The government is working to bring tens of thousands of foreign workers to Israel to overcome the hardship in the construction industry during the war. But the move could only be realized in many months, and the suppression of the Palestinian workers is expected to have a heavy price. In the meantime, apartment prices may climb
Shlomo Teitelbaum, Calcalist January 4, 2024
“A third of the construction industry is based on approximately 80,000 Palestinian workers, who have not entered Israel since the outbreak of the war. There are another 45 thousand Israelis who worked in the industry and have not worked since the war, and 50% of the construction sites have been closed since the war. The construction industry is about 6-7% of the GDP, and this slowdown in just the last quarter of the year subtracted 0.5% from the annual growth of 2023.
According to our models, this will lead to a 1% increase in housing prices,” said Dr. Eyal Argov, director of the Macroeconomics in the research division of the Bank of Israel, at the Aharon Institute for Economic Policy conference held last week at Reichman University.
Argov’s words are concise and sharp. The absence of the Palestinian workers harms not only the construction industry, but the economy as a whole, and may lead to an increase in housing prices. However, as of now, 90 days since the outbreak of the war, the government (and the defense cabinet) has decided not to decide, and has not presented an outline through which it will be possible to bring the Palestinian workers into Israel.
But on the other hand, the government also did not announce that the era of employing Palestinians in the construction industry is over. The only thing the government is doing now is to make an effort to bring foreign workers to Israel. The government increased the quotas to 50,000, and now they are actively working to increase the quotas to 80,000, at a time when it is clear to everyone that the solution of the foreign workers is not a solution for the immediate term, and creates problems for the long term.
As with other economic issues that touch on security issues, the economic bodies in the government are powerless, they do not have the security expertise or access to the full intelligence picture that would allow them to determine whether there is a security risk in bringing in Palestinian workers or whether this security risk can be managed in one way or another.
Considering the composition of the government and as it appears in conversations with government officials, there is great concern that the government is not doing as much as possible to think of ways in which it will be possible to bring some of the Palestinian workers back to work, as part of the world view of senior government officials, for whom there is no difference between the Palestinians: “they are all terrorists and “everyone is Hamas”.
The economists cannot say whether there is a risk in bringing Palestinian workers to Israel, but they can say that the solution of bringing in tens of thousands of foreign workers is not applicable in the short term, and can cause serious problems in the long term.
The Director General of the Ministry of Housing, Yehuda Morgenstern, is trying to take action to bring in foreign workers. Senior officials of his office interviewed 5,000 potential workers in India, and now they are staying in Sri Lanka and trying to recruit about 3,000 more workers. Morgenstern also managed to increase the quotas to 50,000 foreign workers. But he admits that ”the Palestinian workers are also needed, and bringing in the foreign workers is a complementary move. I emphasized that there are areas where only the Palestinians work.”
Morgenstern is optimistic and says that by January 15, ten thousand foreign workers will arrive, and every month we can bring another ten thousand. Even if Morgenstern’s optimistic scenario comes true, the construction industry will suffer from a shortage of workers in the next two and a half quarters, which means – as Argov said – damage to the economy, and an increase in housing prices.
However, the history of the construction industry during times of security tension makes it possible to doubt Morgenstern’s optimism. Thus, around the second intifada (after the year 2000) the situation was similar and the entry of Palestinian workers was stopped. At that time, terrorism came from the territories of the Palestinian Authority, so the security challenge was even more complex. According to Argov it took five quarters to bring in significant numbers of migrant workers, but also then they were only half of the number of Palestinian workers who were in the economy before the Intifada started. In other words, bringing in foreign workers is more complex than it seems at first.
However, the Bank of Israel also says that they agree that there is a need for future diversification of the non-Israeli workers in the construction industry. That is, there is room to reduce Israel’s dependence on Palestinian workers, in light of the constant decrease in the number of Palestinian workers in the industry during security tensions.
However, the history of the real estate industry and foreign workers also teaches something important about the long term. Around the security escalation in the 1990s, a massive jump began in the number of foreign workers in the construction industry, from 6,000 in 1993 to a peak of about 79,500 in 2002. This coincided with a sharp decrease in the number of Palestinians who could work in Israel from about 86,000 in 1992 to 13,000 in 2002.
However, from 2002 and onward the government began working tirelessly to reduce the number of foreign workers in Israel (in all industries). The reason was that at that time there was also a depression. Economically, the employment rate was low at about 65%, and there was a fear that the foreign workers were crowding out the Israelis. In the coming year we may find ourselves again with another 50,000 foreign workers in the construction industry alone, and this has significant economic consequences.
50,000 people who will be mainly in the center of Israel, where the main construction takes place, will create significant pressure on public infrastructure, housing, transportation, health, and education. The Ministry of Housing knows how to point out technical solutions to these difficulties, but it is clear that such a significant addition of foreign workers has consequences.
In addition, experience shows that friction sometimes develops between the local Israelis and the foreign workers, and at some point the foreign workers push the feet of the Israelis from other jobs.
But the most important thing is that the government has not made a decision on what it plans to do with the Palestinian workers. The government needs to understand that the decision to bring in 50,000 foreign workers today means pushing the Palestinian workers outside Israel’s borders. This is a decision with economic and security implications that must be taken into account.
The Palestinian economy is largely dependent on labor in Israel. The income of the Palestinian workers in Israel is about 4 billion dollars a year, which is about 20% of the Palestinian GDP. And there is no doubt that such a question – whether to bring the Palestinian economy to a slowdown or perhaps a recession – is a question that must be decided on seriously, and not through a failed solution to an urgent short-term problem. Pushing the Palestinian workers out will create a great temptation for contractors to employ Palestinians illegally, since the cost of the Palestinian’s salary will be much lower, which will result in significant enforcement costs, and perhaps even increase the security risk.
The government must make an effort to return the Palestinian workers to Israel, while maintaining the necessary security arrangements. But in any case, the government must not tell itself that the foreign workers solve the problem immediately. It is almost the opposite. We may find ourselves in a situation where the foreign workers solution does not solve the short term problem, and only creates problems in the long term.
