The Palestinian Economy. Theoretical and Practical Challenges

332
Di Maio – Nandi
variables included in the full specification (i.e. Column 3, Table 5). 15 This approach
allows for the possibility of different channels being simultaneous at work. The
magnitude of second stage coefficient thus only gives an indication of the relative impact
of different channels.
We begin our analysis considering the effect the number of closure days on four
aggregate level labour market indicators: the average market wage and unemployment
rate in WB and the average (low-skilled) wage and unemployment rate at the district
level. Results reported in Table 6 show that the number of closure days has a significant
effect only on the (low-skilled) district average market wage (lower panel of Column 3,
Table 6). The latter is a measure of the tightness of the labour market and a proxy for the
child’s opportunity cost of not working. 16
The first stage coefficient thus captures the effect of the conflict on the local labour
market: the average low-skilled wage decreases with the number of closure days. From a
theoretical point of view, a change in local average market wage is predicted to have two
opposite effects on child labour (and school attendance): the income and the substitution
effect. The former prevails when a lower market wage increases child labour. This is
the case when the child works for reaching a given level of consumption. On the
contrary, the substitution – or own price effect – prevails when an increase in the
market wage – the opportunity cost of not working – induces the child to work more.
As shown in the upper panel of Table 6, the lower the (low-skilled) district average
market wage the higher the probability of child labour. The result clearly indicates that
in West Bank the income effect prevails, with children working as a response to a
worsening of the economic conditions induced by the conflict. In addition, closures also
marginally reduce school attendance.
Next we consider four household-level channels through which a change in the
intensity of the conflict may have an impact on child labour and school attendance.
15 The predicted value from the first stage regression is a measure of the explained component of the second
stage regressor due to variation in the number of closure days. The predicted value is correlated with the
number of closure days but not with the unexplained component of children’s time allocation choice. Hence
the effect on children’s status can be thought as due to changes in the second stage regressor induced by the
variation in the number of closure days.
16 To measure the child’s opportunity cost of not working, the obvious candidate would be the average child
wage at the district level. This was not possible due to the extremely low number of observations on child
wage in our dataset. Instead we use the average wage of private sector workers with less than 7 years of
education. Note that the average father’s years of education in our sample are 10. Wages are in constant 1996
New Israeli Shekels (NIS), obtained by deflating nominal wages by the Consumer Price Index in West Bank
provided by the PCBS.