Wage differentials and economic restrictions: Evidence from the Occupied Palestinian Territories

Abstract

The article examines the wage impact of Israel’s constraints on economic activities and infrastructure development in the West Bank’s Area C. We provide evidence to show that Area C workers suffer a wage penalty of about 8 percent relative to workers in Areas A and B. The results also show that when controlling for worker characteristics, the magnitude of the Area C wage differential drops by about half. We then extend our analysis to compare average wages between Area C workers and other rural workers and show that the wage difference is statistically insignificant. This indicates that the Area C wage differential we observe can be attributed primarily to a rural environment effect rather than to Israeli economic restrictions placed on Area C per se. This result indicates that the effect of Israeli restrictions on Area C wages is neutralized. We show that negative labor supply shocks (commuting) serve as a potential transmission mechanism. Specifically, we show that Area C residents are more likely to commute than their peers in other rural areas. [JEL codes: R11, J30, J61, J01]