Looking beyond the numbers

The Economic Research Forum, a regional economic research institution, recently announced the results of its 2012 Egyptian Labour Market Panel Survey (ELMPS), carried out in cooperation with the Central Agency for Public Mobilisation and Statistics (CAPMAS).
The survey shows how the 25 January Revolution has impacted the Egyptian labour market and the lives of Egyptian workers and their families. It is the third round of a longitudinal survey that tracks the labour market and the demographic characteristics of households and individuals interviewed in 2006 and 1998, covering a total sample of 12,060 households and 49,186 individuals.

There is always an expectation whenever there is an economic crisis that unemployment will go up. Is that expectation correct?
Not necessarily, because unemployment in a lot of developing countries like Egypt and in the Arab world is measuring the problem of people who are entering the labour market for the first time, who are educated and looking for their first formal job.
In an economic crisis, the people who lose their jobs are generally less educated, poorer and are working in the informal sector. These people can not afford to be unemployed: they look for any job that would generate an income, even if the work is very marginal and very low pay.

The ELMPS 2012 put the unemployment rate at 8.7 per cent, almost unchanged since the ELMPS 2006. Why is there no change despite the economic turbulence after the revolution?
What happened during the period from 2006 to 2012 is that the number of people coming into the ranks of the unemployed declined because of the population demographics. The number of people who are 15-24 years of age and who are usually feeding the unemployment ranks have declined. The phenomenon of “youth bulge” is now centred around people who are around 28 years old, people who are already in the employment market: they are no longer in the unemployment ranks. Unemployment goes down significantly once an individual is in his or her late 20s.
If the economy had been performing as strongly as in 2006, unemployment would in fact have fallen because of the demographic factors. But the fact that the economy was doing worse and the demographic pressures were lower resulted in stability in unemployment.

The Central Agency for Public Mobilisation and Statistics (CAPMAS) shows unemployment standing at 13 per cent. How do you explain that difference?
The international definition of unemployment says that if a person is working even one hour per week, they are considered employed. We interview individuals themselves. We ask them a set of questions to know if they have done anything that is defined as work. And if they did anything, even an hour, they are considered employed. But we also ask how many hours they worked and why their working hours fell below 40 per week, which would be classified as underemployment.
Meanwhile, CAPMAS interviews any adult individual in the household, not necessarily the individual himself. So, the individual might be working a few hours per week, yet a relative, who does not consider that to be work, will say that he is not working.
What drives unemployment?
What drives unemployment is the number of young people coming into the labour market every year. And that is driven by demographics and by their education level. Unemployment is hardly affected by the rate of growth.
Unemployment is almost exclusively among the educated, those who have secondary education and above. So if that number is increasing for demographic reasons, unemployment will go up, and if that number is declining, unemployment might go down, irrespective of what is happening in the labour market.
It is also affected by how much time is spent in the unemployment ranks. How long they spend there depends on what is happening in the formal economy, which could be a result of the economic situation.

Since your figures show that unemployment has been almost constant since 2006, does this mean that the revolution has had no effect on the job market?
On the contrary, the revolution has had a very large effect on the job market, but it is not measured by the narrow concept of the unemployment rate. In economies like Egypt, unemployment is not a good measure of the inadequacy of the labour market. The underemployment rate, which is the people who are working part time but involuntarily because they can not find work, more than tripled between 2006 and 2012, going from 2.6 per cent to 9.6 per cent. This is a much better measure of the inadequacy of the labour market because that is the measure of people who are struggling to find enough employment to keep their families fed. They are usually poorer, more marginal, less skilled and less educated.
Another measure is the percentage of people who report that they are irregularly employed, which means that they work one day and not the other. That has also climbed from about 12 per cent to 22 per cent. So the proportion of people who have been earning below the low-earning line, which is the wage that allows somebody to bring their family up to the poverty level, went up as a result of the revolution.
So the labour market is in distress, and that is measured by a number of indicators but not the unemployment rate because the unemployment rate is a structural variable that depends on demography, on the educational composition of the work force, and on whether they expect to get a government job or not. If the government is providing employment, people have an incentive to queue for these jobs and they will remain unemployed waiting for a government job. When the government is giving signals that it is no longer giving jobs, then people will just go into the informal sector and they will not wait.
What needs to be done to encourage greater job creation?
Resolving the issue of formality and informality is really important for the Egyptian labour market. Nearly two-thirds, around 60 per cent, of jobs in the private sector are in enterprises of fewer than 10 workers. Most of these enterprises are informal and therefore give informal jobs. And since most of the employment is in small firms, to grow employment you have to grow these small firms.
What is happening is that we have a regulatory structure in which if a company is born small, it stays small. And there are very few who can pass from being small to being large. That is a big problem because most of the dynamism in dynamic economies like the US comes from small firms becoming larger.
We have a regulatory structure where being formal imposes very high fixed costs. If a company is small, it can not afford those high fixed costs and therefore it remains informal. So we have this situation in which this regulatory barrier is preventing firms from growing and growing their employment base.

So a change of regulations is needed?
We need a change of regulations to make it a lot easier for firms to formalise. One of the big problems that firms face is the discretion of the tax authority. It is not that the tax rate is high, but that the tax estimation is arbitrary. And that creates uncertainty that becomes completely destructive to firms, so they do not register. And in fact when they do register, they go out of business quickly.
The second issue is that of firms who are formal themselves but employ workers off the books. That was initially because the labour laws were putting too many restrictions on firing and hiring. Now that is no longer the case, and the labour laws have been flexible since 2004. However, the current problem is the high social insurance premiums which the employer and often the employee wish to avoid paying.

Why do job-seekers have a preference for employment in the public sector?
There are all kinds of benefits that come with the job that make the job more attractive even if the wage is lower.
We compared public and private-sector wages. Men are paid about the same in both sectors with the proviso that a public-sector job comes with a lot better job characteristics. Women are paid a lot less in the private sector because the private sector discriminates against women, whereas the public sector cannot. In fact, what men do is get a public-sector job in the day time and a private sector job in the evening and they combine the best of two worlds. And employers prefer to hire someone who is an employee in the public sector so that their social insurance is already covered.

What do you think of the idea of implementing a minimum wage?
In theory, the minimum wage is fine if it can be applied to the entire labour market, but the reality is that it is being applied to the public sector only, and if it applies to the private sector it will apply to the formal private sector only. Therefore, there is going to be a large part of the labour market where it does not apply, thus increasing segmentation and making the labour market more inefficient.
But the bigger problem is that employees of the public sector are getting a much better package, relative to similar people in the private sector. That is why people have a very strong preference for public-sector work even after more than 20 years of structural adjustment.
If the economy is dynamic enough, the formal private sector will grow and will take the labour market with it, like what has happened in China. That requires very high rates of growth and a very dynamic private sector, however, that is not dependent on the state in many different ways.
We do not have a dynamic private sector. We have a dependent private sector that is essentially interested in real estate, which is quick and high return, with very low employment multipliers. If the way to make money in Egypt is to buy and develop real estate rather than build a factory, we are not going to create a lot of employment. And so there is a distortion in the incentives structure of the private sector: even when Gulf investors come to Egypt, they either invest in retail or real estate, neither of which are very large employment creators.
We need to get our exchange rates and incentives structure right in order to encourage manufacturing, exports and labour-intensive industries.

Should there be an industrial policy that targets industries that are labour intensive?
The answer is to fix the overall incentives of the economy, rather than targeting. Reduce the regulatory burden for everyone, create more certainty in the tax and licensing system, have less corruption, and maybe also have a one-stop shop for small firms where they can deal with the entire bureaucracy through one office.
In theory, industrial policy can work in countries like Korea or Taiwan where you have extremely disciplined and competent bureaucracies. You can pick winners and give them incentives. We have a dysfunctional and incompetent bureaucracy, however, and therefore any targeting will turn into corruption.
Industrial policy is about choosing winners and losers. And if bureaucrats are going to choose winners or losers based on who pays them more, then we have a problem. I do not believe that we can successfully conduct an industrial policy in Egypt. However, we can dramatically improve the investment climate by creating macroeconomic and regulatory policies that do not discriminate against labour-intensive industries.
What we have done so far is create exchange rate policies that provide for overvalued exchange rates, therefore discriminating against anything that is for export. We have created energy policies that subsidise energy, so that we are encouraging energy intensive rather than labour intensive industries. We have created land policies that encourage real estate investment as opposed to manufacturing or productive investment. So there are various policies that have distorted the way in which the formal private sector does its investment, and I think that this can be dealt with but not through targeting specific industries.

What should policymakers be on the look out for?
The next youth bulge is looming. Those 28-year-olds that make up our current youth bulge are currently having their own children, and now there is a youth bulge centred around children who are five years of age and younger. That young generation will significantly pressure the labour market in about 15-20 years. But before that they will start stressing the primary education and secondary education systems. We need to make the most of this demographic reprieve in order to focus on the quality of employment.
Something needs to be done about the investment and regulatory climate for small firms. So long as small firms, which represent the bulk of employment in the private sector, are excluded from the benefits of growth because of regulatory barriers, they are not going to be able to contribute to job creation and productivity increases.

http://weekly.ahram.org.eg/News/5075/18/Looking–beyond-the–numbers.aspx

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