Economic Research Forum (ERF)

Raising Egypt’s minimum wage: the impact on inequality

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Since the majority of Egypt’s labour force is in the informal sector, where three quarters of workers earn less than the minimum wage, the recent increase will not benefit them. Indeed, as research reported in this column shows, it will lead to a rise in inequality. A better policy option would be to implement self-targeted public works programmes similar to those supported by India’s National Rural Employment Guarantee Act, which push up the informal sector’s ‘effective’ minimum wage, thereby reducing both wage inequality and some of the precarious nature of informal jobs.

In a nutshell

Despite the good intentions of raising wages, whether or not the announced measures eventually serve their purpose pretty much hinges on the response of wages in the private sector, especially the informal private sector.

In this context, the higher minimum wage in the public sector and the accompanying wage increases will increase inequality, not reduce it.

Working on increasing the ‘effective’ minimum wage in the informal sector by implementing self-targeted public works programmes similar to those supported by the National Rural Employment Guarantee Act, NREGA, in India is a short-run option.

Egypt’s president recently announced a 67% rise in the minimum wage to 2,000 Egyptian pounds ($115.74) per month from 1,200 ($69.27). He also promised state employees a wage rise of 7% plus a one-off bonus of 150 Egyptian pounds.

These increases have been framed as a reward for Egyptians’ endurance of austerity during the reforms implemented in exchange for the International Monetary Fund’s $12 billion loan. The reforms were needed and long overdue, but measures such as floating the currency, sizeable cuts in subsidies and a range of new taxes have contributed to higher prices, hitting the poorest and the middle class the hardest.

But despite the good intentions of raising wages, whether or not the announced measures eventually serve their purpose pretty much hinges on the response of wages in the private sector, especially the informal private sector. In this context, the higher minimum wage in the public sector and the accompanying wage increases will increase inequality, not reduce it.

With the reversal of Egypt’s state-led development strategy in 1991, public sector hiring was frozen in place. As a result, the public sector shrank by 16% between 1998 and 2012. But the formal private sector was only able to absorb 4% of those workers. This meant that the majority of the middle-class workers retrenched from the public sector have had to migrate to the informal sector.

In addition, newcomers to the labour market generally have had to take the lowest paying jobs in that sector. These informal jobs are mainly low-skill, low-pay and concentrated in sectors such as agriculture, construction, street vending and low value added services, especially for rural migrants.

As the informal sector is unregulated, it does not adhere to the minimum wage. Indeed, wages have been dramatically driven down by the competitive pressures caused by the influx of labour that is no longer absorbed by the public sector. As a result, sharp wage gaps have emerged at the tails of the wage distribution. These large wage gaps between the poorest and richest wage earners drive wage inequality.

Increasing the minimum wage in the public sector and implementing the announced wage rises will exacerbate the trend to greater inequality. Public sector wage rises are given in percentage terms. There have been 10% yearly wage increases in the period from 2007 to 2009, a 20% increase in 2010 and a 15% annual increase in both 2011 and 2012. There have also been other haphazard wage rises in the wake of the 2011 uprisings in response to the loud voices of public sector employees.

But since a percentage increase produces a larger absolute increase at the higher ends of the distribution, this means that higher wage earners receive a higher wage increase compared with low earners, introducing yet another source of inequality.

But in Egypt, the majority of the labour force is outside the formal sector – and so 75% of workers in the informal sector earn less than the minimum wage. So a further rise in the official minimum wage only increases the wages of those who already earn more than about half the wage force, thus increasing inequality.

There are a number of recommendations based on this analysis. First, the government could follow the example of the UK and subject public sector workers to a pay freeze or limit their pay rises to 1% per annum. Despite their relatively higher wages, public sector workers have also been crushed by the austerity measures, and indeed some of the lowest paid ‘bread-winners’ are close to the poverty line.

Another option is to formalise the informal sector to bring it within minimum wage legislation. Businesses will only take this step if the benefits outweigh the costs. That will not be the case without a transformation of labour skills to support the higher wages of formality. This needs stronger educational underpinnings. Investing in education for the masses, rather than an arbitrary minimum wage for the labour aristocracy, is how to reduce inequality.

There is a third option that would work better in the current Egyptian context. The government could work on the ‘effective’ minimum wage in the informal sector by implementing self-targeted public works programmes similar to those supported by the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) in India.

This programme guarantees at least 100 days of waged work to every rural household with a guaranteed minimum wage for both men and women. If work is not provided within 15 days of application, applicants are entitled to unemployment allowance. Thus, employment under the scheme is a legal entitlement.

The NREGA programme has enhanced livelihood security in rural areas, built rural infrastructure (for example, roads, canals, ponds and wells), protected the environment, reduced rural-urban migration (by creating rural employment), empowered women and closed the gender pay gap in rural areas.

But most importantly, since the scheme became law, the informal sector has had to compete with this programme for low-skilled labour, thus forcing the unregulated informal sector to increase its own ‘effective’ wage rate.

In the longer term, programmes like NREGA can reduce some wage inequality and partly eliminate the precariousness and instability of informal jobs. They may also assist informal labour in accumulating human capital, which will potentially enable wage progression, thereby breaking the current low skill-low wage trap inertia or the informality trap.

But we need to bear in mind that wage inequality is just one component of overall inequality, with that driven by the gap between earned income and unearned income, be it from capital, rents or inheritance, being the major component.

Further reading

El-Haddad, Amirah and May Gadallah (2018) ‘The Informalization of the Egyptian Economy (1998-2012): A Factor in Growing Wage Inequality?’, ERF Working Paper No. 1210.

 

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