Labor Market Transitions Over the Life Cycle: Evidence from Two Decades of Labor Market Data in Egypt

By Jingyuan Deng, Nelly Elmallakh, Luca Flabbi, and Roberta Gatti*

The ongoing COVID-19 health crisis constitutes a major shock to labor markets the world over. In advanced countries, and in a number of middle-income countries alike, systematic evidence on the impact of the pandemic on labor markets has become increasingly available thanks to high-frequency surveys, the availability of administrative data, and longitudinal panels. Globally, the emerging evidence points to important impacts on youth employment, increased drop-out from the labor force, losses of jobs, wages, and incomes, especially among informal, casual, and domestic workers, and significant impact on women’s employment given their overrepresentation in the health care sector and higher demand on their care work (ILO, 2020; Weber and Newhouse, 2021). However, due to lack of data in large parts of the developing world and especially in the Middle East and North Africa, our understanding of the impact of COVID-19 on those labor markets is still limited. 

A Snapshot of the Labor Market

To assess the impact of COVID-19 on labor markets, it is necessary to understand the functioning of those labor markets prior to the shock, preferably over the long run. We create this comparison by studying labor market dynamics in Egypt over two decades. Focusing on the prime working age population—adults between the ages of 20 and 59— we show snapshots of the Egyptian labor market utilizing four rounds of cross-sectional data from the Egypt Labor Market Panel Survey (ELMPS). 

Figure 1 shows several relevant findings. First, while most men participate in the labor market irrespective of their educational level, only women with post-secondary education significantly do so. Indeed, the share of women who are out of the labor force is always large and has actually increased between 1998 and 2018. Second, public sector employment has declined over the past two decades, among both women and men. The decline coincides with an increase in the size of the private informal sector. It is important to note that while Egypt’s large informal sector is similar in size to other middle-income countries such as Mexico and Colombia—accounting for approximately 60% of total employment   —Egypt has a much larger public sector. In 2020, Mexico’s public sector accounted for 13% of employment  and Colombia’s just over 4% , dwarfed by the Egyptian public sector accounting for over a quarter of employment in 2018. Other comparable countries such as Indonesia and Malaysia also had much smaller public sectors, accounting for 8% and 15% of total employment, respectively.  Third, we find that unemployment rates are consistently higher among the most educated individuals, especially if they are women, although this is declining. Finally, we find that the higher the educational level for both men and women, the greater the share of male and female employment in the formal sector, be it in the public or the private sector, and the lowest their engagement in the informal private sector.

Labor Market Transitions Over the Life Cycle

Relying on the panel dimension of the data, we propose studying the evolution of labor market transitions over the life cycle. We follow the same individuals from 1998 to 2018, showing their transitions over four possible labor market states: public sector, private sector (divided in formal and informal), unemployment and out of the labor force.

We look at men and women aged between 20 and 39 years old in 1998 and we use interactive Sankey charts to represent the transitions. Sankey diagrams are a graphic illustration of flows, in which the width of the arrows is proportional to flow rates. At baseline, 24% of men are employed in the public sector, 44% are informally employed in the private sector, and 8% are formally employed in the private sector (Figure 2).

As transitions occur over the life cycle, the share of individuals employed in the public sector grew from 24% in 1998 to 33% in 2018. Indeed, 12% of men informally employed in the private sector, 23% of those out of the labor force, 13% of the unemployed, and 10% of those formally employed in the private sector at baseline in 1998 joined the public sector in 2006. More private sector male workers, whether in the formal or informal sector, continued to transition to the public sector over the life cycle. Transitions from the private formal to the public formal sector are more frequent, in terms of percentage, as opposed to transitions from the private informal to the public sector. It is also interesting to note that transitions within the private sector, between its formal and informal sectors, are much more frequent than those from the private to the public sector. Conversely, those starting in the public sector rarely transition to the private formal or private informal sectors, though they are more likely to move to the informal than the formal sector over the life cycle.

The picture is very different for women (Figure 3), as the vast majority are out of the labor force both at baseline and at the end of their life cycle in 2018 (71%).

The public sector remains the main employer for women over the life cycle. Indeed, 12% of women at baseline were employed in the public sector, a share that has slightly grown over the life cycle. The life cycle analysis shows that the out of labor force status for women is very persistent: only 3%, 2%, and 1% of women out of the labor force in 1998, 2006, and 2012 respectively, managed to transition to the public sector by the following round of the ELMPS survey.

On the other hand, transitions from out of the labor force to the private informal sector or to unemployment are more likely to occur. Among women out of the labor force in 1998, 2006, and 2012, respectively 15%, 6% and 10% transitioned to the private informal sector, while 3%, 4% and 2% transitioned to unemployment by the following survey round.

Transitions out of the public sector are rare, though we observe women dropping out of the labor force as they aged over our 20-year window. Finally, we observe large percentages of women transitioning from the informal private sector to leaving the labor force over the life cycle: 41%, 64%, and 55% of women informally employed in the private sector in 1998, 2006, and 2012, respectively, dropped out of the labor force in the following wave.

Implications for Post-Pandemic

The analysis presented herein provides important insights on how to address momentous challenges posed by the ongoing pandemic. The cross-sectional stock analysis shows that both men and women experienced an increase in economic inactivity over the years. Therefore, the major disruptions associated with the pandemic further exacerbate pre-existing trends, putting additional pressure on a highly segmented labor market. Segmentation in the Egyptian labor market is striking across multiple dimensions: the gender and the sectoral dimensions. The hefty reliance of the Egyptian economy on public sector employment, in particular for women, the small size of the private formal sector, the large and increasing private informal sector, and the very low participation of women in the labor market are all major challenges that make the Egyptian labor market less resilient in absorbing the negative effects of the pandemic.

However, there are certainly several lessons that can be learnt from this analysis. Importantly, we note that education plays a key role in shaping individuals’ outcomes when it comes to better labor market transitions. For instance, better educated individuals are found to be more likely to transition out of the informal private sector into the formal sector, be it in the public or private sectors, and out of inactivity or unemployment into employment. Moreover, better educated women and men are found to be more likely to have formal sector jobs to start, as opposed to the least educated who are more likely to be employed informally. Given that informal workers are typically more vulnerable and bear more severe consequences associated with shocks, safety nets need to be designed to better target these vulnerable workers. The pandemic brought once again to the policy front the necessity to undertake key essential labor market reforms such as the necessity to boost and support job creation in the private formal sector and to design policies favoring women’s participation in the labor market including the provision of childcare services, the promotion of female friendly working environment, and potentially imposing hiring quotas for women.

The pandemic also calls for high-frequency labor market data to assess the impact of the pandemic on labor markets. To date, high-frequency phone surveys are the most reliable data source to study the impact of COVID-19 on labor markets in developing countries (Hoogeveen, and Lopez-Acevedo, 2021, Krafft, Assaad, and Marouani, 2021a; Krafft, Assaad, and Marouani, 2021b; Krafft, Assaad, and Marouani, 2021c; Krafft, Assaad, and Marouani, 2022). However, phone surveys come with their own caveats. For one, these surveys were conducted only post-pandemic, which means that one can only control for pre-existing outcomes through self-reported retrospective information. Another challenge economists face by design when using phone surveys is the selection of phone survey respondents, which are typically not representative of the whole population. Representative longitudinal panel data address both these concerns and are indeed necessary to understand labor market outcomes during and in the aftermath of the pandemic.

*This article was originally published on the Economic Research Forum (ERF) website.