Labor exports from Palestine to Israel: a boon or bane for the West Bank economy?
Publié en ligne: 17 août 2020
Pages: -
DOI: https://doi.org/10.2478/izajolp-2020-0008
Mots clés
© 2020 Johanes Agbahey, Khalid Siddig, Harald Grethe, Scott McDonald, published by Sciendo
This work is licensed under the Creative Commons Attribution 4.0 International License.
Migration policies have gained considerable attention in recent years (Healy, 2017; Martin, 2017; Scipioni, 2018). From the host country’s perspective, migration policies enable richer economies to attract labor with specific skills and abilities to supplement their stock of human capital (Boubtane et al., 2016), and fill jobs at the bottom of the social hierarchy in which the natives are less interested (Gheasi and Nijkamp, 2017). From the source country’s perspective, remittances by the labor force employed abroad are an important source of income for households, raising not only their current consumption but also their investment capacity with long-run economic growth effects (Donou-Adonsou and Lim, 2016; Lim and Basnet, 2017). While this situation may be beneficial to both the labor-sending and receiving economies, unpredictability of labor mobility policies, especially in the context of political conflict between the two parties, and the attraction of skilled labor into low skill employment may have negative implications for the labor-sending economy. This article investigates using the case of the Israeli labor policies on the West Bank economy.
The labor market in the West Bank is strongly affected by employment opportunities for Palestinians in Israel. In 2018, some 18% of the employed persons in the West Bank were employed in Israel and accounted for some 33% of all labor income (PCBS, 2019); but estimates indicate that wages for West Bank workers in Israel are 20–40% lower than those of Israeli workers for the same jobs (Arnon and Bamya, 2007). Hence, West Bank workers are a relatively cheap source of labor to the Israeli economy. Competition between West Bank and Israeli labor is limited by constraining employment opportunities to sectors offering low-skilled-jobs, especially construction (Miaari and Sauer, 2011) where supplies of Israeli labor are limited (Rosenhek, 2006). However, despite the relatively low wages, employment in Israel is attractive because average wages in the West Bank are even lower (Angrist, 1996).
The labor market in Israel for West Bank workers is an administered market controlled by political decisions taken in Israel. Individual work permits control access to the Israeli labor market. The permits are issued in response to requests from Israeli employers and are conditional upon a security clearance. Thus, the West Bank labor market and economy experience substantial fluctuations when access to the Israeli labor market is changed by legislative fiat. Nevertheless, West Bank workers enjoy a preference in the Israeli labor market over other foreign workers because they have a longer employment history with Israeli employers and are considered more experienced (Arnon and Weinblatt, 2001).
This article explores the implications for the West Bank economy consequent upon changes in the size and composition of Palestinian labor employed in Israel. This article uses a new database (Social Accounting Matrix) (Agbahey et al., 2016) with a detailed representation of labor and the linkages between the Israeli and West Bank labor markets. A computable general equilibrium (CGE) model is employed to assess the complex interactions between multiple agents in many markets and capture the economy-wide effects of changes in Palestinian labor flows to Israel. The model for the West Bank closes a research gap as previous studies either did not account for the multiplier effects of the additional labor income earned in Israel (Bulmer, 2003; Etkes, 2012; Mansour, 2010) or addressed the effects of Palestinian employment in Israel only from the perspective of the Israeli economy (Flaig et al., 2013).
This article is organized as follows. Section 2 reviews the evolution and operation of the Israeli restrictions affecting the access of Palestinian labor to Israel and identifies the role of Palestinian workers in the Israeli economy. Section 3 provides an overview of the West Bank economy in terms of its development, the structure of the economy, and the labor market. Section 4 provides the details about the model and the database, while Section 5 describes the simulations. Section 6 reports and discusses the results, which also includes a subsection on a sensitivity analysis. Section 7 covers the policy implications of this article.
In the aftermath of the Six-Day war in 1967, the Palestinian territories were declared closed military areas with restricted mobility of goods and persons. Later in 1972, the Israeli administration issued general exit orders, allowing free mobility into Israel, East Jerusalem, and between the West Bank and Gaza (Akkaya et al., 2008). This policy of free mobility within the geographical area comprising the Israeli and Palestinian territories was halted in the advent of the first Palestinian uprising in 1987. From 1989 onward, the closure policy was progressively enforced by a series of checkpoints and roadblocks.
For nearly all movement outside their greater area of residence, Palestinians are required to obtain permits to cross the checkpoints. For movements within the West Bank, permit requirements are lower than for movements between the West Bank and Gaza, and from the Palestinian territories into Israel, and East Jerusalem. Requirements for the permits change frequently without prior notice according to Israeli political objectives and perceived security risks (Fischer et al., 2001). Permits for Palestinians are issued for purposes of work, trade, or medical treatment.
The work permit system was first introduced in 1991 during the Gulf war. It requires every Palestinian wanting to work in Israel to have a permit. Work permits are granted to Palestinians who get a security clearance and have in advance a request for employment from an Israeli employer. The conditions for the security clearance are bound to personal status criteria. At the height of the second Palestinian uprising (2001–2004), the criteria required the Palestinian worker to be married with children, and aged more than 35 years (Etkes, 2012). As of 2014, the main criteria became to be married and aged more than 24 years (CoGAT, 2014). During the violent episodes of the conflict, Israel imposed at times complete closures (Rubin and Ihle, 2016).
The work permits also restrict the number of Palestinian workers in the Israeli economy and limit their employment opportunities to specific sectors through a quota system. Most Palestinians employed in Israel are confined to low-skill sectors (Miaari and Sauer, 2011). Between 2010 and 2016, on average 56% of Palestinians working in Israel were employed in the construction sector (PCBS, 2011, 2012a, 2013, 2014, 2015, 2016a, 2017). The number of work permits issued is based neither on the supply nor on demand for Palestinian labor in the Israeli economy. As a result, a black market for Palestinian labor in Israel developed mostly in the West Bank. Between 2005 and 2015, on average 38% of Palestinian workers in Israel were unpermitted (PCBS, 2016b).
Between 1972 and 1987, Israel implemented a customs union and a free trade policy within the geographical area comprising Israel, the West Bank, and Gaza (Missaglia and Valensisi, 2014).
Moreover, Palestinian labor was granted free access to the Israeli market. Nearly one-third of Palestinian workers were employed in Israel through the 1970s and 1980s (UNCTAD, 2012). This economic integration was asymmetric; all decisions were made by Israel and predominantly designed to serve Israeli interests (Dessus, 2004).
While Israeli products benefitted from free access to the Palestinian markets, Palestinian exports to Israeli markets were subject to strict regulations. The development of productive capacity in the Palestinian economy was held back by restrictions and regulations of different sorts (Botta, 2010). Palestinian entrepreneurs were confronted with uncertainty in legal and tax frameworks as well as with limitations on the use of water and other natural resources (Dessus, 2004). Israeli authorities also discouraged Palestinian initiatives that could compete in the Israeli market with existing Israeli firms (UNCTAD, 2009). Moreover, Palestinian production for the domestic market was undercut by economies of scale realized by advanced Israeli manufacturers (Naqib, 2003). Subsequently, the Palestinian economy evolved into a captive market for Israeli products and developed structural trade deficits with Israel.
The Palestinian trade deficit in goods amounts on average to 34% of GDP over the period 2008–2018 (PCBS, 2020). A large part of that deficit is with respect to Israel and is primarily financed by Palestinian labor income in Israel (UNCTAD, 2009). Therefore, the Palestinian economy developed a high dependency on Israeli labor markets. Palestinian employment in Israel has improved household income as most of the income earned in Israel has been repatriated and consumed domestically (UNCTAD, 2016).
The dependency of the Palestinian territories on Israel is illustrated by the evolution of the real Gross National Income (GNI) per capita and the unemployment rate over different periods of the conflict. Figure 1 shows a correlation between the real GNI per capita in the Palestinian territories and the number of closure days over time. While the Israeli closures are not the only factor affecting the development of the Palestinian GNI per capita over that period, there is a statistically significant (at 1%) negative correlation (−0.88) The (Pearson) correlation coefficient (r) is −0.88 and the
Figure 1
Evolution of Palestinian real GNI per capita (in constant 2015 US$) and the number of closure days, 1996–2016.
There is also a significant (at 1%) and negative correlation (−0.82) between the share of Palestinian employment in Israel and the unemployment rate in the West Bank (see Figure 2). The (Pearson) correlation coefficient (r) is −0.82 and the
Figure 2
Evolution of the share of Palestinians employed in Israel in Palestinian total employment and the unemployment rate in the Palestinian territories, 1996–2016.
The high unemployment rate in the Palestinian territories since the tightening of the Israeli restrictions pinpoints the limitation of the domestic market to absorb the growing labor force. In response to this problem, the PNA evolved into a fast-growing public sector with employment in the public sector serving as a safety net to fill the vacuum left by reduced employment opportunities in and the slow development of the private sector (World Bank, 2011). As the payroll and activities of the public sector are largely supported by the international aid, the Palestinian economy developed a new dependency on international aid.
This article uses a single country CGE model, STAGE-2, The model code and all relevant equations are documented in McDonald (2015). The full set of the equations including all model modifications described in section 4.2 can be found in Annex 1.
The behavioral relationships in this model are a mix of nonlinear and linear relationships that govern how the model’s agents respond to exogenous shocks. A social accounting matrix (SAM) provides the database to which the model is calibrated. Domestic agents— activities, households, (incorporated business) enterprises, government, and investment— consume composite aggregates of domestic and imported commodities based on a constant elasticity of substitution (CES) formulation (Armington, 1969). The distribution of domestically produced commodities among domestic demand and exports is governed by relative prices on these markets, using constant elasticity of transformation functions, which reflects imperfect product transformation. Household demand is specified as a linear expenditure system.
For this article, the STAGE-2 model is extended to depict particular features of the West Bank economy. First, a multiple trade partner specification is added to separate Israel from other trade partners to capture and simulate the interactions between the West Bank and Israeli labor markets and the economic links between the two economies: Israel is the main trade partner of the West Bank. Second, the domestic production module is extended from a three-stage production process to a seven-level production process that reflects the composition of the labor force in the West Bank. At the first level, aggregate intermediate inputs and value-added generate the outputs using CES technology. At the second level, aggregate intermediate inputs are produced using Leontief technology, while the CES technology is used to form aggregate value-added from aggregate labor, capital, and land. At the third level, and below, CES technologies are used to combine different categories of labor. The model modifications are documented in the model code (Annex 1) and an illustration of the extended production nest is presented in Annex 2.
In this article, the labor force is defined as consisting of those individuals willing to make their labor available for producing goods and services that are destined for the market, whether for sale or barter (ISWGNA, 2009). Hence, the labor force comprises the employed and the unemployed. The Palestinian Central Bureau of Statistics (PCBS) estimates the unemployment rate for 2011 (the reference year of the study) at 17%. In the model, a surplus labor surplus specification See Agbahey et al. (2020) for a review of labor market specifications.
The factor market equilibrium condition in the model (equation (1)) identifies the two groups in the labor force, that is, the employed and the unemployed. The employed are further mapped to the place of work, reflecting the participation of West Bank labor in both the domestic and Israeli labor markets.
where
The size of unemployed labor in each market segment is determined based on official data from the PCBS (2012b). A surplus labor specification with a switching regime is chosen. Accordingly, the labor supply function has two segments, a perfectly elastic (horizontal) one implying that additional workers can move into production at fixed real wages as long as there is unemployed labor, and a perfectly inelastic (vertical) one reflecting full employment once the pool of unemployed labor is empty. Equation (2) allows variable
The factor markets are segmented among sectoral groups (see Annex 2): this accounts for labor heterogeneity and ensures that workers with notionally identical characteristics can earn different wages depending on their sector of employment. Moreover, the segmentation approach implies that workers can respond to wage changes and move between activities within a market segment, but they cannot move across segments. This approach reflects short to medium-term adjustment processes in the West Bank’s labor markets.
Macroeconomic closures are set up to reflect the economy of the West Bank. For trade, the small country assumption of fixed import and export prices is adopted; Israel is the West Bank’s main trading partner. A balanced macro closure is imposed; this is a “neutral” assumption that fixes the shares of private and government consumption and investment in total absorption. The saving and investment account is cleared by equiproportionate changes in household and enterprise savings rates. The government deficit (saving) is fixed, and the account is cleared by equal multiplicative changes in direct tax rates. The CPI is the numéraire, meaning that transfers and wages are in real terms.
The exchange rate has been fixed because the currency used in the West Bank is the Israeli Shekel. The exchange rate is overwhelmingly determined by events in the Israeli economy and is exogenous to the West Bank economy. The current account is fixed to reflect the fact that the West Bank’s trade deficit is exogenous and that the West Bank is dependent on foreign transfers that reflect a sustainable deficit of the current account. The rest of the world account is cleared by equal multiplicative changes in the VAT rates, which requires that total absorption adjusts. This is not a common closure setting but reflects the “reality” that absorption in the West Bank economy adjusts in response to exogenous factors.
The analysis of interactions between the Palestinian and Israeli economies requires a database with a detailed representation of labor that captures physical labor quantities and wages per labor type and labor market because of the complexity of the labor movements between the two economies. Other elements of the database that need to be represented to investigate the distributional effects of changes in labor mobility are disaggregated household groups, production sectors, and commodity groups.
The SAM compiled for this article meets these requirements and is unique in various aspects. The SAM uses the most recent official data available, mainly from the PCBS, and reflects the West Bank economy in 2011. The sectoral composition of GDP in the West Bank economy in 2011 is presented in Annex 3.
There are 20 household groups classified based on income quintile (measured by expenditure per adult equivalent) and socioeconomic characteristics of their economically active members. Finally, the SAM has a multi-product-activity setup with 47 commodity groups produced by 36 activities. The SAM focuses exclusively on the West Bank economy, which is currently the only Palestinian territory with workers employed in Israel.
A counterfactual scenario returning the Palestinian employment in Israel to its pre-intifada level of 1999 (“
The scenario assumes that the structure of Palestinian labor in Israel is unchanged regarding its skill composition and permission status compared to the base period. The assumption of unchanged composition regarding the permission status is justified by the positive correlation between the number of work permits issued by the Israeli administration and the number of unpermitted Palestinian workers in Israel (PCBS, 2016b). This positive correlation can be substantiated by the fact that an increase in the number of work permits is correlated with lower conflict and relaxed security controls allowing the unpermitted workers to take employment opportunities in the Israeli market. The assumption of unchanged skill composition is justified by the demand for West Bank labor in Israel being predominantly in low-skill occupations (Miaari and Sauer, 2011).
The shock is implemented through the exogenous parameter
Number of Palestinian workers in Israel in the base (physical units) and in the scenarios (% change as compared to the base)
| Core scenarios | Sensitivity analyses | ||||||
|---|---|---|---|---|---|---|---|
| (unit = 8 hours) | (%) | (%) | (%) | (%) | (%) | (%) | |
| Low-skilled ineligible males | 17,364 | +39.4% | +26.4% | +35.7% | −35.7% | ||
| Low-skilled weakly eligible males | 19,065 | +49.7% | +39.4% | +26.4% | +35.7% | −35.7% | |
| Low-skilled highly eligible males | 29,128 | +35.7% | +49.7% | +39.4% | +26.4% | +35.7% | −35.7% |
| Low-skilled females | 1,162 | +35.7% | +35.7% | +39.4% | +26.4% | +35.7% | −35.7% |
| High-skilled ineligible males | 3,123 | +35.7% | +124.5% | +35.7% | −35.7% | ||
| High-skilled weakly eligible males | 1,254 | +35.7% | +49.7% | +124.5% | +35.7% | −35.7% | |
| High-skilled highly eligible males | 2,559 | +35.7% | +49.7% | +124.5% | +35.7% | −35.7% | |
| High-skilled females | 32 | +35.7% | +35.7% | +124.5% | +35.7% | −35.7% | |
| Total Palestinian workers in Israel | 73,687 | +35.7% | +35.7% | +35.7% | +35.7% | +35.7% | −35.7% |
| Total Palestinian labor force | 717,855 | +5.0% | |||||
In the sensitivity analysis section of the results, five variants of the counterfactual scenario are discussed. The first one assesses the effect of the same shock with the only difference being that the additional workers entering the Israeli market are all eligible for a work permit (“ There is a consensus among experts from the Palestinian Central Bureau of Statistics (PCBS) that an increase in the number of Palestinians working in Israel will incentivise people outside the labor force to start looking for employment. This assessment is supported by the low participation rate in the labor force, which stands at 46% in 2011 for the West Bank. This rate is especially low among women (19%) as compared to men (71%) (PCBS, 2012a). Evidence for a growth in the Palestinian labor force in case Israel grants more work permits for Palestinians is also found in Etkes (2012), who shows that part of new permit holders come from outside the labor force.
The increased demand of Palestinian labor in the Israeli economy has implications not only in the West Bank labor markets but also in other parts of the economy. This result section starts by discussing the effects of the
The increased demand for Palestinian labor in Israel triggers four effects. The first is a movement of labor out of unemployment within the West Bank into Israeli labor markets. The second is a switch from employment in the West Bank domestic market into employment in Israel. The third is a replacement of workers who left the domestic market to work in Israel by labor previously unemployed in the West Bank. The fourth is an increase in domestic employment due to the feedback effects of increased labor income from Israel. The additional income allows households to demand more goods and services, which translates into increased import demand as well as increased demand for domestically produced commodities. The latter stimulates domestic production leading domestic activities to absorb more labor out of unemployment.
The results show that out of the 26.3 thousand Palestinians who start working in Israel, 25.8 thousand, corresponding to 98%, were previously unemployed. About 500 workers, corresponding to 2% of the additional demand in Israel, switch between the domestic market and the Israeli market. The feedback effects of increased labor income from Israel on the domestic activity take 20.0 thousand more Palestinians out of unemployment to join the domestic labor market, hence overcompensating those who switch from employment in the domestic market to working in Israel.
The finding that some workers exit the domestic market to start employment in Israel indicates that the pool of unemployment in some market segments is emptied. Figure 3 shows that this is the case only in the market segment associated with the construction sector. This finding needs to be put into perspective with the construction employing more than half (56%) of all Palestinians employed in Israel. As the shock keeps the composition of Palestinian labor in Israel the same as in the base period, the extra demand of construction workers is larger than the pool of unemployed labor in that market segment in the West Bank. Consequently, wage rates in the construction sector rose by 10%.
Figure 3
Number of unemployed (thousands, absolute and percentage changes) in the Base and the PreInti scenarios.
Figure 3 also shows that the total pool of unemployed labor is reduced by 37%, compared to its initial level. This means a drop in the unemployment rate in the West Bank from the initial 17% to 11% of the labor force. Percentage change results are depicted on the right-hand axis.
Table 2 shows that from the 46.0 thousand unemployed getting into employment, 56% start working in Israel, and 44% start working in the domestic economy. From a gender perspective, more men move out of unemployment to join the Israeli market, while most women moving out of unemployment finds a job in the domestic market. Similarly, while most low-skilled workers, who move out of unemployment start working in Israel, most high-skilled workers moving out of unemployment start working in the domestic market. These findings are consistent with the empirical evidence that the domestic market offers more suitable employment opportunities for high-skilled workers and for women (Etkes, 2012). These results are driven by the composition of the Palestinian labor employed in Israel in the base period, which is dominated by men working in low-skill sectors.
Changes in employment status (worker and percentage) among labor categories
| Moving out of unemployment to employment in Israel | Moving out of unemployment to employment in the domestic market | Total moving out of unemployment | |
|---|---|---|---|
| Aggregate labor | 25,778 (56%) | 20,009 (44%) | 45,787 (100%) |
| Male population | 25,352 (63%) | 15,038 (37%) | 40,390 (100%) |
| Female population | 426 (8%) | 4,971 (92%) | 5,397 (100%) |
| Low-skilled | 23,452 (69%) | 10,415 (31%) | 33,866 (100%) |
| High skilled | 2,327 (20%) | 9,594 (80%) | 11,921 (100%) |
The increased labor from Israel and the additional income generated in the domestic market by workers who were previously unemployed results in household income increasing by 9.4% on average. Due to their higher income, households demand more goods and services, with household consumption increasing by 7.0% on average (Figure 4). Household consumption increases more for manufacturing products, utilities, and services because these commodities have a higher income elasticity of demand.
Figure 4
Change in household consumption and in domestic output (in%).
The increased household demand is met by increasing imports and domestic production. Domestic output increases in all sectors, except manufacturing (Figure 4). This de-industrialization is related to the “Dutch disease” effects of Palestinian employment in Israel. The increased employment in Israel and the subsequent large inflow of income from Israel causes a real appreciation of the domestic currency. Consequently, the West Bank export industry is negatively affected, as it loses competitiveness in international markets. This leads to a decline in manufacturing output, as the manufacturing sector is the leading export sector in the West Bank. In the base period, manufacturing contributed 63% to the total export of goods and services and is the most export-oriented sector with 72% of the domestic output being exported (Annex 5 presents shares of commodity groups in total exports and shares of exports in domestic output in the West Bank). A collateral effect is the increase in factor prices with wages, capital rent, and land rent rising respectively by 2.5%, 5.6%, and 0.7% on average.
“Dutch disease” symptoms and de-industrialization in connection with inflows of labor income from abroad/remittances were also reported in Asian developing countries by Hien et al. (2019), in Latin American countries by Amuedo-Dorantes and Pozo (2004) and in South Pacific countries by Laplagne and Brazys (1997). The mechanism at play is the expansion of the economy resulting from large inflows of foreign currency. This mechanism was first described for the natural resource boom in the Netherlands. Whether the cause of the Dutch disease symptoms is the discovery of natural resources or the sharp increase in natural resource prices, foreign assistance, foreign direct investment, or workers’ remittances, the adverse macroeconomic effects are similar (Rabbi et al., 2013). The theoretical paradigm to explain how financial capital inflows put an upward pressure on the real exchange rate goes back to the Salter model of a dependent economy producing traded and nontraded goods (Corden and Neary, 1982). According to this paradigm, there are two impact channels. First, the
A factor affecting the Dutch disease symptoms in labor-sending economies is the level of exports. Hien et al. (2019) show that overshooting of the real exchange rate and declining competitiveness of the tradable sectors are particularly observed in countries with low ratios of exports to GDP. This factor also plays a role in the West Bank where the ratio of exports to GDP is low (19.9% in 2018) compared to the world average (30.1% in 2018) (World Bank, 2020). Finally, Acosta et al. (2009) showed that countries where labor income from abroad and remittances are poured into final consumption instead of investment, experience more damaging effects of the Dutch disease. This is the case of the West Bank where the unresolved situation of conflict creates a high degree of uncertainty discouraging investments (Missaglia and Valensisi, 2014; Botta, 2010).
Household income increases by 9.8% on average and household expenditure increases by 7.0% with the difference between household income and expenditure being saved or transferred. As a measure of household welfare, the equivalent variation The equivalent variation is defined as the amount of compensation, that must be added (subtracted) to (from) the household’s initial income, to leave it as well off as under the combined price and income changes. The formula for the equivalent variation is derived from Blonigen et al. (1997) and is presented in Annex 6.
Figure 5
Welfare effects (Equivalent Variation as a share of Base household expenditure).
Changes in the macroeconomic aggregates show that export supply decreases by 4.8% at constant domestic prices, while import demand increases by 5.9%. The decline in the real value of export supply is due to the increased cost of production in the domestic economy and the real appreciation of the domestic currency by 2.5%. Subsequently, Palestinian exports become less competitive in international markets. Moreover, a higher share of domestic output is now sold in the domestic market as the consumer price in the domestic market increases relative to the export price. This finding is in line with Astrup and Dessus (2005) who suggested the existence of a trade-off in the Palestinian economy between exporting more labor and more goods. The increase in the real value of import demand stems from the increased household income driving overall demand up.
Increasing household demand leads to absorption in the West Bank to increase by 6.0% in real terms. The combined effects of the various changes in the economy are reflected in a GDP increase by 3.6% at constant domestic prices. This means that an increase in Palestinian employment in Israel positively affects the West Bank economy. This finding is consistent with Bulmer (2003), who suggests that an increase in labor income from Israel leads to welfare gains and positive growth for the West Bank economy.
The results of the first three sensitivity analyses where the composition of the Palestinian labor in Israel is modified, show only very small differences in macroeconomic variables as compared to the scenario
Changes in macroeconomic, household and labor force indicators compared to the Base under the sensitivity analyses and the scenario PreInti
| Indicators | Core Scenario | Sensitivity analyses | |||||
|---|---|---|---|---|---|---|---|
| Macroeconomic indicators | Change in real GDP | −3.98% | |||||
| Change in domestic output | −2.92% | ||||||
| Change in import demand | −5.62% | ||||||
| Change in export | −5.07% | −5.37% | −5.05% | −5.21% | −4.81% | ||
| Household indicators | Change in household consumption | −6.26% | |||||
| Change in household income | −9 23% | ||||||
| Change in household welfare | −5.35% | ||||||
| Labor force indicators | Change in the number of unemployed | −36.96% | −37.08% | −36.79% | −37.44% | −30.08% | |
| Change in the number of employed in the domestic West Bank market | −4.03% | ||||||
The assumption that improved access to the Israeli market stimulates labor force participation in the West Bank with an increase in labor supply by 5% (
Finally, the results of the scenario with reduced Palestinian labor demand in Israel are opposite to those of the main scenario. The most affected sector is the construction sector where the scale of unemployment more than doubles. This result reflects the inability of the domestic West Bank market to absorb the labor no longer employed in Israel. The loss in factor income from Israel triggers a reduction in household incomes, reducing import demand and domestic output. As domestic demand for domestically produced commodities decreases and the domestic currency experiences a real depreciation, export supply increases, but household welfare decreases, and the economy shrinks by 4.0% in real terms.
This article contributes to the understanding of the economic implications of temporary migration where migrant labor from low-income economies is employed in “low-skill” jobs in high-income economies. The article uses a CGE model calibrated to a new SAM for the West Bank to examine the operation of dual labor markets. The scenarios investigate the effects of changes in the size and composition of Palestinian labor employed in Israel on the West Bank economy. From the analyses, specific conclusions regarding the situation in the West Bank case are derived as well as general conclusions.
Specifically, a return of Palestinian employment in Israel to its
The limited development options for the West Bank, and its relative isolation due to Israeli control over the external borders and the Israeli restrictions in place, may make seeking increased employment options for West Bank labor in Israel attractive to the PNA, but will come at the cost of “de-industrialization” and reduced exports of manufactured goods.
While the magnitude of the results is specific to the implications of Israeli labor market policies on the West Bank economy, the insights into the implications of labor policies in host countries on the economies of source countries are general and have a wider applicability. Exporting more labor may result in nontrivial benefits for labor-sending households and economies. However, achieving those benefits may involve costs, as substantial inflows of remittances can trigger a real appreciation of the domestic currency and negatively affect the competitiveness of the export sector.
While the PNA may find attractive to seek increased employment of West Bank labor in Israel, it needs policy instruments to counter the “Dutch disease” effects of the labor income inflows. In the absence of control over monetary policies, the PNA may resort to fiscal policy instruments to direct the labor income from Israel to investments instead of final consumption. For example, the PNA may levy a tax on West Bank workers employed in Israel. This tax policy may be administered at feasible costs, as most of the West Bank workers in Israel commute daily through checkpoints between the West Bank and Israel. The tax would generate revenue for the PNA that could be invested to support domestic enterprises in developing their productive capacity and upgrading production technologies to improve their competitiveness in the international markets. Further research would be needed to investigate the effects of such a taxation scheme on the West Bank economy and labor market dynamics.
In countries where such a taxation scheme cannot be implemented, policymakers may apply other monetary or fiscal policies to counter the “Dutch disease” effects, depending on the specific features of their economies and labor market.