Economic Research Forum (ERF)

Informality during political turmoil: evidence from the Arab Spring

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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.

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