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

Why the West got rich and the Middle East did not

Today’s rulers of the three largest Middle Eastern economies all look to religious authorities as a key source of legitimacy. Drawing on a broad sweep of historical analysis, this column explores what this might mean for the region’s economic future. One notable danger is that the types of people who would push for policies that promote long-run growth are excluded from the political bargaining table.

Why Turkish growth ended

Following a period of rapid economic growth, the Turkish economy has slowed significantly since 2007. This column argues that these economic ups and downs reflect institutional improvements in the aftermath of the country’s 2001 financial crisis, followed by an ominous slide in the quality of these economic and political institutions.

Implications of the current low oil prices for MENA countries

The current low oil price environment, in part driven by the US shale oil revolution, has important macroeconomic implications for the Middle East and North Africa (MENA). This column reports research evidence on its likely impact on both oil-exporting and oil-importing countries in the region.

Prospects for development with democracy in the Arab world

What are the prospects for democracy in the Arab world? This column expresses the hope that as conflict-afflicted countries embark on their programmes of economic reconstruction, autocratic institutions will not be re-established under the pretext of the need for a speedy and steady recovery. The optimal path of development necessarily includes robust growth, equity as well as democracy.

An agenda for reducing income inequality in the Arab countries

What can be done to reduce income inequality in Arab countries? This column explores issues of measurement as well as potential policy measures. It concludes by calling for a new multipurpose pan-Arab survey that would allow for an evidence-based decision-making process on the impact of proposed policies on poverty and inequality.

The United Arab Emirates’ dilemma

As energy-producing economies strive to reduce their reliance on oil revenues, they must strike a balance between the competing demands of fiscal sustainability and steady growth of the non-energy sector. This column outlines how the United Arab Emirates is addressing this challenge.

Freedom for women is crucial for economic progress in MENA

The Middle East was once the cradle of civilisation: can it prosper once again? Looking back at lessons from the European Enlightenment, this column argues that if the region wants to advance economically, it needs to advance in terms of its treatment of women. Female agency is central to understanding the West’s technological leadership of the past two centuries.

Inequality in higher education: Egypt, Jordan and Tunisia

Attainment of higher education is strikingly unequal in Egypt and Tunisia, and a little less so in Jordan. This column reports research showing that in all three countries, family background is the primary driver of inequality. Particularly in Egypt and Tunisia, public spending on higher education is regressive, with the result that what purports to be a meritocratic and equitable system in reality perpetuates inequality.

Oil exporters’ responses to the US fracking boom

What are the implications of low oil prices for the economic and political stability of Arab oil-exporting countries such as Saudi Arabia? This column explores the impact of the US fracking boom on Arab oil revenues – and how policy-makers in these countries should respond.

Pension reform that avoids harming MENA labour markets

To tackle the deficits in their pension systems, should governments in Arab countries raise social security contributions, reduce pension levels or increase the statutory retirement age? This column summarises the results of research assessing the costs and benefits of different pension reforms in terms of their impact on different generations and on the labour market.