New Evidence on Technology, Trade and Adjustment to Immigration in Israel

Abstract

In the 1990s, nearly a million Russian Jews emigrated to Israel following the fall of the Iron Curtain. This event was exogenous in nature and resulted in a large increase in the relative supply of skilled labour in Israel. Despite this change in factor abundance occurring in conditions seemingly well suited to an application of the Rybczynski theorem, the evidence so far indicates that changes in sectoral output mix played no role in Israel's adjustment to Russian immigration. Instead, the inflow of factors complementary to skilled labour, such as skill-biased technology, has been put forward by the literature as an explanation for the adjustment process in Israel. By accounting for the extent of occupational downgrading of Russian immigrants and an appropriate amount of time for sectoral changes to occur I present new evidence that changes in the composition in output across sectors was indeed an important adjustment mechanism in Israel. Changes in output mix were of a similar importance to changes in production techniques within sectors in accounting for the increase in skilled labour. Changes in production techniques appear to be consistent with skills biased technical change; sectors with a greater high technology equipment and services input intensity were associated with increased skill upgrading in the workforce in subsequent years.