Chapter 4
Report conclusion

The general aim of FALUP 93 is a better understanding of the mechanisms at work among individuals and households in Gaza and the West Bank refugee camps with regard to adaptation to economic shocks. As mentioned, we are not measuring merely the short-term effects of the border closure, but also the long-term effects of occupation and Intifada and the medium-term effects of the Gulf War.

Using as a baseline the pre-closure FALCOT 92 living conditions survey, FALUP 93 has documented a dramatic drop in adult male labour-force participation from 1992 to 1993. In Gaza this reduction amounts to one third of the males in the 1992 labour force; in the West Bank refugee camps, one fourth.

This reduction in labour-force participation is particularly marked among young, unmarried men, and among Gaza non-refugees. Some indications were found that the Northern West Bank refugee camps were more affected than the Central/ Southern camps. One possible explanation is that, of the population in the Central/ Southern camps, 20% are less affected by the closure because they live in Arab Jerusalem, where there is a generally stronger local economy. The sample in FALCOT 92 is, however, too small to permit direct comparisons.

The discussion has further showed that the reduction in male labour-force participation reflects widespread under-utilization of labour in the survey area. Open unemployment rates cannot capture the magnitude of labour under-utilization, and have stayed roughly unchanged since 1992. Such unemployment rates must consequently be supplemented with the number of "discouraged workers" and the number of employed persons who, although employed, state that they want more work.

Only half the persons employed in Israel in 1992 were still working there in 1993. Two-thirds of those who lost employment in Israel express a desire for more work. Less than one fourth of those who lost employment in Israel have found new employment in the Occupied Territories. Employment characteristics of these workers indicate a group of marginal workers, employed in low-status jobs with high instability and insecurity. There are no indications that these workers have "squeezed out" other workers in local employment.

It seems misleading to take the low and comparably stable open unemployment rates as indicating that the labour market in the Occupied Territories has quickly adjusted to reduced labour demand through lower wages. The reduction in formal employment is much larger if we take the unemployment rates as well as the high number of "discouraged workers" into consideration.

Because the survey did not measure wages directly, we cannot tell whether the large reduction in employment is due to a greater decrease in labour demand than assumed by the Israeli Central Bureau of Statistics/ the World Bank, or the downward shift in worker reservation wages is less than expected.

The high number of "discouraged workers" may support the last explanation. The reservation wage of these workers (i.e. the lowest wage for which they offer employment), still seems to be above the wage level they can obtain in the Occupied Territories. Many persons can still "afford" to be inactive while looking for an "acceptable" job. The search for any kind of local employment at any wage level has not yet been launched.

Labour-force participation is found to be primarily determined by gender, age, marital status and position in the household. This observation may indicate that individual response and adaptation strategies are closely coordinated with the coping strategies practised on the household level. One possible explanation for the apparently low downward shift in worker reservation wages may thus be found in household systems for re-distributing economic resources among their members.

In the chapter on household economy we found no reason to reject the "family employment network" hypothesis, which stipulates that individuals facing employment problems rely primarily on the labour activity of other household members for economic support. The reservation wage of unemployed and discouraged workers seems to depend primarily on the labour activity of other household members. The presence of other income-earners in the households is of decisive importance for the economic welfare of individuals who lose employment. The larger the household, the greater the chance that at least one household member will be full-time employed. Large households thus seem to form a private "social security system" on the microlevel, offering their members a kind of collective insurance against sudden economic shocks.

Non-labour income from public sources is not more important in households with one or more unemployed and "discouraged workers" than in other households. Support from UNRWA and various social benefits does not seem to have any strong influence on the reservation wage of unemployed and discouraged workers.

The "family employment network" hypothesis cannot, of course, apply to households where no members are labour-force participants. Because of their small size and low labour activity, most female-headed households fall outside the private "social security system". Small households thus seem to be particularly vulnerable; many of them must, in contrast to large households, rely on public transfers for survival.

The second major household adaptation strategy seems to be that of drawing on net wealth, which allows them to break the immediate link between income and consumption expenditures. The vast majority of households with loans have increased their debt after the border closure, regardless of how they score on the index for household possession of consumer durables. Particularly poor households are characterized by having no gold or other savings, by taking up debt for consumption purposes, and by using credits for daily consumption because they "cannot pay".

The degree of reliance on reducing net household wealth, however, varies with the type of households. Both households with at least one full-time worker, and households without labour-force members or with female heads, seem to rely less than average on this strategy - albeit for different reasons.

For households with at least one full-time worker, the need for adaptation is less pressing, and the best "adaptation strategy" is simply to uphold the income flow from labour activity. In contrast, households without labour-force members, or with female heads, in general seem already to have adapted to a minimum level of consumption expenditures before the closure.

Households which at present seem to rely most strongly on reducing net liquid wealth as a household coping strategy are large households, households with members who lost employment in Israel from 1992 to 1993, and households with one or more "discouraged" or unemployed workers.

These households do not yet seem to have adjusted their level of consumption expenditures down to the new lower level of income. For large households, this may also be extremely difficult, because of a higher minimum level of consumption expenditures.

Relying on net liquid household wealth can only be a short-term strategy. In the long term, households without public social security must either reduce their consumption expenditures, or implement some compensatory measures on the income side to meet their minimum consumption requirements. Reducing net liquid wealth as household coping strategy is consequently closely linked to expectations about future income possibilities.

One possible explanation for the apparently low downward shift in worker reservation wages may be expectations of an improvement in the employment situation in the near future. The high proportion of male "discouraged workers" who cite "security" related reasons for not seeking work at present may support this assumption.

Expectations of a future improvement in the employment situation may also help explain why income-generating household activities (at least in the short term) have not increased to compensate for the reduction in formal labour activity, neither at the individual nor at the household level. It must also be remembered that the field work was conducted in September/ October 1993, and that the survey thus reflects the situation only six months after the border closure.

If the border closure is regarded as temporary, then employment in Israel is eventually expected to be available, and workers may well prefer to await developments. Such expectations have solid foundations in the experience of numerous fluctuations between tighter and more relaxed border restrictions in recent years.

"Discouraged" and unemployed workers aspiring to get permission to obtain relatively well-paid work in Israel, may be described as participants in a "lottery". Economic activity, and hence employment opportunities, in the Occupied Territories are also characterized by unpredictability and sudden changes in fundamental factors.

The apparently low downward shift in worker reservation wages and the tendency for households to rely on short-term strategies may thus be interpreted as an effect of the lack of overall control stemming from prolonged occupation, and a high degree of vulnerability towards outside factors.

For large parts of the population, the economic situation depends as much on "high policy" and political events outside their control as on their own efforts and actions. In the present state of occupation, living conditions are thus not only threatened by adverse effects on income and employment, but also by the fact that the population has been deprived of control over basic factors that influence its situation.

If there is no improvement in the employment situation in the near future, the majority of households may drift into a situation of worsening poverty, typical of very poor Less Developed Countries and presently found among households in the FALUP sample without labour-force members, or with female household heads.

Minimum consumption expenditure requirements and depleted savings may oblige households to implement any and every possible compensatory measure on the income side. Alternative sources of income, other than formal labour activity and access to capital, will be crucial to the development of worker reservation wages, and hence the supply of labour.

Another factor critical for worker reservation wages is expectations of an economic revival in the Occupied Territories through foreign aid. Donors may face a dilemma between giving priority to the poorest segments - small households and households with female heads, on the basis of poverty criteria and trying to moderate social frustration and political turmoil by targeting households with young and middle-aged under-utilized male workers, which are, however, not those worst off.

The question of expectations poses parallel dilemmas for a Palestinian self-governing authority. On the one hand, expectations of rapid improvements may have to be met to avoid political turmoil. On the other hand, expectations of rapid improvements may raise worker reservation wages above realistic levels, which in turn could encourage short-term, less rational adaptation strategies.

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