The effects of labor supply shocks on labor market outcomes: Evidence from the IsraeliヨPalestinian conflict

a r t i c l e i n f o Since September 2000, as a result of mobility restrictions, the supply of Palestinian workers competing for local jobs in the West Bank has increased by about fifty percent. This paper takes advantage of this unique natural experiment to study the effects of labor supply shocks on labor market outcomes. Using quarterly information on wages and employment in each city in the West Bank, the paper analyzes the short-run adjustment of labor markets to a large inflow of workers separately from the effects of political instability. The results suggest that low-skilled wages are adversely affected by an increase in the supply of low-and high-skilled workers, while high-skilled wages are only weakly negatively related to an increase in their own supply. This is consistent with a scenario in which high-skilled workers compete for low-skilled jobs, pushing the low-skilled into unemployment. This latter hypothesis is confirmed by analyzing the effects of changes in labor supply on unemployment. This paper studies the impact of labor supply shocks on labor market outcomes. Despite clear theoretical predictions, numerous empirical papers trying to estimate the effects of labor supply shocks on wages have yielded different, and at times, contradictory results (Borjas, 2003). In September 2000, as a consequence of the second Palestinian uprising, the borders between Israel and the West Bank were closed, preventing Palestinian workers from commuting to their jobs in Israel. The closure of the borders did not generate an immediate, one time, increase in the local labor supply because Palestinian workers expected to return to their jobs in Israel. Instead, as the political instability persisted, workers gave up their expectations of returning to work in Israel, and the local labor supply increased gradually. By 2004 the share of Palestinians commuting to work in Israel had decreased by more than fifty percent, generating a large increase in the supply of workers competing for local jobs in the West Bank. 1 Aside from restricting mobility into Israel, the security measures imposed by Israel since September 2000 severely restricted the mobility of Palestinians between West Bank cities. Consequently, the once homogenous West Bank region was divided into separate local labor markets, in which the mobility of both workers and products was limited. 2 As a result, I argue and provide evidence that labor supply shocks would have been absorbed locally because most past-migrants had to compete …