This paper seeks to quantify the labor outcomes arising from changes to labor policy in the context of a potential final status agreement between the Palestinian and Israeli governments. An equilibrium labor model provides the theoretical framework to test different labor policy options for the highly integrated Palestinian and Israeli labor markets. The analysis describes the main factors affecting labor supply and demand decisions in the West Bank and Gaza and Israel – namely, the importance of Israeli labor demand for Palestinian workers, the persistent wage gaps between domestic employment and better-paying Israeli jobs that are available only in limited supply, and the structural unemployment observed in the West Bank and Gaza. These distortions are captured in a model that hinges on the fixed supply of Palestinian labor to Israel due to Israeli immigration policy. The model is solved to characterize the impact of exogenous changes in Palestinian labor flows to Israel as a result of changes in Israeli permit policy, security controls and border closures. The model’s results are calibrated using available data to generate quantitative estimates of the long-run impact on employment levels, unemployment, and wages in the Palestinian and Israeli economies. The comparative statics results indicate that an increase in labor flows to Israel raises the domestic Palestinian wage as some workers already employed domestically are drawn to higher-paying Israeli jobs which have become more readily available and at a lower commuting cost. The increase in external Palestinian employment is therefore only partially offset by a decline in Palestinian unemployment, and domestic Palestinian employment is predicted to decline. The resulting wage gap between domestic and Israeli jobs narrows somewhat, but the remaining gap continues to affect labor supply and demand decisions.