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Competition, substitution, or discretion: an analysis of Palestinian and foreign guest workers in the Israeli labor market


This paper investigates the effects of foreign workers on labor market outcomes for Palestinian workers in the Israeli labor market. The paper utilizes a micro-dataset on the Palestinian labor force combined with time-series data on foreign workers in Israel. The data covers the period 1999–2003, a period in which Israel enforced a strict closure on labor (and goods) movement, particularly in 2001 and 2002. The evidence suggests that foreign workers in Israel do not affect Palestinian employment; however, an increase in the number of foreign workers in Israel tends to reduce Israeli wages paid to Palestinian workers from the Gaza Strip. The Israeli closure policy appears to be the main cause for the substantial reduction in long-run Palestinian employment levels in Israel, not the presence of foreign workers.

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  1. Friedberg and Sauer (2003) found a significant reduction in earnings only among Palestinians from the Gaza Strip; meanwhile, Miaari and Sauer (2006) found negative effects on earnings regardless of workplace location.

  2. Foreign workers in Israel are mainly from the Far East (particularly Thailand), Latin America, and Eastern Europe.

  3. Similar experiences could be found in the case of French workers commuting to Germany and Switzerland.

  4. The overall non-response rate amounted to almost 10.4 percent, which is relatively low; a higher rate is rather common in an international perspective.

  5. Men constitute the bulk of the Palestinian labor force, as labor force participation of women is low, 8% in the Gaza Strip and 10–12% in the West Bank.

  6. The referred variable capturing if the individual is working in Israel also includes if the wage earner was working in Israeli settlements in the Palestinian territories.

  7. The Gaza Strip experienced a more severe border closure policy, compared to the West Bank, where Palestinian workers were cutoff from their work in Israel during long periods.

  8. Daily wages are expressed in New Israeli Shekels (NIS). During 1999–2003 the New Israeli Shekel was worth approximately 0.22–0.25 USD.

  9. The plot does not consider the structural change in the Palestinian labor force during the period 1999–2003.

  10. As seen in Table 2, over 80% of Palestinians employed in Israel during 1999–2003 worked in elementary occupations or as craft and related trade workers.

  11. Following an Israeli policy decision after the signing of the Oslo accords in 1993, the Israeli government dramatically increased the number of permits to foreign workers from outside of the region. The aim of this policy was to decrease the former Israeli reliance on Palestinian workers, as those now became the responsibility of the newly established Palestinian Authority.

  12. These findings are probably due to the problems associated with defining competing groups of immigrants and natives. In this paper, these problems can be overcome, as foreign guest workers and Palestinian workers from the West Bank and Gaza Strip actually compete in the Israeli labor market.

  13. The experience of countries that have employed migrant workers at one time or another has been mixed. Recent examples of non-citizen labor include US employment of Mexicans, German employment of Turks, Western European employment of citizens of Southern and Eastern European nations, and Malaysians employed in Singapore.

  14. For formal models, see among others, Borjas (1999), Greenwood and Hunt (1995), and Johnson (1998).

  15. A variable description is given in Appendix A.

  16. They argue that the number of foreign work permits issued is a potential source of exogenous variation in the number of foreign workers actually employed in Israel. This is because there is a virtually infinite supply of unskilled workers from other countries that are willing to work in Israel, and there are lags and inefficiencies in the regulatory process that govern the issuance of permits, which creates a situation whereby the influx of foreign workers is not directly dependent of the Israeli labor market conditions.

  17. An F test for joint significance of the identifying instruments suggests that these instruments have good explanatory power.

  18. Although the Israeli policy of closure is applied to restrict all individuals who need to cross the borders, the border with Israel is not completely hermetically sealed. The random selection at the border crossing has created a situation of long border lines during time of closure. This is so especially in the Gaza Strip where the Israeli policy of closure is much closer to hermetic compared to in the West Bank.

  19. Closure might also affect labor demand negatively, since closure may increase the uncertainty on behalf of the Israeli employers regarding Palestinian workers showing up at work or not. If employers are risk-averse, closure might in effect induce employers to change their hiring practices. However, since the Israeli policy of closure is instituted as a security instrument during political instability, which most likely has a negative impact on the Israeli economy, labor demand in Israel, may also exhibit a negative correlation with closure. In fact, the Israeli economy experienced a deep recession in 2001, a year in which days of closure peaked.

  20. Since the correlation between the external and internal closure in the West Bank and Gaza Strip is very high, the effect of internal closure will be captured by our measure of closure in the estimations.

  21. The F test for joint significance of the identifying instruments is 36.63, suggesting that the instruments are well correlated with the endogenous variable. Staiger and Stock (1997) propose that strong instruments should have a joint F statistic of around 10.

  22. The results from the first-step regressions are reported in Tables 6 and 7 in Appendix B.

  23. An F test was carried out to control for across-region equality. The test rejects that the estimated parameters from the West Bank regression are statistically equal to the estimated parameters from the Gaza Strip regression.

  24. Additional specifications have been estimated to illuminate the impact of foreign workers on different types of skill group occupations in the economy. Given that Palestinian jobs in Israel are predominantly low-skilled, one might expect heterogeneous effects of foreign workers on different types of skill groups. However, as indicated by the results from these specifications, the effect of foreign workers does not significantly differ.

  25. Wooldridge (2006) points that the Donald and Lang approach is “roughly valid” if the common group size is large (those are reported in Tables 6 and 7 in Appendix B) and that the variance of the unobserved cluster effect dominates the variance of the compounded error.

  26. Only the ordinary least square estimates for Gazans employed in Israel are statistically different from zero, however, at the 10% level.

  27. In view of the more recent building of the separation wall around the West Bank, it is plausible that this disparity may vanish as West Bank borders are also now more strictly sealed.


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Earlier versions of this paper have benefited from discussions with and suggestions from Lars Hultkrantz, Gunnar Isacsson, and Aysit Tansel. We also wish to thank Klaus F. Zimmermann and three anonymous referees for valuable comments. Thanks also go to the Palestinian Central Bureau of Statistics (PCBS) for providing the data. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Executive Board of Sveriges Riksbank.

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Correspondence to Ted N. Aranki.

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Responsible editor: Klaus F. Zimmermann


Appendix A

Table 5 Variable description

Appendix B

Table 6 First step estimates of the wage equation
Table 7 First step estimates of four separately estimated binominal logit models

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Aranki, T.N., Daoud, Y. Competition, substitution, or discretion: an analysis of Palestinian and foreign guest workers in the Israeli labor market. J Popul Econ 23, 1275–1300 (2010).

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  • Labor market outcomes
  • Palestinian labor force
  • Foreign guest workers

JEL Classification

  • J21
  • J31
  • J61