Using estimates based on the crossings survey, the Labor Force Survey, and Ministry of the Interior administrative data, the Bank of Israel on Wednesday issued a report titled (in Hebrew): “Illegal trade in work permits for Palestinian workers in Israel.”
The work permits of about 20,000 PA Arab workers, constituting 30 percent of PA Arab laborers employed under permits in Israel, were purchased illegally for an average monthly payment of about NIS 2,000 (about 20 percent of their gross monthly income). Annual revenue of the illegal trade of permits is conservatively estimated at about NIS 480 million, with annual profits of about NIS 120 million.
Paying workers, those who purchased their permits, are typically employed by an employer other than the one listed on their permit. They report an average monthly income of about NIS 10,100, or about NIS 8,100 after deducting the price of the permit. Non-paying workers are generally employed by the employers named on their work permit, and report a monthly salary of about NIS 7,800. The price of the permit is thus almost equal to the difference in salary between payers and non-payers who are working for the listed employer, and the rent due to employment under the permit in the open market rather is captured almost completely by the permit traders.
A study conducted by Haggay Etkes of the Bank of Israel Research Department and Wifag Adnan of New York University-Abu Dhabi, which will soon by published in “Selected Research and Policy Analysis Notes”, documented the illegal trade of work permits for PA Arab workers in Israel through a targeted survey of about 1,200 workers that was conducted in June 2018. The study found that about 20,000 PA Arab workers—or about 30 percent of workers employed in Israel under a permit—purchased their work permits. The price of a permit is about NIS 2,000 per month, and the average monthly profit for a permit trader, net of compulsory payments to the state, is about NIS 500. A conservative estimate of the total revenue from the illegal permits trade is about NIS 480 million per year, with profits of about NIS 120 million per year. The vast majority of receipts and profits are in the construction industry, where most of the PA Arab workers are employed, and the price of a permit in this industry is higher than in other industries.
The trade in permits is due to the fact that the existing permit regime grants employers control over the permits. Under this regime, Israeli employers receive permits for specific PA Arab workers, and can easily cancel them. The permit enables the PA Arab worker to enter Israel on condition that he is employed only by the Israeli employer who requested the permit. However, since the permits are distributed under administrative allocation, the output of workers for some of the employers who obtained a permit is lower than their potential output for employers who did not obtain a permit. Therefore, some of the workers purchase the permit from an employer with a quota of permits, and then work illegally at a higher wage for employers who don’t have a quota.
The findings of the survey that the researchers conducted among PA Arab workers at the crossings entering Israel show that paying workers, those who purchased work permits, earned an average of NIS 10,100 per month. In contrast, non-paying workers worked for the employer named on the permit at an average monthly wage of about NIS 7,800. In other words, most of the wage gap between these groups of workers was offset by the price of the permit, while the net monthly wage of payers is only about NIS 300 higher than the wage of non-payers, mainly because they worked an additional half-day each month (Figure 1). This finding shows that almost all the rent generated from PA Arab employment in the open market in Israel under the existing permit regime is captured by the permit traders.
The findings regarding the widespread trade in work permits show the potential advantages of the reform in the work permit regime in Israel that was approved by the cabinet in December 2016. The objective of the reform was to enhance the efficiency of the allocation of PA Arab workers and to protect their rights by allowing workers to more easily rotate between employers. This reform would replace the administrative allocation of quotas with a market mechanism (Cabinet Decision 2174, December 18, 2016). The implementation of the decision in the construction industry is expected toward the end of 2019, after completion of a pilot program conducted at the Atarot Industrial Zone starting in March 2019.
In view of the existing distortions in the current permit arrangement, our assessment is that the reform, if applied efficiently, may significantly reduce the trade in permits and increase the income of workers and the profits of employers who did not receive permit a quota, at the expense of employers who did receive a quota under the current mechanism, including permit traders. As a result of the allocation of workers to companies based on economic, rather than administrative, criteria, the labor productivity of the PA Arab workers, their wages, and their overall social welfare will increase. Moreover, operating an Internet-based designated mechanism to connect workers with employers, which is being developed by the Coordinator of Government Activities in the Territories, is expected to help realize the objectives of the government reform: enhancing the efficiency of the allocation of PA Arab workers, and increasing their wages.