Economic Research Forum (ERF)

Informality during political turmoil: evidence from the Arab Spring

How was the balance between Egypt’s formal and informal economies affected by the political turmoil that accompanied the Arab Spring? This column reports research showing that the number of jobs with no contract or social security coverage has increased in recent decades, but particularly since the uprising in 2011. Educated young people have been hurt more than the less educated.

In a nutshell

Informal employment in Egypt has risen for both high- and low-educated workers, but through different paths.

The high-educated have become more likely to be stuck in informality, unable to move to a protected job; while low-educated workers in the formal sector have been more likely to lose their contracts and hence to rely on informal work to make a living.

The Egyptian labour market is characterised by rigidity and lack of dynamism even in the wake of the Arab Spring.

The Arab Spring in 2011 was perceived by many as an opportunity for change – an uprising against the lack of good job opportunities, the lack of economic and social justice, and rising corruption. In particular, many young people felt excluded from being able to access decent jobs and future higher living standards.

Many workers have had to rely on low quality jobs in the informal sector to earn their living, with no job contracts and little stability and security. At the same time, without a job contract, workers do not benefit from social security coverage as well as other rights and benefits, such as paid holidays and health insurance. They also have little chance of moving to formal employment as those jobs have become scarcer.

The growth of education in Egypt, as in other countries in the MENA region, has led to rising expectations among young people entering the labour market but without any matching improvements in labour market opportunities. The growing labour supply and mounting expectations have coincided with the breakdown of the region’s social contract, in which the limited political rights of the middle class were obtained through the provision of free and subsided services, and guaranteed employment in the public sector for the educated.

Despite economic reforms, the private formal sector has continued to be small, resulting in an increase in informal employment. But with the onset of the financial crisis in 2008, employment growth and net job creation fell, and employment conditions deteriorated.

Economic realities underscored the limits of the state-led model of development and drove the downsizing of the public sector, which was the main employer for many decades. The frustration of the young and the middle class with lack of public sector jobs, voice, economic and social justice led to popular uprisings in the region and the Arab Spring in countries like Egypt.

Our study provides evidence on the impact of the political instability experienced during the Arab Spring on the dynamics of the informal sector in Egypt (Elsayed and Wahba, 2017). We find that informal employment – jobs with no contract or social security coverage – has increased over the last few decades, but particularly in the wake of the Egyptian uprising in 2011.

Informal employment has risen for both high- and low-educated workers, but through different paths. The high-educated have become more likely to be stuck in informality, unable to move to a protected job; while low-educated workers in the formal sector have been more likely to lose their contracts and hence to rely on informal work to make a living.

Despite an initial policy response to the uprising that favoured the middle classes by raising the wages of public sector workers and providing them with more secure employment, that was too concentrated to make a significant dent in informality.

In addition, there has been a remarkable slowdown in the expansion of formal private jobs in the wake of the uprising. This was accompanied by a decrease in the hiring rate in the formal private wage employment, and increased difficulty for non-employed individuals to find jobs during the period after the uprising.

Assaad et al (2017) document that in the aftermath of the Arab Spring, while the composition of labour supply has increasingly shifted toward more educated workers, this has not been matched by the creation of jobs with greater human capital requirements. The private sector is creating jobs in a few sectors that do not appeal to educated workers, namely construction, trade and transport. These sectors offer mostly informal jobs and they are often precarious and intermittent.

The evidence also suggests that the Arab Spring has had a significant impact on the economy affecting certain sectors badly in the short run (such as the tourism sector) and slowing down foreign investment. In addition, given the rigidity of the labour market, this has led to very little labour market mobility: no hiring but limited firing, underscoring further the rigidity and lack of dynamism in the Egyptian labour market.

To make things worse, especially for frustrated educated young people, the informal pay penalty – the gap between wages in the formal private sector and wages in informal jobs – increased significantly over time for both low- and high-educated workers. This has underscored the monetary advantages of formal jobs.

Moreover, the divergence between informal and formal wages has particularly increased for the educated, perhaps fuelling the frustration of that group about their lack of decent formal job opportunities both before the 2011 uprising and immediately afterwards.

Overall, the results suggest that the political instability in Egypt has harmed all educational groups. But ironically, it is the educated, the initiators of the uprising, who have been hurt more than the less educated.

Further reading

Assaad, Ragui, Caroline Krafft and Shaimaa Yassin (2017) ‘Job Creation or Labor Absorption? An Analysis of Private Sector Employment Growth by Industry in Egypt’ ERF mimeo.

Elsayed, Ahmed, and Jackline Wahba (2017) ‘Political Change and Informality: Evidence from the Arab Spring’, IZA Discussion Paper No. 11245.

Most read

Fair competition is needed to empower women economically in the Arab world

The participation rates of women in the labour market in Arab countries are the lowest in the world. This column argues that remedying the under-representation of women in the labour force is a social and economic imperative for the region. There are three dimensions for action to realise the potential of Arab women: amending laws and regulations; instilling fair competition in markets; and promoting the digital economy.

Recession without impact: why Lebanese elites delay reform

The survival of Lebanon’s political elites is highly dependent on the wellbeing of the economy. Why then do they delay necessary reform to avoid crisis? This column examines the role of politically connected firms in delaying much-needed economic stabilisation policies.

Competition laws: a key role for economic growth in MENA

Competition policy lacks the attention it deserves in the countries of the Middle East and North Africa (MENA), a region characterised by monopolies and lack of market contestability. As this column explains, there are many questions about the extent of anti-competitive barriers facing new market entrants in the region. What’s more, MENA’s weak overall performance on competition is likely to be hindering economic growth and the path towards structural transformation.

The future of Egypt’s population: opportunities and challenges

Egypt’s potential labour supply depends on the growth and changing composition of its working-age population. This column reports the latest data on labour supply and fertility rates, concluding that the country has a window of opportunity with reduced demographic pressures to try to address longstanding structural challenges for the labour market.

Formidable challenges facing the Middle East require a sea change in economic policies

Weakening global growth, endemic conflicts and increased tensions within the Middle East and North Africa (MENA) – as well as emerging challenges such as climate change and rapid demographic shifts – are likely to have an adverse impact on the region’s economic, social and political stability in the coming years. This column outlines the policy responses that are needed to avert disaster.

Domestic demand and competition: a new development paradigm for MENA

A lack of competition in domestic and regional markets is holding back development in the Middle East and North Africa. This column argues that the region and the international community must ensure that barriers to market entry and exit are eliminated, and that independent regulatory bodies at the national and regional levels help to promote domestic demand as the main engine for sustainable and inclusive growth.

Gender discrimination in small business lending: evidence from Turkey

Discrimination in access to financial services can prevent women from exploiting their entrepreneurial potential. This column reports on a ‘lab-in-the-field’ experiment to test for the presence of gender discrimination in small business lending in Turkey.

Effects of urbanisation on productivity and wages: evidence from Turkey

Are the substantial productivity gains associated with larger cities in developed countries similar for developing countries? This column provides evidence on urbanised economies in the non-Western world by focusing on Turkey, a country that has experienced fast urbanisation and a high rate of growth of the urban population.

Labour supply in Egypt: untapped potential

Labour force participation has decreased for both men and women in Egypt. This column reports the latest data, noting that the potential contributions of a large share of the country’s increasingly educated population are untapped. Creating a conducive business environment that can generate good jobs is critically important to engaging all of Egypt’s human potential.

How import dependence could lead to corruption in MENA

Export-led development strategies have had little success in MENA countries; what’s more, instruments of earlier import-substitution strategies – such as state-owned enterprises, high tariffs and subsidies – have survived. As this column explains, these legacies have created crony-capitalist industries that have limited the level of competition in many sectors of the economy and furthered the region’s dependence on imports.