Political Instability, Economic Restructuring, and the Informal Sector: Evidence from Palestine

This study investigates how prolonged political instability and economic restructuring have shaped the informal sector in Palestine. Using data from the Palestinian Labor Force Survey and applying econometric analysis with selection correction, we examine structural and institutional determinants of informal employment and how these dynamics are mediated by conflict. The findings reveal that weak formal job creation and institutional deficits have sustained a large informal workforce, consistent with dualist and institutionalist theories that view informality as a residual sector for those excluded from formal employment. Higher regional employment rates and broader social security coverage are associated with significantly lower informal employment, whereas agrarian economic structure and limited enforcement correlate with higher informality. Conflict-related violence has a nuanced impact; spikes in fatalities cause overall labor participation (including informal) to contract, while intensive-margin responses among those who remain informally employed are more muted and region-specific, with any added-worker adjustment largely confined to informal earnings in particular local labor markets rather than emerging uniformly. The analysis also uncovers pronounced gender and regional heterogeneity: women exhibit different informal labor patterns than men, and Gaza’s informal sector expanded markedly under blockade relative to the West Bank. These results show the informal economy’s role as both a structural byproduct of insufficient formal opportunities and a buffer during turmoil, offering insights for theory and policy on labor informality in conflict-affected developing economies.