Labour leisure trade-off meets a mobility function to model cross-border movements of labour between Palestine and Israel

This paper presents the first model analysis combining the labour leisure trade-off and a factor mobility function to assess the long-term effects of an increased Palestinian labour demand in the Israeli economy. A unique and comprehensive social accounting matrix is constructed and used to calibrate the model. The model features a nested utility function combining the benefits of linear expenditure systems and constant elasticity of substitution functions by depicting the household’s behaviour with different functional forms at each stage of the nest. The results show that an increased Palestinian labour demand in Israel has in the long-run negative effects on the Palestinian economy, but positive welfare effects for Palestinian households. This finding demonstrates both the mitigating effect of Palestinian employment in Israel on poverty in the Palestinian territories and its deteriorating effect on the Palestinian economic growth by bidding up domestic wages, reallocating labour away from tradable activities and reducing the competitiveness of the Palestinian export sector. The paper also highlights the divergence between the outcomes of increased Palestinian employment in Israel in the short-run and the long-run. In light of these results, the paper discusses some policy options for the Palestinian National Authority to tap into the benefits of Palestinian employment in Israel, while alleviating its negative effects on the domestic production capacity.