March 31, 2011 - The West Bank and Gaza economy went into a deep crisis after the start of Second Intifada in 2000. In the past eleven years, violent political conflict has flared up frequently, particularly at the outset of the Intifada and its immediate aftermath, and in Gaza during 2005-2007. There have also been severe restrictions on the mobility of people and goods (‘closures’), and on access to services. This study undertakes a comprehensive micro-economic analysis of the West Bank and Gaza labor market in this period, using quarterly Palestine Labor Force Survey datasets collected by the Palestinian Central Bureau of Statistics between 1999 and 2009. A major contribution of this study is to describe and analyze the labor market trends in the light of closures and the major episodes of conflict. A unique feature of this analysis is a longer-term perspective that looks beyond the immediate impact of the conflict to explore persistent ‘structural’ impacts.
In the last decade, the West Bank and Gaza economy has witnessed some of the highest unemployment rates in the world. Peaking at 30 percent in 2002, it remained above 20 percent in 2009. Even these rates understate the extent to which Palestinians lack work: between 1998 and 2009, the incidence of underemployment among those holding jobs rose from 15 percent to above 25 percent.
This has been accompanied by a disproportionate and steady decline in youth employment and economic participation: in 2009, the youth labor force participation rate stood at only 33 percent. Another particularly vulnerable group have been the less educated, who experienced the sharpest declines in employment after the start of the Second Intifada. Our analysis of panel data suggests that these vulnerabilities are linked to two factors: sharply reduced access to the Israeli labor market, which has been a major employer of unskilled Palestinian workers, and the relative ‘stability’ of government jobs, which are less accessible to the young and the less educated.
The deep impact of the conflict and closure regime on the labor market is evident not just in unemployment rates: there is little evidence of sustained per capita GDP growth, and there has been a secular decline in the private sector. The West Bank and Gaza economies have experienced marked de-industrialization, with the share of manufacturing and construction in total employment falling from 37 percent in 1998 to 24 percent in 2009. In response, the share of the government in total employment rose from 17 to 26 percent between 1999 and 2009. This was largely driven by growth in health and social work, education and public administration– suggesting an aid-driven expansion of the public sector. Yet another concern with this trend is that investing in education and health will have limited returns as long as private investment remains low and opportunities for productive employment are restricted.
Indeed, there is strong evidence of a fall in labor earnings, with real wages having fallen by at least 10-30 percent depending on the education level. This decline has been especially severe amongst the least educated, which is likely due to the loss of low-skilled jobs in Israel that carried a wage premium and the labor supply shock as Palestinians who held jobs in Israel returned home. Persistent closures may have also had a long-term effect on earnings in the West Bank and Gaza labor market: the wages earned by those with high school or less education did not recover between 2003 and 2009. Another worrying, though unsurprising, trend is the relative decline in private sector wages.
There are also marked gender differences in the West Bank and Gaza labor market. Women in the West Bank and Gaza are constrained not only by the same social and cultural norms faced by other women in the region, but also by additional concerns of safety, mobility, and the sheer scarcity of jobs. Despite having one of the lowest female labor force participation rates of less than 16%, both labor force participation and female unemployment have increased since 2003, suggesting that widespread male unemployment is pushing women into work. Worryingly, less educated women increasingly report working as ‘unpaid family members’, while well educated women are increasingly confined to government jobs.
A major dimension of the conflict has been the sharp deterioration in conditions in the Gaza Strip since 2005. The Gaza Strip has been cut off from the rest of the world: almost no one from Gaza Strip now works outside. Compared to the West Bank, Gaza Strip has done markedly worse along all measurable labor market dimensions- with higher unemployment, lower labor force participation rates, lower wages, fewer private sector jobs and higher rates of discouragement in the labor market.
While the impact of the external closures is evident in the sharp loss of employment among unskilled workers who held jobs in Israel, and in the marked divergence between the economies of the West Bank and the Gaza Strip, understanding the mechanisms through which internal closures affect economic activity is more difficult. The analysis finds little evidence that variations in closure intensity are correlated with variations in labor market indicators such as underemployment. A potential explanation is data limitations- more detailed information on workers’ commuting patterns, firms’ supply chain behavior and investment climate constraints is needed. Another explanation is that Palestinians might have adjusted to a chronic but unpredictable closure regime so that they are relatively shielded from temporary changes in closure intensity. For instance, there is anecdotal evidence that employees work out arrangements to stay close to the workplace during the workweek.
At a general level, the decline in private sector manufacturing and the increased reliance on government jobs may be interpreted as ‘adjustments’ to mobility barriers. At a more specific level, our analysis hints at systematic differences across workers and jobs in vulnerability to closures. For instance, there is some evidence that internal closures do lead to missed days of work: compared to those working inside their governorate, those who work outside are significantly more likely to have days of absence from work when closures are high. However, they are also less likely to be underemployed. A potential explanation is that those who work further from home do so because they have found less ‘vulnerable’ or more stable jobs, where enough work is available on other days to make up for the lost days. Thus, the impact of internal closures may depend not just on distance to work, but also on other factors such as occupational or industry characteristics currently not captured in surveys.
Ultimately, sustainable employment and wage growth in the West Bank and Gaza must be driven by the development of the private sector. Though current political constraints severely limit the immediate opportunities for growth, policies should focus on supporting sectors which are best placed for creating employment in this restricted environment while continuing to invest in skills and human capital. Indeed, the distorted labor market conditions prevailing in the West Bank and Gaza necessitate a well-thought out policy package to support the Palestinian economy when the political uncertainty and mobility barriers are lifted.