Does the Cost of Foreign Workers Affect the Wages of Local Agricultural Workers? Evidence from Israel

Modern agriculture often relies on foreign workers. Critics claim that it hinders investments in labor-saving techniques, and leads to unemployment of unskilled native workers. Proponents highlight the contribution of foreign workers to growth, especially in rural areas.

This paper investigates whether the inflow foreign workers really affect the demand for local workers in agriculture. We exploit an 8% tax that was assessed on the wages of foreign workers in 2003. If foreign workers are substitutes to local unskilled workers, the demand for local unskilled workers should increase as a result of the tax, and their wages should increase, unless their supply is perfectly elastic. On the other hand, if unskilled workers, foreign or local, are complements to skilled agricultural workers, the demand of the latter should decline, and their wages should decline as well.

We found, using a difference-in-difference regression approach, that the wages of local unskilled agricultural workers in Israel increased about 9% following the taxation of foreign worker wages, but the effect is not statistically significant, perhaps because of the small sample size. No changes in wages were found for skilled workers.

To conclude, this research provides some support to the hypothesis that there is substitution between foreign workers and local unskilled Israeli workers in agriculture, but this conclusion is not strong enough statistically.