Monday,25 March, 2019
Current issue | Issue 1353, (20 - 26 July 2017)
Monday,25 March, 2019
Issue 1353, (20 - 26 July 2017)

Ahram Weekly

The economic consequences of informality

Tackling the informal economy in Egypt is essential to providing wider opportunities for young people and to fiscal sustainability and economic growth, writes Aisha Ghoneimy


New graduates with high levels of education and even postgraduates are today suffering from harsh economic challenges. In many cases, they are unable to find jobs suiting their level of education that at the same time preserve their legal rights.

The economic challenges forcing many of them to accept any job opportunity that comes their way, even if it does not match their skills and level of education, are considerable since these young people do not want to be marginalised in the job market and they may consider the informal economy to be a stepping stone that will allow them to obtain practical experience and overcome skills mismatches on the road to formal employment.

Formal-sector positions are often limited to young people with wealthy and/or well-educated parents with strong social networks, and they may not be available to young people from poorer households.

The developing countries today have more than 87 per cent of the world’s young people, and many of them are under-employed or are working in vulnerable positions under poor conditions. They are at greater risk of working below their skills or educational level, working longer hours or fewer hours than they would like to under substandard or insecure conditions, holding temporary jobs, or having few or no prospects for advancement or lacking job stability.

The informal labour market has increased in size since the 1990s, and it has today become a widespread phenomenon due to the inability of the formal private sector to provide a sufficient number of formal-sector jobs in order to contain youth unemployment and replace the number of formal public-sector jobs that have been lost in the wake of privatisation. The informal economy now represents over half of Egypt’s total employment.

The majority of jobs in this sector are unprotected by employment contracts providing social insurance, health insurance, defined working hours, annual leave and a minimum wage. The private sector has a greater percentage of informal employees than the public sector, and its younger employees in many cases have a high level of education and significant qualifications.

There are four degrees of labour market informality. The first involves working without a contract but with social and health insurance. The second involves neither a contract nor health and social insurance. The third means working without a formal contract but with some insurance rights, while the fourth is totally informal and means working without a contract or any form of insurance.

Sustainable economic growth cannot be achieved if it is based on poor and unsafe working conditions and real wages that are not equivalent to labour productivity. As a result, the informal economy is one of the critical issues considered in the UN Sustainable Development Goals (SDGs) as well as in the Egyptian government’s Vision 2030 plans. Moving towards formal employment in both the public and the private sectors will lead to increasing investment in human capital and greater efficiency in the allocation of resources, thus achieving higher economic growth in the long run.

In addition, the Egyptian government is targeting the improvement of education in the country through increasing public expenditure on education, particularly on educational infrastructure and human capital in order to produce graduates that match labour-market requirements. The proper relationship between the supply of new graduates by the education sector and the demands of the labour market is essential in bridging the gap between these two sectors.

The government has also increased the level of technical and financial support available to small and medium-sized enterprises (SMEs), and this is reflected in new legislation in this area, passed on the initiative of the Central Bank of Egypt (CBE), as well as in providing greater support to connecting Egyptian firms with foreign direct investment in order to assist business growth and development and thus creating a wider range of formal job opportunities for young people.

Addressing the informal labour market in Egypt is necessary because of its consequences for political stability, fiscal sustainability, economic growth, business productivity and innovation and social welfare. The large informal sector also limits the effectiveness of government fiscal and monetary policies, as informal firms avoid paying taxes that could be used to fund economic reforms and essential social programmes. The growing gap between wages and working conditions in the formal and informal sectors has also led to widening social inequalities.

Among the crucial steps that should be considered in order to tackle the informal labour market in the short run is extending social and legal protection to employees, boosting the capacities of SMEs to contribute to economic growth, productivity, innovation and employment, and establishing informal labour organisations that can assist the government in implementing policies targeting informal employees in both the formal and the informal sectors. These things would provide informal employees with a louder voice in demanding fair wages and better working conditions in a safe and supportive environment.

Egypt has huge wealth in the shape of its human capital, and investment here will result in valuable returns for the economy. The potential of Egyptian young people is very high, and everything possible should be done to assist their learning and enhance their capacities in order to find sufficient and stable job opportunities that will in turn contribute to increasing the productivity of the economy.

The writer is a lecturer at the Faculty of Economics and Political Science, Cairo University.

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