The Effect of Migrant Workers on Employment,Real Wages and Inequality The Case of Israel -1995 to 2000

This paper deals with the impact of migrant workers on the Israeli wage structure, on the chances of being unemployed or out of the labor force and on inequality in gross earnings from work. One of the manifestations of globalization is the movement of migrant workers from low-income to richer countries.The recent increase in living standards in Israel has created significant wage differentials for workers from low-income countries. Paradoxically,an important trigger for this process was also the worsening of Israel’s security situation in 1993,following the Oslo accord between Israel and the Palestinians.Israel responded to the deterioration by closures,which sharply reduced the number of Palestinian workers in Israel,substituting them with migrant workers, mainly from Eastern Europe,South and Central America and the Far East. The rapid inflow of migrant workers,especially since 1995,makes Israel an interesting case study for studying its effects on labor force participation, unemployment,the wage structure and gross earnings inequality.Given the bias in the government’s permit policy in favor of unskilled workers,the paper emphasizes the effects on Israelis with weak economic endowments. The research is based on pooled micro data,combined with data on the number of non-Israeli workers by economic branch.The micro-data is based on the Israeli income survey,including a host of personal characteristics,such as the individual’s education level,labor market status and a model-based calculation of welfare benefits. The research also focuses on government policy issues,such as the effect of the replacement ratio on the rate of labor force participation.For individuals not in the labor force the replacement ratio is defined as the income support payment divided by the potential wage.The inflow of migrant workers affects the potential wage negatively and together with a relatively easy access to income support payments,this policy variable is found to contribute significantly to the explanation of the exclusion from the labor force and the worsening of gross earnings distribution in a statistically significant way.The effect of these variables on unemployment is less clear and the effects on the wage structure are varied,distinguishing between substitutive and complementary effects,depending on the individual’s occupational and educational characteristics as well as on the time perspective. The study also shows that the highly branch-specific Israeli migrant permit policy did not prevent the effects on wages from spreading throughout the economy,thus emphasizing the general-equilibrium nature of these effects.