Don't sacrifice security for the sake of cheap labor !! The Israelis can get all the cheap labor they need from Thailand, Romania, India, and China without having to hire even one Muslim.
This is only a temporary measure. Whenever the situation escalates those who are likely to murder Jews (and those who happen to be in their vicinity) are kept out of Israel. As soon as things quieten down the borders are opened again.
However there are Palestinians who live within Israel and they obviously are free to travel in the country of which they are citizens.