Do Immigrants Affect Labor Market Disparities?

This study exploits the natural experiment, provided by the start of the second intifada, to measure the effect of immigration on labor market outcomes of Israeli-Arabs and Jews. It finds that Immigrants of different origins, Palestinians versus Foreigners, have different effects on the labor market, and these effects are experienced differently by different native groups, suggesting that the degree of substitution with native workers varies between groups. More specifically, a 10% foreign-worker-induced increase in the supply in a particular industry reduces the wage of Arabs by about 1%, while having no effect on Jewish wages. Palestinian-induced increase in the supply in a particular industry, in contrast, has the opposite effect: it reduces the wage of Jewish workers by about 1% but increases the wage of Arabs by 2.5%. Employment opportunities of either Arabs or Jews are not significantly affected by foreign workers, but are harmed by Palestinian influxes (in the scale of 1.5% for Arabs and 0.5% for Jews, for a 10% Palestinian-induced increase in the supply in a particular industry). Simulation analyses show that immigration of Palestinians and foreign workers together explain 7.6% of the increase in the wage gap between Israeli Arabs and Jews in the 1990s. They provide no explanation for changes in the employment gap.