Unemployment in the Palestinian Territories: Testing How External Funding Makes a Difference Using ARDL Methodology

Unemployment in the Palestinian Territories has reached a critical level due to political instability, economic fragmentation, and restrictions imposed by Israel. This study examines the effects of external funding on unemployment, considering variables such as foreign grants and aid, foreign direct investment, compensation of workers in Israel, private sector transfers from abroad, and trade openness as a control variable. Utilizing quarterly data from 2000 to 2023, this analysis employs the ARDL model to explore the short- and long-term relationships between these variables and unemployment rates. The results show that foreign grants and aid, foreign direct investment, and trade openness significantly reduce unemployment in the long run, indicating that these factors can stimulate employment and economic activity. Conversely, foreign private-sector transfers increase unemployment, suggesting a failure to channel remittances into productive investments. The marginal effects reveal a short-term decrease in unemployment due to foreign grants, while private transfers cause a temporary shock. The error correction model (ECM) indicates a relatively fast convergence towards equilibrium, with approximately 45.7% of each disequilibrium corrected every quarter. These findings underscore the need to align external funding with development priorities, promote the productive use of remittances, and enhance trade openness. Targeted investments, transparency, and economic stability are crucial for maximizing the impact of external funding on reducing unemployment and achieving sustainable development in the Palestinian Territories.