After Israel became self-sufficient in food in the late 1960s, farmers started migrating out of agriculture while production continued to increase towards export markets. This process intensified considerably when foreign labor became available. Traditional production theory predicts that foreign workers replace local workers, but the number of Israeli hired farm workers has actually increased since the arrival of foreign labor. This paper develops a modified theoretical model in which farm labor is heterogeneous, so that changes in the number of foreign and local hired workers are not necessarily opposite in sign. The results of the model are consistent with the observation that the availability of foreign labor has led to an increase in the production and export of labor-intensive horticultural products. Farms became larget and more specialized, and this has led to labor specialization, with foreign workers doing manual tasks and Israeli hired employees doing mostly managerial and professional tasks.