The study provides circumstantial evidence for the short-run impact of permits for employment in Israel on the Palestinian labor force in the West Bank. It utilizes a database that combines the Palestinian Labor Force Surveys with Israeli administrative data on employment permits at the governorate level. Merging the two types of data makes it possible to quantify the changes in employment status and location (i.e. unemployed, employed in Israel, employed in the West Bank, etc.) and in the return to schooling that coincided with changes in the number of permits.
The paper provided evidence that an increase of a 100 employment-permits in Israel in a West Bank governorate coincided with:
An increase in employment and a reduction in unemployment among qualified (married 30–45 year-old) unskilled males: The cross section estimates point that the total employment in the Palestinian and the Israeli economies increased by 86 qualified males, and the employment in the Israeli economy increased by 50 qualified males.20 The panel estimations point that the above increase in permits coincided with an increase of 60 qualified males who started working, of whom 42 were unemployed in the previous period.
A switch of employment from the West Bank to the Israeli economy by about 19 qualified (30–45 year-old) males – About half of the Palestinian permit holders who switched from employment in the Palestinian economy in 2007 to the Israeli economy in 2008 were employed in the Palestinian construction industry and presumably had relevant experience for employment this industry in Israel.
No replacement of non-permitted workers by permitted workers: An increase in the number of permits is positively correlated, though only weakly, with an increase in the number of non-permitted workers employed in Israel. This finding
20 The reasons for the increase of merely 50 qualified males employed in the Israeli economy (including the settlements) when the number of permits in Israel (only) include different geographical and period definitions and plausible misreporting either in the statistical or in the administrative data.
Section V provides further details.
seems to negate the common working-assumption that permitted workers replace non-permitted workers.
Erosion of the return to schooling: The increase in the number of permitted unskilled workers in Israel raises the wages of unskilled Palestinians. Since this is not accompanied with a similar wage increase for skilled Palestinians, the return to schooling is eroded by 13 percent21 when 100 permits are granted to the above illustrative governorate. There is also evidence of an increase in the wages of unskilled workers in the internal Palestinian labor market which might adversely affect Palestinian employers.
Notably, unskilled Palestinians are the beneficiaries of any positive effects of an increase in the number of employment permits, i.e. they will have a greater likelihood of employment and a higher wage. There is no evidence that permits had any significant effect on the employment or wages of skilled Palestinians. This is consistent with Mansour (2010)’s finding for the early 2000s and can be ascribed to the manual labor jobs in which Palestinians are employed in Israel.
The above results point to the trade-off between the immediate benefits and and long-term adverse effects of employment in Israel for the Palestinian economy; an increase in the number of work permits leads to an immediate improvement in the employment status and wages of unskilled Palestinians though it erodes the incentive to invest in human and possibly physical capital, which are the engines of modern growth.22 Hence, the results of the micro-econometric analysis using a new source of data confirm the assumptions of Schiff (2004) and Astrup and Dessus (2005) who highlighted the above tradeoff. In fact, Schiff claimed that employment in Israel harms Palestinian productivity.
Schiff (2004) suggested that the Palestinian government impose a fee on employment in Israel in order to moderate the tradeoff between short-term benefits and long run growth. This would reduce the very large wage premium of Palestinian workers in Israel and thus prevent both the erosion of the return to schooling and the upward pressure on wages inside the Palestinian economy, which might reduce profitability of Palestinian enterprises. To the extent that Palestinian labor has a
21The return to a year of schooling drops from 5.8 percent when no permits are available to 5 percent when 100 permits are granted to males in the illustrative governorate.
22 In addition, a reduction in the return to schooling is likely to enhance population growth at the expense of schooling to the extent that Palestinian fertility follows the standard Beckerian quantity-quality pattern, i.e. a low return to schooling induces parents to prefer more but less-educated offspring over fewer but better-educated ones. This argument is modeled by Azarnert (2011).
certain amount of market power in the Israeli labor market, the fee could also increase total Palestinian revenue from employment in Israel.
In contrast to Schiff's recommendation, Palestinian workers in Israel rarely pay income tax for their reported income is typically below the taxable income threshold in Israel (about NIS 4,700 as to 2011). Apparently, such income, which is significantly higher than the average monthly wage in the Palestinian economy, would be taxed in the Palestinian economy. This discrepancy is evident in the Palestinian income tax data: in 2010 about USD 140 Million were levied from workers in the West Bank while merely USD 0.5 Million were collected from workers in Israel.23 De-facto, this situation generates tax incentives for Palestinian workers to seek employment in Israeli economy rather than in the Palestinian economy as suggested by Schiff. This tax incentive could harm both Palestinian employers and unskilled Israeli employees.
Another policy tool, i.e. the age restriction on employment in Israel – which moderates the tradeoff between immediate benefits and long-run harm to the Palestinian economy – is already in place. This policy was instituted by Israel for security reasons, but has beneficial economic side effects. As a result of this policy, young Palestinians are not diverted from investing in human capital24 which will be productive in the future while at the same time older Palestinians, who are less likely to accumulate human capital, benefit from employment in Israel. In addition, Nandi and Di Maio (2010) provided evidence that offspring of Palestinians who are employed in Israel were more likely to stay in school and to delay entering the labor market in comparison to those who ceased to work in Israel. Therefore, employment of older Palestinians in Israel may be both beneficial in the short run and to a certain extent even productive for human capital accumulation, with little harm in the long run.
We believe that the wise management of Palestinian employment in Israel using tools beyond the number of permits – such as fees, age restrictions, managed geographic distribution – could stimulate the Palestinian economy while reducing the risks to its long-term development.
23Palestinian MOF budget reports of December 2010, Table 5.
http://www.pmof.ps/en/news/plugins/spaw/uploads/files/15012011_eng.html
24Employment in Israel can divert young Palestinians from investing in human capital both directly due to foregone income during the years of schooling and indirectly by reducing the lifetime return to schooling.
Data Sources
Palestinian Labor Force Surveys (1999–2008). According the data
purchasing agreement: "The Palestinian Central Bureau of Statistics granted the researchers access to relevant data in accordance with license no.
SLN20091117-07, after subjecting data to processing aiming to preserve the confidentiality of individual data in accordance with the General Statistics Law – 2000. The researchers are solely responsible for the conclusions and inferences drawn upon available data.”
Employment Permits in Israel (January 2005 to June 2008): Matash (Ministry of the Interior).
Permits for Employment in the Settlements (January 2005–June 2008):
Israeli MOD, Coordinator of Governoment Activities in the Territories Bibliography
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Angrist, Joshua D. (1996). "Short-Run Demand for Palestinian Labor" Journal of Labor Economics, 14, No. 3, 425-453.
Antonio Ciccone, Elias Papaioannou (2009). "Human Capital, the Structure of Production, and Growth" Review of Economics and Statistics, 91, No. 1, 66-82.
Aranki, Ted Nabil (2004) "The Effect of Israeli Closure Policy on Wage Earnings in the West Bank and Gaza Strip" Working Papers from Örebro University, Swedish Business School.
Astrup, Claus , and Sebastien Dessus (2005) "Exporting Goods or Exporting Labor?: Long-term Implications for the Palestinian Economy," Review of Middle East Economics and Finance, 3, No. 1, 39-61.
Azarnert , Leonid V. (2011) "Guest-Worker Migration, Human Capital and Fertility" Cesifo Working Paper No. 3429.
Becker, Gary S., Edward L. Glaeser and Kevin M. Murphy (1999) "Population and Economic Growth" The American Economic Review 89, No. 2, Papers and Proceedings of the One Hundred eleventh Annual Meeting of the American Economic Association. 145-149.
Benmelech, Effi, Claude Berrebi and Esteban Klore (2010). "The Economic Cost of Harboring Terrorism" Journal of Conflict Resolution, 54, No. 2, 331-353.
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From Malthusian Stagnation to the Demographic Transition and beyond" The American Economic Review, 90, No. 4, 806-828.
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economic return to schooling for 28 countries, Labour Economics, 9, No. 1, 1-16.
Appendix A: Permits for Employment in Israeli Settlements and Industrial Zones in the West Bank
The employment of Palestinians in Israeli settlements and industrial zones in the West Bank is regulated by a mix of Jordanian and Israeli labor laws, as well as military regulations. Unlike the permits for employment in Israel, there is no quota on employment permits for the settlements, nor are they subject to the abovementioned age and personal status restrictions (e.g. being married and above the age of 29).
Similarly, the Israeli employers in the settlements are not required to submit reports on work hours and wages to the Israeli authorities, who in turn do not issue wage slips, as they do for Palestinians employed in Israel. Thus, we can measure Palestinian employment in the settlements using the number of permits granted without taking into consideration whether they are utilized or not. However, the data on these permits is less likely to reflect actual Palestinian employment than the data on utilized permits for employment in Israel.25 Another shortfall of the permit data for the settlements is the lack of systematically recorded data on permits for employment in the Jordan Valley, which is therefore omitted from the analysis
The personal characteristics of the holders of settlements-permits reflect the different criteria for getting a work permits in Israel and the criteria for a employment-permit in the Settlements. Many settlement-permit holders are bachelors.
25 A low utilization rate is a plausible explanation for the gap between the number of Palestinians who reported to the PCBS that they were employed in the settlements in the previous week (about 10 thousand in 2010 Q2) and the number of permits issued to work in the settlements (about 21 thousand in that quarter).
In addition, and the age profile of holders of the settlements-permit mirrors the age-profile of the holders of the Israel-permits: the share of young settlements-employment-permits holders is large, and it declines with age among Palestinians older than 30 years, the effective minimum age for getting a work permit in Israel (compare Figures V and A-I). These features suggest that the two types of permits are substitutes and that some permitted workers in the settlements switched to employment in Israel, when it was possible, probably because of the higher wages paid in Israel.
Figure A-I: Distribution of Employment-Permit holders in the Settlements by Age (2005–2008)
-500 1,000 1,500 2,000 2,500 3,000 3,500
18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 Age
No of permits issued during the year 2005
2006 2007 2008
Source: Calculations based on Israeli MOD, Coordinator of Governoment Activities in the Territories data.
Note: excluding permits for employment in the Jordan Valley
We generated a measure of the valid settlement employment permits in each governorate and for each quarter by summing up the fraction of the quarter during which each permit was valid.26 This measure overstates the number of reported workers since it includes permitted workers who stopped working while the permit was still valid. This measure is divided by the number of males in the relevant governorate in order to reflect the proportion of permit holders in the male population.
26 For instance, a three-month permit that was issued on April 1st is translated into 2/3 of a valid permit in the second quarter and 1/3 of a valid permit in the third quarter.
The changes in the proportions of valid settlement permits among the 20–45 year-old male population by governorate (Figure A-II) shows that employment in the settlements was most important for the residents of the Bethlehem governorate, of whom between 7 and 13 percent held a valid permit and the residents of the Ramallah governorate where this proportion varied between 4 and 8 percent. One can assume that it is also important for the residents of Jericho, whose employment in the Jordan Valley settlements is excluded from this analysis for technical reasons. Employment in the settlements accounted for less 5 percent of the population in other governorates.
Figure A-II: Distribution of Valid Permits by Governorate (2005–2008)
Settlements-Permits / 20-45 Y.O. Males by Governorate (Jordan Valley excluded)
0%
2%
4%
6%
8%
10%
12%
14%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2005 2006 2007 2008
Permits/ Males
Jenin Tubas Tulkarem Nablus Qalqilia Salfeet Ramallah Jericho Bethlehem hebron
Source: Calculations based on Israeli MOD, Coordinator of Governoment Activities in the Territories and PCBS data.
Note: excluding permits fpr employment in the Jordan Valley
It is important to note the low inter-temporal volatility in the number of valid settlement permits during 2005–06, which is in contrast to the volatility of employment in Israel (Figure VI). This constitutes a major obstacle in estimating the impact of employment in the settlements on the Palestinian labor force. Specifically, the measure is highly correlated with the governorates' fixed effects and was dropped from the FE estimations (Table III) due to multi-collinearity.
Appendix B – Main Empirical results for Unskilled and Skilled Males Table B-I: Main Empirical Results of Granting employment permits
(Unskilled Males aged 20-45, 2005–2008/Q2) β1 Qualified 3 - Employed in the Israeli economy
(including Settlements) 4 - Employed in the Palestinian economy 0.353
(0.365) 6 From unemployment to employment 0.463
(0.135)***
-0.048 (0.240)
4.63
[0.04]** 0.01 7 Started working in the Israeli Economy 0.557
(0.166)***
0.089 (0.117)
7.82 [0.001]*** 0.02 8 - Started working in the Israeli Economy
with a permit † 9 - Started working in the Israeli Economy
without a permit† 10 Started working in the Palestinian
Economy Notes: * 10%, **5%, *** 1% significance. Robust SE in parentheses clustered by governorate.
The estimates are derived from FE regressions and do not add up.
† Data on employment with and without permits is available since 2006. N=13,335
Table B-II: Main Empirical Results of Granting employment permits (Skilled Males aged 20-45, 2005–2008/Q2)
β1 Qualified 3 - Employed in the Israeli economy
(including Settlements) 4 - Employed in the Palestinian economy 0.513
(0.379) 6 From unemployment to employment 0.221
(0.318) 8 - Started working in the Israeli Economy
with a permit † 9 - Started working in the Israeli Economy
without a permit† 10 Started working in the Palestinian
Economy Notes: * 10%, **5%, *** 1% significance. Robust SE in parentheses clustered by governorate.
The estimates are derived from FE regressions and do not add up.
† Data on employment with and without permits is available since 2006. N=4,998