Opening Up, Falling Behind: A Quasi-Natural Experiment for Informal Wages in Egypt

Résumé fourni par la source

The informal sector is perceived as a buffer in crisis times in developing countries. Yet, its high vulnerability suggests that external shocks may undermine its ‘buffer’ role, leading to adverse outcomes for informal workers. This paper explores how trade shocks influence the formal-informal wage differential, with a special focus on the Egyptian case. We combine worker-level data from the labour market panel survey with industry-level trade data for the tradeable sector between 1998 and 2006, a period that spans a broad-based trade liberalisation episode which provides an ideal setting for a pre- and post-reform analysis. We find a significant effect on the formality wage premium where a 1-percentage point reduction in trade protection leads to a 0.45 percentage-point rise, on average, in the wage differential between formal and informal workers. The wage effect is consistent with a concurrent contraction in informal employment that operates primarily locally within industries and holds under different specifications, robustness checks, and when the exogeneity assumption of industry protection is relaxed.

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