Assessing the impact of trade reforms on informal employment in Egypt

Abstract

This paper proposes an empirical investigation of the effect of trade liberalisation on informal employment in Egypt. The effect of trade liberalisation on the informal sector has been widely discussed at both empirical and public policy levels but was never tested empirically in Egypt. Thus, combining a microeconomic data set (the Egyptian Labor Market Panel Survey) with macroeconomic variables (tariffs), we try to assess to what extent trade reforms affected informal workers in Egypt. Our main findings show that trade liberalisation has reduced informal employment in Egypt. Such results remain unchanged under different robust testings.

Keywords:

• trade liberalisation
• informal employment
• Egypt

JEL Classification:

• F10
• F26

Notes

1 Overall employment has increased annually by, on average, 4.6% during the period 1998 to 2006. For further details on the evolution of employment in the Egyptian labour market, see Assaad (2009)

2 For more details on this law, see Wahba (2009).

3 It is important to note that using a single measure of trade liberalisation may not be enough to reflect different trade reforms in Egypt. Yet, we did so for three main reasons. First, the only official policy variable that captures the direct effect of trade liberalisation is tariff reduction. Second, there are some published data on non-tariff measures in Egypt. Yet, they are not available over the years of our study (between 1997 and 2005). Third, although export share of domestic output and import share of domestic consumption are commonly used in trade theory, we opt to measure trade policy by applied tariffs only since exports and imports depend upon tariffs, and hence might lead to an endogeneity bias. Thus, we use them for robustness checks only.

4 Employment structure is classified into six categories: public wage work, private regular wage work, private irregular wage work, employers, self-employed and unpaid family work.

5 These numbers are calculations based on the ELMS 1998 and the ELMPS 2006, described in Section 3.4

6 MFN tariffs are what countries promise to impose on imports from other members of the WTO, unless the country is part of a preferential trade agreement (such as a free trade area or customs union). This means that, in practice, MFN rates are the highest (most restrictive) that WTO members impose on one another. Applied tariff rates are the average of effectively applied rates for all products subject to tariffs calculated for all traded goods

7 Weighted mean tariff is the average of tariff rates weighted by the product import shares corresponding to each partner country. Simple mean tariff is the unweighted average of tariff rates for all products subject to tariffs calculated for all traded goods.

8 QIZ are designated geographic areas, within Egypt, that enjoy a duty-free status with the USA. Companies located within such zones are granted duty-free access to the US markets, provided that they satisfy the agreed upon Israeli component of 10.5%, as per the pre-defined rules of origin.

9 See Assaad (2009), and Assaad and Roushdy (2009) for more details on data description

10 There are 22 industry sectors for which the data on tariff levels are available. In the estimation, food and beverages are excluded as the reference industry dummy.

11 Since tariffs may suffer from an endogeneity problem, a Sargan test is run. We conclude that tariffs are not endogenous. Even if endogeneity of tariffs is assumed, instrumenting them by the tariffs of the principal trade partner leads to the same results. The impact of tariffs remains negative and significant in 1998 and positive and significant in 2006.

12 Flexicurity is the mix of two words, flexibility and security. According to the ILO, it has three components: easing hiring and firing, income security and active labour policies (Cazes and Nešporová, 2007).