Schooling Choices’ Responses to Labor Market Shocks: Evidence From a Natural Experiment

This paper uses the closure of Israeli labor market to examine the effect of a large labor market shock on educational choices for Palestinian youth. Right after the outbreak of Second Intifada in October 2000, Israel severely restricted the entrance of Palestinians workers (commuters) to its market, which resulted to more than 50% reduction in the number of Palestinian workers in Israel, mostly males. Our identification strategy relies on the variation in the geographical distribution of commuters within the West Bank prior the Second Intifada. We implement a difference-indifference strategy to compare high school dropout between localities with different commuting shares pre the shock over time. We find that the closure had significantly decreased high school dropout for males aged between 15-19 year-olds but not for females. The triple difference analysis confirms that the gender gap in high school dropout rates had decreased more in localities with high commuting shares than that in localities with low commuting shares. These effects are driven by the significant decline in employment prospects for school dropouts, as commuters were mainly concentrated in low-skill male-dominant jobs.