Who shared the fruits of growth in the Palestinian economy, 2006-2010?

Abstract

The economic boom in Palestine that began in 2007 had by 2010 increased real GDP by 33% above its 2006 level, following four years of rapid growth in the West Bank and a deep recession in the Gaza Strip with limited recovery in 2010. Yet many Palestinians have been inclined to believe that this boom is an illusion. This is perhaps because its benefits have been unevenly shared, and have flowed mainly to employment rather than real wages. This new study identifies the demographic groups, sectors, and locations that were winners, and those that were losers, focusing on output, employment and wages. A fuller study of who shared the fruits of growth would also do a detailed examination of poverty and consumption using household survey data, though the World Bank’s Coping with Conflict (2011) already has explored these issues in considerable detail. This study finds a kind of paradox: that 108,000 people were newly employed, but that this was barely sufficient to employ new entrants into the labor force, and insufficient to reduce the economy-wide unemployment rate. In fact, it is worse than that: without new employment in Israel and the settlements that accounted for about 23,600 – more than one-fifth – of those newly employed in the whole economy, given the rapidly growing labor force the unemployment rate would actually have risen in both the West Bank and the Palestinian territory as a whole. The Palestinian economy has one of the highest rates of labor force growth in the world, and for this reason it would have required much more rapid growth to reduce the unemployment rate through new employment in the Palestinian economy alone. There were other welcome benefits of growth, however: 99,000 of the increase in employment was in wage employment. So although total employment grew only 13% as a result of growth in the Palestinian economy (excluding new employment in Israel and the settlements), wage employment in the Palestinian economy grew about 30% in both the West Bank and Gaza Strip, and private sector wage employment grew even more, about 39% in the whole Palestinian territory. This is explained by a strong shift, among those who were already employed, from unpaid work in a family business to wage employment. A welcome shift from underemployment to employment also took place in the West Bank.That is the good news. The bad news, however, is that the real average daily wage fell sharply in the whole Palestinian economy – by 11% – because it declined 3% in the West Bank, and much further, a staggering 31%, in the Gaza Strip. In other words, the gains that flowed to labor as a whole from economic growth were almost entirely limited to the employment benefits; overall, labor did not reap gains in real wages from growth, despite rapid growth in labor productivity. This was particularly striking in the Gaza Strip, where, according to Economic Survey data, labor’s share of value added fell by half, and total employee compensation in the Gaza Strip actually declined sharply, even as employment grew. In other words, in the Gaza Strip during 2006-2010 the entire gain in real GDP – and more – went to non-labor incomes. The inescapable conclusion is that for the whole Palestinian economy the disproportionate beneficiaries of growth from 2006 to 2010 were the recipients of non-labor incomes such as profit, interest, and rent. The report also finds that the gender pay gap shrank in some low-wage sectors and widened in one low-wage and one high-wage sector. Refugees lost ground in employment relative to non-refugees, although refugee camp residents did better than refugees as a whole. The percentage of the male working age population that was employed rose in the West Bank but fell in the Gaza Strip, while the percentage of females of working age who were employed fell in the West Bank and stayed nearly the same in the Gaza Strip. This study recommends reviewing policies that tend to create greater inequality in income distribution, such as tax breaks for firms that already are highly profitable. In an earlier draft it recommended considering establishment of a minimum wage, something which the Palestinian Authority actually announced in October 2012 would be implemented, though controversy remains about the level at which it was set. This study further recommends that the PCBS expand its data collection to allow closer tracking of trends in employment and real wages by governorate. A central goal of all these policies should be to ensure that labor gains a fair share of increases in GDP. The rock bottom minimum policy goal should be that nominal wages rise at least as fast as the Consumer Price Index, so that the purchasing power of the average wage does not fall.