The Relationship Between Wages and Unemployment in the Palestinian Economy, 2004–2020

Unpublished working paper, prepared during postgraduate study at the Doha Institute for Graduate Studies. The full text is in Arabic and available as a PDF from the top of this page.

Abstract

The study examines the relationship between wages and unemployment, and the extent to which nominal wage levels and other variables affect unemployment rates in the Palestinian economy over 2004–2020.

It reviews how unemployment and wages are conceived across economic theories, traces the evolution of unemployment rates and wage levels over the period, and considers the effect of the COVID-19 pandemic on both.

Method

The study is econometric, using quarterly data from local sources. A time-series model was built with unit root and cointegration tests to establish stationarity and reveal the long-run relationship between variables.

Principal finding

The study finds a positive long-run relationship between nominal wages, inflation and unemployment — contrary to economic theory and to the literature, which hold the relationship to be inverse, as expressed in the Phillips curve.

The paper attributes this to:

• Structural distortion in the Palestinian economy
• Falling real wages against a rising general price level
• Divergent daily wages between the West Bank, Gaza and inside the Green Line
• Imported inflation from the Israeli economy, given structural dependence
• The absence of a Palestinian currency with which to influence the general price level

Recommendations

The study proposes a policy package aimed at reducing unemployment and raising real wages relative to the general price level.