Download The Impact of Employment in Israel on the Palestinian Labor Force

BANK OF ISRAEL
Office of the Spokesperson and Economic Information
13.11.2011
Press Release
The Impact of Employment in Israel on the Palestinian Labor Force (2005–08)

In the short term, employment in Israel increases employment and reduces
unemployment among Palestinians unskilled education.

The ability of unskilled Palestinian workers to earn a wage in Israel, which is
high relative to the average wage in the Palestinian Authority territory, may
reduce the incentive of Palestinians to accumulate human capital, and thus
can impair the long term growth of the Palestinian economy.

The adverse impact of employment in Israel on the return to education could
be alleviated by taxing Palestinian workers in Israel. Yet, the contrast
between the negligible ($ 0.5 million) income tax revenues from employment
in Israel in 2010, and the $ 140 income tax collected in the West Bank points
on a tax incentive for Palestinian employment in Israel, which might
adversely affect both Palestinian employers and unskilled Israeli workers.
Research conducted by Dr. Haggay Etkes of the Bank of Israel Research Department
provides circumstantial evidence of the influence of permits for employment in Israel
on the Palestinian labor force in the West Bank between 2005 and 2008. The research
presents estimates of the growth in employment of unskilled Palestinians (without
post secondary education) who are employed in the Israeli and Palestinian economies,
and the decline in the unemployment rate among those workers, as well as the erosion
in return on education. These findings indicate the positive short term effect of
employment in Israel, while also showing the potential impairment to accumulating
human capital and in long term growth of the Palestinian economy.
Examining the effects of Palestinian employment in Israel on the Palestinian labor
force takes on added importance in light of the current increase in employment
permits granted for work in Israel (excluding settlements) which has occurred in
recent years–so that as of the beginning of 2011, the number of permits was around
25,000–and in light of possible changes in the diplomatic and security situation,
which can influence the number of permits.
The research is based on analysis of a dataset that merges data from the Palestinian
Labor Force Survey with Israeli administrative data on permits for employment in
Israel. The merging of the two databases makes it possible to directly analyze the
connection between Israeli permit policy and the Palestinian labor force in the West
Bank. The findings indicate that employment with a permit serves as an important
source of employment for the residents of the governorates of Tul Karm, Qalqilia,
Salfit, Bethlehem, and Hebron. It should be noted that the population in the study
excludes residents of the Jerusalem governorate who are included in Palestinian
surveys but often do not need Israeli work permits.
The study differentiates between those qualified for a permit, meaning married men
aged 30–45, and those who do not qualify, meaning those aged 20–29 or not married,
who were not able to receive a permit for employment due to security considerations.
The research found that an increase of 100 permits in an illustrative governorate,
which had 1,000 qualified (aged 30–45) and 1,000 unqualified (aged 20–29 or
unmarried), was associated with:
 Increase in employment in general, (about 86 qualified workers), and in the Israeli
economy in particular (about 50 people), and a decrease of about 60 qualified
people in the number of unemployed. It is likely that the increase in employment
in general is a result of partial replacement of employees who switched to work in
Israel with workers who began to work in the Palestinian economy.
 A switch to employment in the Israeli economy of 19 qualified workers who were
employed one year earlier in the Palestinian economy and of 25 qualified workers
who were unemployed a year earlier.
 A slight increase in employment in the Israeli economy among those who did not
have an employment permit. This finding contradicts the working assumption that
workers with a permit for employment in Israel replace workers without such a
permit.
 Erosion of about 13 percent in the return on education from a 5.8 percent increase
in wage for each year of education to 5 percent.
The findings of the research indicate that permits for employment in Israel influence
unskilled workers (those without post secondary education). In that case, the erosion
in return on education is a result of the increase in wage of unskilled workers.
Empirical research findings from around the world show that the erosion in return on
education often cuts into the acquiring of human capital and long term economic
growth.
Research published by World Bank economist Maurice Schiff in 2004 recommended
that the Palestinian Authority mitigate the negative effects on the Palestinian economy
of employment in Israel by collecting an additional tax on such employment. In
actuality, most Palestinians employed in Israel, whose salary is considerably higher
than the average salary in the Palestinian Authority, do not reach the threshold for
paying tax in Israel, and thus do not pay income tax. In contrast, the Palestinian
Authority began in recent years to collect income tax from employees in the
Palestinian economy. This situation is reflected in the fact that in 2010, income tax
collection in the Palestinian Authority was about $140 million, while income tax
collection from Palestinian workers in Israel was about $500,000. This situation
provides a de facto tax-incentive to Palestinian workers to work in Israel. This
incentive is liable to negatively impact both Palestinian employers and Israeli workers
who lack higher education.