Egypt’s diminishing unemployment rate is an illusion. Here’s why

In almost any economy, one important measure for economic growth or success of economic reform strategies is the employment rate, or, conversely, the decline in the unemployment rate. However, it isn’t always an easy figure to read in relation to all factors that could impact it. Drops and hikes in unemployment don’t always mean that the economy is going in the right direction or- in case of hikes- the wrong direction – it’s not that black and white.

Understanding the relationship between jobs and economic growth in Egypt entails looking at it from different perspectives and factoring in many indicators. A recent joint report by the International Labor Organization, as part of the Advancing the Decent Work Agenda in North Africa (ADWA) Project, and the Economic Research Forum, titled ‘Regional Report on Jobs and Growth in North Africa’, takes an in-depth look into this relationship in countries across the North African region, and we spotlight Egypt’s section of the extensive report.

Today, Egypt’s unemployment rate stands at 7.4 percent according to CAPMAS. It’s a slight increase, attributed to the pandemic situation, than the last quarter in 2020 in which it stood at 7.1 percent. Both these figures represent a leap forward from 2016’s unemployment figure of 12.5 percent. 2016 is also the year Egypt enacted tough reform measures that aimed at improving its macroeconomics indicators.

“Indeed, in 2019, Egypt’s GDP growth rate reached 5.6 percent, inflation rate fell to 9.4 percent, the unemployment rate declined to 7.9 percent, and the overall fiscal deficit dropped to 8 percent after having peaked at 16.5 percent in 2014, while international reserves increased to USD 44 billion after plummeting to USD 14.9 billion in 2013,” reads the report.

These reforms, however, have hit the lower and middle class the hardest, hiking poverty levels to 32.5 percent in 2018 before recently dropping to 29.7 percent – up from 27.8 percent pre-reforms.

One area where the impact of such transformative public policies is most pronounced is the labor market, which has been heavily affected by the 2016 reforms and also, more widely, public policies over the past two decades.

Major events that have had strong impacts on the labour market over the past two decades include the dot-com bubble, which reduced FDI to Egypt and developing countries to a big extent, as well as a series of reform measures taken by the government of Egypt in 2004 that led to increasing the growth rate from 4.1 to 7.2 percent in 2008. The Egyptian revolution of 2011 pushed growth rates down to 1.8 percent that year, leading the new government of Egypt to enact the aforementioned economic reform program starting in 2016, financed by an IMF loan. “This programme rectified several macroeconomic imbalances, leading to a relatively high growth rate, of 5.2 percent, in 2018,” reads the report.

Jobless growth?

The recent hike in growth rate hasn’t been matched by a similar hike in jobs, mainly due to the fact that the growth rate in the past few years have been chiefly driven by growth in oil and gas investments, which are capital, not labor, intensive, but not only that.

“While unemployment rates have declined, many other equally important variables are in the red,” reads the report. “Employment rates have slipped, the proportion of discouraged job-seekers has risen, the quality of jobs has deteriorated and the skills-mismatch has widened. Precarious and informal types of employment have greatly increased, in particular among the most educated graduates, partly reflecting the disproportionate growth of the construction and trade sectors [that tend to generate unstable and informal jobs] the declining role of the public sector and the predominance of micro and small enterprises. Working poverty has increased and a substantial drop in real wages (hourly and monthly), including among the middle class, has been observed.”

How have employment rates slipped, you may be thinking, if unemployment rates have also declined? That is because, as per the report, the ‘youth bulge’ Egypt experienced since the onset of the new millennium has slowed down, with less entrants to the job market in the latter half of the 2010s. This has led to less pressure on the labor market in terms of employment needs, leading to lesser employment rates and, conversely, lesser unemployment rates. The report predicts this trend to rebound in the 2025-2030 period, with more youth entering the job market and requiring higher employment rates.

Furthermore, “at the macroeconomic level, the Egyptian economy has further increased its dependency on services. The industrial sector is dominated by construction and oil industries, while the share of manufacturing in employment and in GDP has contracted. Manufacturing is concentrated in chemicals, food processing and textiles, which are rather capital-intensive and whose modernization is lagging. This explains why growth has been jobless, with a declining share of labor in total value-added. Moreover, this jobless growth can be also attributed to declining credit to the private sector; the mismatch between the labour market, education and skills; the deficient business regulatory environment; as well as to state-protected markets and state-controlled resources.”

Productivity and value-added

On another hand, not all industries that employ a large number of Egyptians are highly productive. The most prominent example of that is the agriculture industry, one of the biggest employers in Egypt yet with one of the lowest productivity per worker.

“Egypt’s largest employer is the agriculture sector (on average 29 percent of total employment). With a small share in total value added, it is clear that the productivity of this sector is among the lowest, even when compared to other Asian, Latin American and African countries. The public administration sector ranks second while wholesale and retail trade sector ranks third, with a respective share of 23 and 20 percent of total employment. The mining sector, with a share of 16 percent of GDP, employs only 2 percent of workers. This confirms the previous finding regarding the prevalence of capital in several sectors.”

Manufacturing, alternatively, is one sector where worker productivity is relatively high.

“The ‘other manufacturing’ sectors, which are likely to be more labor-intensive, have relatively higher productivity since the share of this sector to GDP is 13 percent and it employs 11 percent of the population,” explains the paper, further recommending how important it is “to encourage the manufacturing sector to generate more jobs, especially in non-traditional sectors such as products that are intensive in high-technology, machinery, electronics and electrical equipment.”

Another important finding of the report is that when it comes to the public sector, traditionally viewed to be less productive, it was found to be more productive in certain sectors. “The public sector is more productive when it comes to industrial activities such as ‘mining and quarrying’, ‘wholesale and retail trade, transportation and storage, accommodation and food services’ and ‘construction’. These sectors are characterized by firms that are generally larger and more politically connected.”

Egypt’s private sector, on the other hand, is more productive in sectors of real estate, financial and insurance activities and information and communication.

“Yet, it is important to highlight the drop in private sector investments in the manufacturing sector, which reached 12 percent in 2019 down from 22 percent in 2014. Indeed, this is one of the important reasons why investments failed to generate more jobs,” further adds the paper.

Policy recommendations

“Thus, from a policy perspective, three recommendations are proposed. First, at the macroeconomic level, reforms must focus on higher-productivity sectors that generate good quality jobs, such as the manufacturing sector and tradable services. Proper investment in these sectors can curb the de-industrialization trend, the worsening working conditions and the rising abstention from the labor market. Second, in order to increase both domestic and foreign investments, enhancing the business climate, along with facilitating access to finance, land and energy, especially for small and medium enterprises, should remain at the top of the reform agenda. Third, improving the quality of education is key to facilitating access to skilled labor for these sectors.”

Stay tuned for more coverage of the extensive “Jobs and Growth in North Africa 2020” report.

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