From Economic Integration to Near Elimination: The Economic Consequences of Isolation

This paper captures the labor market consequences of the Gaza Blockade (2007–), a politically motivated and unanticipated event that provides a rare opportunity for a natural experiment. I am aided by the fact that the West Bank is a natural comparison group for examining the Gaza Blockade. Using a difference-in-difference framework, I find that, relative to domestic workers in the West Bank, those in Gaza experienced an additional 11% point increase in the unemployment rate and an additional 13–20% reduction in real wages. The long-term effect (3 years later), on real wages was at least 1.5 times larger. Rising wage inequality was another consequence of the Blockade, which manifested itself in an upsurge in industry wage differentials and to a lesser extent, the skill premium. This paper also discusses the impact of the crisis on the sectoral composition of the Gazan economy, particularly as a result of the severe contraction of non-service industries in the private sector. While the Gaza Blockade constitutes an extreme case of a massive economic shock and a radical departure from the close economic integration experienced in earlier decades, the results of this study can nevertheless serve to shed light on how other open economies are likely to respond to the increasingly common imposition of restrictions on trade and factor mobility such as economic sanctions, visa restrictions, and trade wars. The effects of such barriers to trade and labor mobility are particularly dire in the absence of labor reforms designed to mitigate their adverse effects.KEYWORDS: Middle East; conflict; economic development; labour; wages; trade