^ I CHICAGO JOURNALS National Opinion Research Center Short-Run Demand for Palestinian Labor Author(s): Joshua D. Angrist Source: Journal of Labor Economics, Vol. 14, No. 3 (Jul., 1996), pp. 425-453 Published by: The University of Chicago Press on behalf of the Society of Labor Economists and the National Opinion Research Center. Stable URL: http://www.jstor.org/stable/2535361 Accessed: 16/11/2009 04:25 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. 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AngriSt, Hebrew University, Massachusetts Institute of Technology, and National Bureau of Economic Research Palestinian residents of the West Bank and Gaza Strip who work in Israel generally earn more than Palestinians employed locally, but this wage premium is highly volatile. Beginning with the 1987 Palestinian uprising, changes in wage differentials by work location parallel Palestinian absences from work in Israel. This article interprets changing location differentials in response to exogenous shocks as movements along an Israeli demand curve for migrant workers. Estimates of a model of the West Bank and Gaza Strip labor market are used to evaluate the effect of policies governing Palestinian access to the Israeli labor market. I. Introduction Since October 1970, changes in access to the Israeli labor market have constituted the major field for innovations in the economic relationship between Israel and the occupied territories. An important recent example This article is part of the Falk Institute research program in human resources and has been supported by the Falk Institute through a grant from the Manpower Planning Authority in the Israeli Ministry of Labor and Social Affairs. Preliminary work and data collection were supported by a grant from the Ford Foundation. Special thanks to Zvi Eisenbach, Zeev Krischer, and other staff members at the Israel Central Bureau of Statistics for providing the Territories microdata. Natalie Aflalo, Ron Arbeli, and Samer Haj Yehia provided expert research assistance. Thanks also go to Eli Berman, Maggie Eisenstadt, Giora Hanoch, Ephraim Kleiman, and seminar participants at Hebrew University, Tel Aviv University, the Bank of Israel, and Princeton University for helpful comments. I bear sole responsibility for the content of this article. [Journal of Labor Economics, 1996, vol. 14, no. 3] © 1996 by The University of Chicago. All rights reserved. 0734-306X/96/1403-0002$01.50 425 426 Angrist is the Palestinian uprising, which has periodically restricted access to the Israeli labor market because of actions taken on both sides. On one hand, strikes and curfews restrict mobility and employment opportunities for workers from the territories. On the other, beginning in 1988, and especially since the 1991 Gulf War, Israeli authorities stepped up enforcement of laws against employing Palestinian workers who are not registered with the Israeli Employment Service, and registration itself has become more difficult {Jerusalem Post 1988; Jerusalem Media and Communications Center 1991). Recent changes in Palestinian employment patterns have been widely noted (see, e.g., Angrist 1992; Fishelson 1992; Kleiman 1992). In Angrist (1992), I also documented a number of significant changes in the wage distribution of workers from the West Bank and the Gaza Strip over the period 1981-90. One of the most important changes is the virtual elimination of the wage premium paid to Palestinians for working in Israel in the mid-1980s. This was a period of inflation and economic crisis that included a severe contraction in the Israeli construction sector where many Palestinians are employed. Following Israeli stabilization, however, the daily wage premium paid for work in Israel climbed to a new high, reaching 40% by 1989.1 Since December 1987, changes in the Israeli wage premium have roughly paralleled the pattern of absences from work by Palestinians employed in Israel. Such a correlation suggests that recent wage increases may reflect movements along a short-run Israeli demand curve in response to the sudden withdrawal of labor from the territories. This article develops a model of the Palestinian labor market that is used to estimate parameters affecting short-run Israeli demand for Palestinian labor. An understanding of this issue is essential for developing effective policies governing the evolving relationship between the Palestinian and Israeli labor markets. Suppose, for example, that the Palestinian Authority is able to tax the wages of Palestinians employed in Israel or to impose payroll taxes on their employers. How much revenue are such taxes likely to generate? Might the Palestinian Authority rationally choose to restrict exported labor supply so as to maximize repatriated earnings or tax revenue? Of more immediate relevance, to what extent do higher wages offset the earnings costs of periodic restrictions on Palestinian labor mobility? Answers to such questions turn partly on the elasticity of demand for the labor services exported by Palestinians to Israel. The article is organized as follows. Section II provides background information on the Israeli-Palestinian employment relationship, describes data from the Territories Labor Force Survey (TLFS), and provides a brief 1 Wage differentials between Palestinians working in Israel and Palestinians employed locally generally declined throughout most of the 1970s (Zakai 1988). Demand for Palestinian Labor 427 empirical description of Palestinian labor market outcomes in recent years. Section III outlines a simple equilibrium model that describes how supply and demand for labor might interact to determine Palestinian wages and employment. Section IV presents estimates of key parameters in the model, and Section V discusses policy implications of the estimates. Section VI offers a summary and some conclusions. II. Background, Data, and Descriptive Analysis Official Israeli policy requires residents of the territories who want to work in Israel to apply for work through the Israeli Employment Service. The Employment Service then channels Palestinian workers to Israeli employers (Israel Employment Service 1991). The Employment Service is the only legal avenue through which Israelis may employ Palestinians, and the Palestinian payrolls of Israeli employers are supposed to be disbursed by the Employment Service. The Employment Service also deducts taxes, social insurance contributions, and union dues from these payrolls. Until recently, the Employment Service was also the only legal employment agency for most noncollege-educated Israeli citizens, and most job openings in Israel were posted through this agency (Berman 1994). Legal restrictions notwithstanding, until the 1991 Gulf War, the vast majority of Palestinians employed in Israel did not actually reach their employers through the Employment Service. Rather, most Palestinians were contacted directly by Israeli employers or through a Palestinian labor contractor. Employment Service data typically record between 30,000 and 40,000 registered Palestinians working for Israeli employers in the 1980s, while data from the Israel Central Bureau of Statistics' quarterly Territories Labor Force Survey (e.g., Israel Central Bureau of Statistics 1991) show that 100,000-110,000 Palestinians were employed in Israel, including Jerusalem.2 A. The Territories Labor Force Survey This study is based on TLFS microdata.3 Survey interviews are conducted by local Palestinian enumerators employed by the Israeli Civil Administration in the territories. The TLFS sampling frame includes most households in the West Bank and Gaza Strip, regardless of the employment status or work location of the head of household. The TLFS extract used to prepare this article contains observations on men aged 18-64, interviewed 2 Since early 1991, enforcement of the official work registration requirements has become stricter. From the Gulf War until March 1993, roughly 70,000 Palestinians were registered as working for Israeli employers each month. 3 Wage and employment data from the TLFS are compared to wage and employment data from Employment Service administrative records in the appendix to Angrist (1995). 428 Angrist in the years 1981-91. Men constitute the bulk of the Palestinian labor force because labor force participation rates for women are very low (6%-9% in the sample period; see Israel Central Bureau of Statistics 1991). Table 1 provides descriptive statistics for the sample of men aged 18-64 by region of residence. Some 8,000-10,000 interviews were conducted each year in the Gaza Strip, and between 22,000 and 30,000 interviews were conducted each year in the West Bank. Because of the sample rotation scheme, only one-quarter of these observations are newly sampled in any given year. The sample sizes show that the number of completed interviews fell with the onset of the Palestinian uprising in 1988, especially in the Gaza Strip, where the uprising started earliest and was most intense. The average age of men in the sample is 33, and the proportion married rose from 67% to 75% in the Gaza Strip and from 64% to 67% in the West Bank. Married men are probably overrepresented in the sample because the interviews of employed men are often completed by proxy respondents. The average level of schooling rose considerably over the sample period, from 7.6 years to 8.8 years in the Gaza Strip and from 7.7 years to 8.6 years in the West Bank. This is partly attributable to the large number of new college graduates who entered the labor force in the 1980s (Angrist 1995; Simon 1988). The descriptive statistics also show a substantial increase in labor force participation, which is primarily a consequence of increased participation by men aged 18-24. B. Employment Patterns Table 1 shows that the fraction of the Palestinian labor force employed as wage earners was stable at roughly one-half over the sample period. Members of the labor force not employed as wage earners are either self-employed or unemployed. The data analyzed below are for wage earners only. The last column of table 1 shows that 41 %—50% of Gazans were employed in Israel and 35%—41 % of West Bank residents were employed in either Israel or Jerusalem.4 The proportion of the Gaza labor force working in Israel was stable until 1987; after 1987 this proportion declined from 48% to 41%. The proportion of the West Bank labor force employed in Israel (outside Jerusalem) increased from 22% to 27% between 1981 and 1987 and reached 29% by 1991. Between 1987 and 1991 the proportion of 4 These rates are based on weighted counts from the TLFS. In 1991, there were an estimated 166,000 West Bank and 102,000 Gazan men aged 18-64 working as wage laborers. In addition to the work locations mentioned in the text, a few Palestinian men were employed in Jewish settlements in the territories, and a few were probably working abroad in the reference week. Work abroad was an important source of employment for residents of the territories over some of the sample period (Gabriel and Sabatello 1986). Table 1 Descriptive Statistics* Sample Sizet Years of Schooling Age Labor Force Participation Wage Earner Days Worked Married Work in Israel A. Residents of the Gaza Strip: 1981 7,854 7.61 33.0 .78 .50 22.2 .67 .47 1982 8,223 7.92 32.6 .77 .51 21.9 .68 .48 1983 8,228 8.18 32.7 .76 .50 21.6 .66 .50 1984 8,930 8.33 32.9 .76 .50 21.9 .66 .49 1985 9,271 8.40 32.7 .77 .51 21.7 .67 .50 1986 9,743 8.69 32.4 .77 .51 22.3 .66 .49 1987 9,692 8.62 32.7 .80 .52 22.0 .69 .49 1988 6,932 8.48 32.9 .79 .49 16.9 .70 .48 1989 7,830 8.52 33.3 .77 .45 15.6 .71 .42 1990 8,892 8.63 33.2 .80 .47 16.5 .73 .44 1991 8,011 8.80 33.2 .80 .48 17.2 .75 .41 B. Residents of the West Bank: 1981 21,768 7.66 33.2 .70 .47 21.9 .64 .36 1982 21,992 7.82 33.3 .72 .47 22.4 .63 .36 1983 22,734 7.90 33.3 .74 .47 22.1 .64 .38 1984 23,807 7.98 33.3 .76 .48 22.1 .63 .38 1985 25,038 8.11 33.1 .76 .47 21.8 .62 .36 1986 26,394 8.26 32.9 .79 .48 22.2 .62 .35 1987 29,530 8.27 32.8 .81 .52 22.5 .63 .40 1988 27,593 8.36 32.7 .83 .52 18.1 .63 .40 1989 27,462 8.48 32.6 .83 .53 18.9 .64 .41 1990 27,773 8.49 32.8 .82 .52 19.5 .66 .39 1991 26,128 8.60 32.7 .80 .51 17.4 .67 .39 * Statistics .ire unweighted except for those in the last column, which are based on weighted counts. 1" Sample size: 373,825 men aged l S—64 in the sample period; one-quarter of these are independent observations. 430 Angrist the West Bank labor force employed in Jerusalem declined from 13% to 10%. Palestinian workers, especially those employed in Israel, have generally been concentrated in a number of industries. In 1981, half of the Palestinians employed in Israel worked in construction; by 1991 this proportion had risen to 70%. Most Palestinians working in Jerusalem were also employed in the construction sector. Agriculture was the second most important source of employment for Palestinians working in Israel, accounting for 13%-17% of the total. Roughly 20% of the Palestinians who were employed in their region of residence also worked in the agricultural sector. The importance of employment in manufacturing, mining, other types of industries, and the service sector has declined as the proportion employed in construction has risen. Workers employed in construction and industry account for a larger share of local employment in the West Bank than in the Gaza Strip.5 This study focuses on recent changes in Palestinian employment patterns. The data on average days worked per month in table 1 show a sharp drop in 1988, from 22 to 17 days for residents of the Gaza Strip and from 23 to 18 days for residents of the West Bank, again a consequence of the Palestinian uprising. An important component of this change comes from work absences and difficulties in getting to work. Figure 1 shows the fraction of the labor force absent from work by workplace location.6 Data on absences exhibit a seasonal pattern across quarters and a large increase in absences beginning in 1988 and during the Gulf War in the first quarter of 1991. A related aspect of the changing work environment for migrants is documented in figure 2, which plots the difference between daily hours worked in Israel and locally by region of residence. Until 1988, both Gazans and residents of the West Bank who were employed in Israel worked roughly 1 hour longer per day than men employed locally. Beginning in 1988, however, the gap in length of workday grows to almost 4.5 hours for Gazans and almost 2.5 hours for residents of the West Bank. It seems likely that the many proxy responses to the TLFS question on hours worked record the time elapsed between leaving home and returning. Significant changes in hours worked are therefore most likely due to changes in travel 5 Statistics in this paragraph are from Angrist (1994). For other analyses of the occupational mix of Palestinians employed in Israel, see Semyonov and Lewin-Epstein (1987); and Kleiman (1992). 6 Absentees are defined as labor force participants who did not work, assist on a farm or family business, or actively seek work during the reference week who reported that they had a job, farm, or agricultural position from which they were absent (for any reason). Demand for Palestinian Labor 431 time rather than hours on the job.7 The gap has grown larger for residents of the Gaza Strip because time-consuming security measures at the Gaza border are relatively easy to enforce. C. Wages and Work Location Figure 3 plots survey data on average real daily wages by work location for the period 1981-91. The wage series were computed from the monthly wages of men employed in either Jerusalem, Israel, the Gaza Strip, or the West Bank, who reported real monthly wages under NIS 10,000 (in fourth-quarter 1991 shekels). Daily wages were computed by dividing monthly wages by days worked. Figure 3 shows a decline in real wages at all work locations in 1984-85, with subsequent strong real wage growth until early 1987. The real wages of Palestinian men employed in Jerusalem continued to grow into 1988 and the real wages of men employed in Israel continued to grow into 1989. Subsequently, real wages fall sharply for men employed at these locations. Real wages in Gaza were flat for the period 1987-89 and fell thereafter; real wages in the West Bank fall sharply beginning in early 1988. Note that the period 1985-89 was generally one of strong real 7 The TLFS question on hours worked asks, "How many hours did the household member work at all jobs last week?" This number was multiplied by 4.35 weeks per month and then divided by the number of reported workdays in the month to estimate hours worked per day. 432 Angrist 4.5 r 0 lli..........................I.............. 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 '91 FlG. 2.—Extra hours to get to work in Israel by region of residence wage growth for Israeli citizens as well as for residents of the territories (Israel Central Bureau of Statistics 1992). Regression estimates are used to describe changes in average Palestinian wages conditional on demographic characteristics. Table 2 reports parameter estimates from the following equation (computed by weighted least squares using the Central Bureau of Statistics sampling weights): In wit = 2 <4? (3) where x; is the price of a second Hicks composite input in each production function. Local demand for the local product, ye, is assumed to be a function of the wages paid in Israel and in the territories and the price of the local good, p{: N-it{E,pt), (4) where E = weLe + wmL„, is the per capita earnings of Palestinian workers, and d((E, pe) is a per capita demand function. This function can include a component of "export demand" by Israel for the local Palestinian good without introducing substantive changes in what follows. Aggregate de- 10 This model is an adaptation of Altonji and Card's (1991) model of a labor market with two skill groups. 438 Angrist mand for the Israeli good is assumed to be a function of price, dm(pm). Equilibrium in the product market requires and yt = de(E, pi) (5) where dt = N • de{E, pe). Producers are assumed to be cost minimizers in the factor market, so that conditional factor demands can be obtained from cost functions by Shepherd's Lemma. In factor market equilibrium, we therefore have y, • Cji{wp x>) = £j (wt, wm, z;), = {, m, (6) where c;] {wj, xj) denotes the partial derivatives of the unit cost function with respect to wage rates, and where (, = N • Lj. Finally, firms are assumed to choose a level of output by equating marginal cost to price, where each firm takes the product price as given. Therefore, product prices are set by Pj = ci(wh J = ^ m- (7) Equations (5), (6), and (7) determine the equilibrium level of Palestinians' wages paid locally and in Israel and the prices of goods produced using Palestinian labor locally and in Israel. The exogenous variables that affect equilibrium are the prices of other inputs, xe and xm, and shifts in the labor supply functions, ze and zm. The effect of shifts in exogenous variables on equilibrium wage rates can be obtained by substituting (7) into (5) and (5) into (6) to give anc de[E, ce(w(, xe)] • c(x{w(, xe) = te{we, wm, ze) dm[cm(wm, xm)] • cml(wm, xm) = im{we, wm, zm). (8) This substitution eliminates the endogenous product prices and leaves a pair of equations that jointly determine the wage rates, we and wm. Taking logarithms and differentiating, the proportional changes in wage rates can be shown to satisfy the following two equations: [£,\£ + T|« - Eee]d In w( -I- [t,Xm - Sem]d In wm = 8^(1 - Qd In ze - 8m2(l - 4>)E4 In zm - T[(xd In xe, (9) -Em(d In we + [r\mm - Smm]d In wm = Smzd In zm - r\mxd In xm, Demand for Palestinian Labor 439 where &jk is the elasticity of labor supply to location j with respect to argument k (k = m for wm, k = £ for w(, and k = z for zm or ze). Similarly, r\jk is the elasticity of factor demand at location j with respect to factor price k.u The parameter £ is the income elasticity of demand for the local product, ye, 4> = wt{e/E is the share of local earnings in total labor earnings, and \{ = d In E/d In we and Xm = d In E/d In wm characterize the labor supply effects of wages on earnings.12 Given estimates or assumptions about the underlying structural parameters, system (9) can be used to predict the effect of exogenous demand shocks (components of d In xe, d In xm) and supply shocks (components of d In ze, d In zxm) on Palestinian wages and employment. This system also provides a framework for estimation. Note that the terms in (9) can be rearranged and simplified as follows: d In we = (l/r|wy In ie - ^/r\u)d In £ - (r\ex/r\ee)d In xe and (10) d\nwm = (\/r\mm)d In £m - (r\mx/\\mm)d In xm. At this point, the definitions of d In xm and d In xe are expanded to include labor demand shocks of any sort, as well as shifts in the prices of other factor inputs.13 The values d In xm and d In xe can therefore be interpreted as error terms for the purposes of structural estimation. Supply shocks that are independent of these error terms can be used as instrumental variables to identify the parameters in (10). IV. Structural Estimation The supply shocks to be used for instrumental variables (IV) estimation consist of quarterly time-series data on person-days under curfew in the West Bank and Gaza Strip, combined with control variables derived from Israeli Army data on civil disturbances. Figure 4 plots the Pales- 11 This is the total elasticity of demand including scale effects (see, e.g., Hamermesh 1986). 12 These parameters are Xe = 4>{\ + eel) + em^(l — 4>) and "Km = {\ — 4>)(\ + emm) + e) is fixed at 60%. 0.4 0.3 0.2 > > i 0.1 > 0 -0.1 3 -0.2 - income elasticity =1 1'' ............../:■'■+- local demand elasticity = -1.0 : / / * / / / / + .-...//*.. . . //+ // * . .... . : A i * ^/ ............... ^ — — — *~ ~~ - -2.5 -2 -1.5 -1 -0.5 elasticity of demand 0.4 0.3 0.2 I 0.1 w cd 0 -0.1 -0.2 -3 income elasticity = 0 local demand elasticity = -1.0 -2.5 -2 -1.5 -1 elasticity of demand - supply elasticity = 0 ---supply elasticity = .5 + supply elasticity = 1.5 * supply elasticity = 3.0 -0.5 0 FlG. 8.—Earnings effect of +15% local and -50% Israel supply shocks 450 Angrist VI. Summary and Conclusions A range of graphical and statistical evidence strongly suggests that exogenous decreases in Palestinian labor supply are associated with significant increases in the wages Israeli employers pay their Palestinian workers. Instrumental variable estimates of demand equations are somewhat sensitive to the details of model specification, but the best-fitting models consistently suggest that the observed covariance between Palestinian wages and days worked can be rationalized by a short-run Israeli elasticity of demand for Palestinian labor ranging between —1 and —2. Even simple IV estimates that do not control for demand shocks by quasi-differencing imply a short-run elasticity of between —3 and —4.19 More and better data on the Palestinian labor market may lead to more robust results in future work. In the meantime, the results presented here suggest that labor market policies in the territories should be analyzed with a number of possibilities in mind. First, and most important, short-run Israeli demand for Palestinian labor may be inelastic enough to considerably dampen the earnings loss from reduced access to the Israeli labor market, at least for a while. Second, local labor and product demand do not appear to change dramatically in response to transitory changes in earnings from Israeli employment. In light of these findings, a Palestinian social planner might well choose to exploit the monopoly power Palestinians have if they continue as the principal supplier of semi-skilled construction and agricultural labor to the Israeli labor market. In particular, rents might be obtained by deliberately restricting labor supply. Of course, social planners would also consider factors like the distribution of unemployment and the loss of skills among the unemployed. Such consideration might well outweigh simple calculations designed to maximize earnings or income tax revenues. Finally, higher Palestinian wages create a strong incentive for Israeli employers to develop alternative labor resources. Israel's increasing use of non-Palestinian guest workers to fill positions vacated by Palestinians appears to be an attempt to develop such resources. The use of a model and the associated empirical results for forecasting is most helpful when future economic circumstances are likely to be similar to past circumstances. This point is worth emphasizing in a study of Palestinian-Israeli labor relations because changes in access policy that come about as part of a deliberate regime shift could have labor market consequences very different from the effect of the shocks analyzed here. 19 This finding contradicts those in Fishelson (1992), who reports a positive coefficient from a regression of log wages on the number of Palestinians employed in Israel. But his estimates are from a large multiequation macro model for a long time period that ends in 1986. The Fishelson results therefore do not seem directly comparable to those reported here. Demand for Palestinian Labor 451 Data Appendix Curfew and Disturbance Data A. Curfews The Jerusalem Media and Communications Center (JMCC) compiles press releases and monographs in an effort to represent Palestinian positions to members of the press. As part of this effort, the JMCC collects data on the number of days under curfew by locality. The curfew data used here were taken from a JMCC data set listing curfew incidents by month and locality between December 1987 and December 1991. Those data were compiled primarily from reports by local observers, from press reports and from the UN Relief and Works Agency records (Jerusalem Media and Communications Center 1991). Local population data used to inflate incidents into person-days were taken from Benvenesti and Khayat (1988). The incidents and population series were then combined to construct aggregate time series on person-days under curfew. Unpublished data on curfews from a second Palestinian source for the period December 1987-November 1988 (Al-Haq in Ramallah, West Bank) are highly correlated with the JMCC figures, as are the IDF data on civil disturbances in the territories. B. Disturbances The IDF compiles data on the number of Israeli citizens, local residents, and soldiers injured or killed each month in the territories, on the number of attacks by local residents on Israeli citizens and soldiers (with and without use of firearms), incidents of arson, Molotov cocktails thrown, grenade attacks, and the number of civil disturbances. Some of these data are published in Israel Defense Forces (1992). The detailed monthly series used here were provided by the IDF spokesman's office. The civil disturbances series includes a count of incidents of stone throwing, road blockades, tires set ablaze, and unruliness. These data do not count incidents involving firearms. References Altonji, Joseph, and Card, David. 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