In this study, a detailed model is presented to incorporate the labor markets in the West Bank & Gaza Strip with the macroeconomic variables such as private investments and capital government expenditures. The estimated model was utilized to conduct macroeconomic simulations to trace out the evolution of unemployment, and the allocation of labor between local markets and Israel. This study has simulated the expected impact of absorbing returning Palestinians on the West Bank and Gaza Strip labor markets. Restrictions imposed by the Israelis on Palestinian labor mobility directly and indirectly affect absorbing laborers in the local market. The expected impacts are as follows:
carrying out investments with external transfer has the anticipated effect of absorbing oversupply of Palestinian laborers and returnees
by the year 2010, Palestinian labor exports to Israel will be re-absorbed into the local sector
intensive investments and external transfers are required to create jobs for returning Palestinians and to re-absorb returning workers from Israel
Therefore, applying intensive investment programs with external transfer are the only mechanisms to absorb over supply of laborers originating from Palestinian workers in Israel and returning Palestinian workers from abroad.
The key message from this paper is the centrality of investment in tradable sectors (both exportable and import-substitutes) that is needed to absorb the growing labor supply. That in turn requires a policy environment, which fosters private investment. However, it should be clarified that this paper provides background information to Palestinian decision-makers to deal with the refugee problem. According to the author, the refugee problem requires a political solution to be settled. Nevertheless, economic and social adjustments will occur when the absorbing process for Palestinian returnees takes place. Therefore, this paper deals only with the necessary economic conditions required to absorb Palestinian returnees in the economies of the WBGS. Although the refugee problem is a political problem, it has been influenced and effected by the Israeli measures and practices, which led to deterioration of the Palestinian economy over the past five decades.