Policy Roundtables

The Economic Effects of Labor Shortages on CertainKey Sectors in the Local Economy

author: Palestine Economic Policy Research Institute - MAS
year: 2023

Palestinian employment in Israel has witnessed a steady rise over the past decade, from 78,000 workers in 2010 to 193,000 workers by EO 2022, equivalent to about 17% of the labor force in Palestine and 23% of all workers in the West Bank (PCBS, 2023a). During 2020, their remittances contributed about 13% of the Palestinian national income, equivalent to $2.4 billion (PCBS, 2023b). For political and economic reasons, Israel has increased the quota for work permits granted to Palestinians, allocating part of this increase to sectors that did not previously benefit from such quotas, including the technology sector and the health sector (nurses and doctors). Since the beginning of 2021, Israel has allowed the entry of workers from the Gaza Strip, introducing changes to the permit issuance system and workers’ payment mechanisms.

This increase in the number of workers in Israel has been accompanied by a disturbing phenomenon in the Palestinian labor market, particularly prevalent during the past few years. This is the shortage and scarcity of labor in certain sectors within the local economy, despite the significant increase in unemployment rates, reaching 24.4% in 2022 (and about 13% in the West Bank) (PCBS, 2023a). This phenomenon sparked a heated discussion among stakeholders in affected economic sectors (as well as economists and government) in diagnosing the extent of this phenomenon, and its effects on the Palestinian labor market specifically and the economy overall. The Palestinian Prime Minister, Dr. Muhammad Shtayyeh, recently indicated that there is a shortage of labor in the local market(1), confirmed by both the Coordinating Council for the Private Sector and the Palestine Economic Policy Research Institute (MAS, 2022a).

In addition to the ‘easing’ of restrictions applied by Israel (and despite the suffering endured by workers at crossings in their daily commute from the West Bank or Gaza Strip to their place of work in Israel), one of the main reasons for Palestinian labors’ attraction to the Israeli labor market (especially skilled labor) is the large wage differential relative to local wages.

Concurrently, this phenomenon was also a factor in raising local wages without an accompanying increase in worker productivity, reflected in the high cost of production in the local market and its repercussions on the rise in local prices, weakening their competitiveness locally and internationally. 

Resultantly, this paper sheds light on the size and cause of the phenomenon of underemployment in some vital, local sectors, and its relationship to both supply and demand for labor, as well as its effects on the Palestinian labor market and the local economy. The paper then discusses a set of possible interventions and solutions to this phenomenon, in order to reduce its negative impact on the local economy.

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