The labor market costs of conflict: closures, foreign workers, and Palestinian employment and earnings


In this paper, we provide a lower bound estimate of the labor market costs of the Israeli–Palestinian conflict. The conflict is quantified by the number of overseas foreign workers in the Israeli labor market and the frequency of temporary closures of the West Bank and Gaza Strip. IV estimates, which exploit a source of exogenous variation in the number of overseas foreign workers, yield significant negative effects of the conflict on Palestinian employment rates in Israel and monthly earnings. Our cost-of-conflict estimates are also relevant for the literature on the economics of immigration.

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  1. 1.

    A notable exception is Angrist and Kugler (2004), who analyze the consequences of a shift in the drug trade (and related violence) on the income of the self-employed and the labor supply of teenage boys in Columbia.

  2. 2.

    Other economic and political consequences of the Israeli–Palestinian conflict are examined in Berman and Laitin (2005), Berrebi and Klor (2005), and Jaeger and Paserman (2005).

  3. 3.

    Borjas (2003) is a notable exception.

  4. 4.

    This includes Palestinians who work in Israeli settlements.

  5. 5.

    The monthly earnings of residents of Gaza that work in Israel were higher than the monthly earnings of residents of the West Bank before September 2000. This could be due to the relatively larger proportion of Gaza residents working in construction as opposed to agriculture prior to 2001 (see Table 3 below).

  6. 6.

    Israel began issuing work permits allowing Palestinians to work in Israel in the early 1970s.

  7. 7.

    Note that residents of Gaza shifted more sharply out of construction and into agriculture and manufacturing than residents of the West Bank starting in 2001. This could partially explain why residents of Gaza experienced a decrease in mean monthly earnings in Israel as opposed to residents of the West Bank (see Table 1).

  8. 8.

    In 2002, in the agricultural sector, most legal foreign workers are from Thailand. In the construction sector, most legal foreign workers are from Romania, the former USSR, China, Turkey, Bulgaria and Thailand. Illegal foreign workers tend to originate from Romania, Philippines, India, Sri Lanka, Burma, Bulgaria, Hungary, Poland, the former USSR, South America, Africa, Jordan, China, Turkey and Thailand (see Unfortunately, these data are not comprehensive enough to be fruitfully included in estimation.

  9. 9.

    The number of Palestinian laborers in Israel falls from a high of 140,000, just prior to the fourth quarter of 2000, to around 50,000 in the fourth quarter of 2004. The mean number of Palestinians in the Israeli labor market over the period is 79,200 with a standard deviation of 39,600.

  10. 10.

    Using ICBS data in the first half of the 1990s Friedberg and Sauer (2003), introduced foreign worker permits as an instrument for overseas foreign workers in studying the effect of foreign workers in Israel on Palestinian labor market outcomes. There are several advantages of our estimates over theirs. First, there were only a negligible number of overseas foreign workers in the early 1990s. Second, PCBS data on the Palestinian economy are widely believed to be much more reliable than ICBS data. The ICBS ceased collecting data on Palestinians in the West Bank and Gaza Strip in 1995.

  11. 11.

    Observed proxies for the total demand for foreign workers and Palestinians (such as aggregate Israeli wages or GDP per capita) are not directly included in estimation because they could lead to potentially severe proxy variable biases.

  12. 12.

    Individual fixed effects are not included in Eq. (1) because they are not plausibly correlated with foreign worker supply or closures, which vary at the quarterly level. In addition, estimating with random effects considerably reduces standard errors. Thus, to be conservative, we do not report them (see Miaari and Sauer (2006) for results with individual effects). Other sources of persistence, such as lagged employment status, are not included because of a potentially severe missing data problem—the PLFS sampling frame skips two quarters. Thus, the data limit our ability to examine issues of state-dependence versus unobserved heterogeneity and its effect on the coefficients of interest.

  13. 13.

    Additional specifications show that there are no important nonlinearities in the effect of foreign workers and closures and very few significant interaction terms with background characteristics.

  14. 14.

    As an indication of the sample size problem for Gaza, see Table 1, which shows that less than 3% of Palestinians are employed in Israel in each year after 2001.


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Robert Sauer gratefully acknowledges the support of the Armand Hammer Fund for Economic Cooperation in the Middle East and the British Academy (grant number SG-43646). We also thank Joshua Angrist, David Genesove, Rachel Friedberg and Corinne Sauer for helpful comments.

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Correspondence to Robert M. Sauer.

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Miaari, S.H., Sauer, R.M. The labor market costs of conflict: closures, foreign workers, and Palestinian employment and earnings. Rev Econ Household 9, 129–148 (2011).

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  • Conflict
  • Immigration
  • Foreign workers
  • Closures
  • Employment
  • Earnings
  • Instrumental variables

JEL Classification

  • J21
  • J31
  • J40
  • J61
  • F22
  • C23