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Is there an informal employment wage penalty in Egypt? Evidence from quantile regression on panel data

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Abstract

This is the first study that uses panel data to assess the magnitude of the informal sector wage gap in Egypt. We consider the private sector male wage earners in Egypt and examine their wage distribution during 1998–2012 using the Egyptian Labor Market Panel Survey. We estimate Mincer wage equations both at the mean and at different quantiles of the wage distribution taking into account observable and unobservable characteristics with a fixed effect model. We also consider the possibility of nonlinearity in covariate effects and estimate a variant of matching models. We find a persistent informal wage penalty in the face of extensive sensitivity checks. It is smaller when unobserved heterogeneity is taken into account, and unlike many previous studies, there are very few differences across the conditional wage distribution. We also examine the informal wage penalty over time and in different subgroups according to age and education. The informal wage penalty has increased recently over time and is larger for the higher educated and the young.

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Notes

  1. The US dollar exchange rate was equal to 6.04 EP in May 2012, and it was an average of 7.05 in 2014. Thus, 700 EP was 116 US dollars and 1200 EP was 170 US dollars.

  2. For an analysis of the public versus private formal wage gap in Egypt, see Tansel et al. (2018).

  3. In the ELMPS the computation of the hourly wage depends on the type of worker. For regular workers, there are questions about the hours per day and the days per week that are multiplied to get hours per week. This is then multiplied by the number of weeks worked in the past 3 months to get the hours worked in the past 3 months. The regular workers are also asked to report the amount and the frequency of different types of wages (basic, overtime, primary job, secondary job, etc.) which are used to calculate the wages in the past 3 months. This is divided by the number of hours worked in the past 3 months to get hourly wages. As the last step, the hourly wage is deflated by CPI base 2012 to get the real hourly wage for the regular workers. For irregular workers, there are questions about the number of weeks worked in each of the last 3 months and the number of hours per week in each of those months to estimate the number of hours worked in the last 3 months. The number of hours per week in the past 3 months is added up and divided by the number of weeks worked to get the number of hours per week. There are data on the daily wage (it is the usual type of wage) for irregular workers and their usual hours per day (asked in a question). This is used to calculate the hourly wage. There are do files that do the computations for both wages and hours in the Open Access Micro Data Initiative (OAMDI) of ERF. We have benefited from these files as well as from personal correspondence with Caroline Krafft.

  4. We report the estimates of the female sample in Tansel et al. (2015). However, the labor force participation of women in Egypt is very low and most women are either inactive or work as UFW (Tansel and Ozdemir 2014). Issue of women’s selection into employment is not addressed since selection within the QR framework is a nonstandard econometric procedure. Further, the number of observations is small in the female sample. The selection into labor force is less of an issue in the male sample (which is the focus of this paper) due to men’s high participation rate.

  5. Full estimation results reported in Tansel et al. (2015) indicate the following. The wage returns to experience (as proxied by age) are positive and exhibit a quadratic relationship. The wage returns to age decreases as one moves to higher quantiles in the QR estimation, while there is no discernable pattern across the quantiles in the FEQR estimation. The returns to education is quite low, 1.5% at the mean, and increases smoothly across quantiles and about 2% at the highest quantiles (insignificant at the lowest quantiles). Largest returns are attained in the construction sector (which is the sector with most concentration of informality) compared to manufacturing. The wage returns in the construction sector are highest at the lowest quantile and decrease across quantiles. Assaad (1997) finds segmentation within the construction sector itself. The wage returns are higher both at the mean and across quantiles when unobserved heterogeneity is taken into account. The wage returns are lower in the trade and service sectors of economic activity compared to manufacturing. The wage returns are higher in Greater Cairo than in all of the other regions. Finally, the wage returns are significantly higher in 2006 and 2012 than in 1998.

  6. These estimates are available from the authors upon request.

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Acknowledgements

We would like to thank the editor Michael Lechner and two anonymous referees of Empirical Economics for their insightful comments on an earlier version of this paper. We are also grateful to Caroline Krafft for her kind help and for many suggestions while preparing the Egypt Labor Market Panel Survey data set. We would like to thank Christophe J. Nordman for valuable discussions. Earlier versions of this paper are presented at the EconAnadolu Conference in Eskişehir Turkey, 10–12 June 2015 and at Middle East Economic Association Conference in San Francisco, USA, January, 2016. Any errors are our own.

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Authors and Affiliations

  1. Department of Economics, Middle East Technical University, 06800, Ankara, Turkey

    Aysit Tansel

  2. Institute for the Study of Labor (IZA), Bonn, Germany

    Aysit Tansel

  3. Economic Research Forum (ERF), Cairo, Egypt

    Aysit Tansel & Zeynel Abidin Ozdemir

  4. Cukurova University, Saricam, Adana, Turkey

    Halil Ibrahim Keskin

  5. Atilim University, Ankara, Turkey

    Zeynel Abidin Ozdemir

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  1. Aysit Tansel
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  2. Halil Ibrahim Keskin
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Correspondence to Aysit Tansel.

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Data and computer code availability

The data that support the findings of this study are available from Economic Research Forum (ERF) web page. The surveys were carried out by the ERF in cooperation with Egypt’s Central Agency for Public Mobilization and Statistics (CAPMAS). No restrictions apply to the availability of these data. All the information needed to proceed from the raw data to the results of the paper (including code) is available from the authors upon reasonable request.

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Table 6 Probit estimation of propensity to be in the informal sector, male sample, Egypt, 1998–2012
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Tansel, A., Keskin, H.I. & Ozdemir, Z.A. Is there an informal employment wage penalty in Egypt? Evidence from quantile regression on panel data. Empir Econ 58, 2949–2979 (2020). https://doi.org/10.1007/s00181-019-01651-2

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