Changes in earnings inequality in the developing world can often cause social upheaval. During the years leading up to the first Intifada, Palestinian men experienced dramatic wage compression. The returns to schooling fell significantly, especially for those with a college degree. Many observers believe that it was not a coincidence that these young, educated and underemployed youths quickly became the vanguard of the Intifada. During the early part of the Oslo period (1993-2000), with an increase in overall economic growth and government employment, there is some evidence that the labor market for educated workers improved. However, once the peace process stalled, the Palestinian economy collapsed and Palestinian workers became even more dependent on unskilled work in Israel. This paper investigates variations in wage inequality and schooling returns for Palestinian men living in the West Bank and Gaza Strip from 1995 to 2001 using
recently released Palestinian labor force survey micro data. In order to do so, we first examine the wage distribution. Next, we examine the returns to schooling using a simple Mincerian model. The evidence from this paper shows that leading up the Al-Aqsa Intifada Palestinian workers saw noticeable wage compression, but mostly because less educated workers saw their wages rising. Our next step is to examine some of the possible causes for these changes in the returns to schooling. We find that the size of the government sector and the ability of Palestinians to work in Israel strongly affect the returns to schooling.