was between software and hardware companies. In software, the layoff rate jumped to 6.6% in the first half of the year, more than twice the industry-wide average. The Innovation Authority and Zviran attributed the increase mainly to the impact of the artificial intelligence revolution and intensifying competition.
Hardware companies, by contrast, recorded a layoff rate of just 1.1%, while the medical and pharmaceutical industries recorded a rate of 2.7%.
The divergence reflects, in part, the surge in global demand for computing infrastructure, chips and advanced hardware needed to power AI systems. While AI is putting pressure on some software business models and the workers who support them, the same technological shift is creating demand for the physical infrastructure on which the AI boom depends.
The survey also reveals significant differences based on company size and ownership.
The highest layoff rate was recorded among medium-sized companies employing between 50 and 200 people, where layoffs reached 8.7% of the workforce, more than three times the industry average. These companies account for nearly half of the companies that carried out extensive layoffs in Israel and are particularly exposed to cash-flow pressures, rising employment costs and exchange-rate fluctuations.
The strong shekel is adding another layer of pressure for Israeli companies whose revenues are largely denominated in foreign currencies while much of their workforce is based in Israel. Some 17.6% of companies that carried out broad layoffs and 28% of companies that reduced hiring cited exchange rates as a direct factor in their decisions.
Israeli growth companies with international operations also recorded higher layoff rates than the Israeli development centers of multinational corporations, highlighting the different pressures facing locally headquartered companies and global technology giants.
The outlook for the remainder of 2026 is considerably more subdued.
More than one-third of high-tech companies expect employment to decline during the second half of the year, nearly twice the share recorded in the previous survey. Planned hiring has also weakened: The average planned hiring rate fell from 7.2% in the first half of the year to 5.9% for the second half.
At the same time, the planned layoff rate among companies expecting to reduce their workforces rose from 4.1% to 6.4%.
The figures suggest that the stability seen in the first half of the year should not necessarily be interpreted as an all-clear for the sector. Companies are becoming more cautious about expanding their workforces even as employment remains broadly stable.
And increasingly, artificial intelligence is part of that calculation.
AI is not yet the dominant direct cause of layoffs. Only 7% of companies identified it as the main reason for workforce reductions, while business efficiency remains the leading factor.
But its influence on workforce planning is growing rapidly.
The share of companies reporting widespread implementation of AI in their products rose from 21% to 30% in just six months. Meanwhile, the proportion of companies that reduced hiring after implementing AI tools tripled, from about 3% to approximately 10%.
Perhaps more significantly, half of the companies planning layoffs said new technology was influencing their decisions, compared with less than one-third in the previous survey.
That suggests AI may be reshaping the labor market well before it produces a dramatic decline in the total number of technology workers. Companies are changing what they hire for, how many people they need and where those employees need to be deployed.
Dror Bin, CEO of the Innovation Authority, has described the shift not as a retreat of Israeli high-tech but as a rapid structural transformation. The industry is not necessarily becoming smaller; rather, the composition of demand is changing.
That change could prove painful for workers whose skills are concentrated in parts of the software industry facing automation and greater competitive pressure. At the same time, it could create opportunities in hardware, chips and deep tech, where demand is rising.
The transition could also change the structure of Israel's technology industry itself. As AI tools lower the barriers to software development, smaller teams may be able to build products that previously required much larger workforces. That could produce leaner software companies while freeing capital and talent for other parts of the technology ecosystem.
For now, the headline numbers tell a story of stability. The underlying data tell a different story: Israel's high-tech workforce is being reshaped, with AI accelerating a migration of demand from some parts of the industry toward others.
The question for the coming years is therefore less whether Israeli high-tech will employ fewer people than whether the workers and companies that emerge from this transition will have the skills and capital required for the next phase of the industry.
