Egypt’s firm-level data offer insights on “broken link” between trade and job markets

In the 1990s, Egypt began implementing policies designed to boost trade. This was followed by another wave of trade liberalization in 2004. As a result, the tariffs tumbled, and trade rose significantly—almost tripling from 2000–2020—with exports increasing 196 percent and imports soaring 231 percent. But despite increased trade, the export sector remained a relatively small share of GDP– a mere 13 percent, compared to 35 percent in Morocco, 38 percent in Tunisia, 61 percent in Malaysia, and 52 percent in Thailand. In 2020, only 1 percent of Egypt’s firms were exporters. These exporters tended to have more employees (an average 18.9) than non-exporters (3.2 employees); and be more capital intensive (capital-labor ratio of 332) than non-exporters (capital-labor ratio of 22).

Our study, Exports and Labor Demand: Evidence from Egyptian Firm-Level Data, builds on earlier work from 2021, that found that higher Egyptian exports did not increase employment nor improve labor market outcomes, such as wages, female labor force participation, and informality. Our study asks if it is possible to explain this “broken link” by looking at how export flows relate to labor demand at the firm level. We drew on firm-level data for 198 firms from the World Bank’s Enterprise Surveys (ES) in 2013, 2016, and 2020. To our knowledge, our 2021 study is the first to extend a regional analysis at the firm level.

Our main finding shows that although there is a positive employment response to export expansion, it does not occur at a large enough scale to be felt at the macroeconomic level.  Egypt seems to be an exception to the positive export-employment link that many other developing countries have experienced. 

Egypt’s Exporting Firms Still Remain a Tiny Part of Labor Market

Although rising exports usually increase employment through increased labor demand, there are at least four reasons why this may not be the case, even when the labor supply is constant:

• Exporting firms might be too small of a segment in the local labor market to significantly affect overall employment.
• In the presence of hiring and firing costs, firms might hold on to workers, creating a relatively idle “reserve” group of workers to fill the demand from rising exports.
• Firms in capital-intensive sectors might expand production by using new machinery or extending the run-time of existing machinery.
• Firm-level production might simply shift from the domestic to the international market, without expanding production or employment.

Could any of these reasons explain what is occurring in Egypt? To answer this question, we present a simplified general equilibrium model with two sectors: one able to export—with heterogeneous firms using increasing returns-to-scale technology; and one “reserve” sector, like the informal or service sector —where firms are the same and produce using only labor with decreasing returns-to-scale technology. We assume two periods of time when firms in the export sector have the option to shut down, or not produce, for the domestic market or produce for the foreign export market. We simulate this model to illustrate how an increase in export opportunities, as shown by a higher export market price, affects local employment.

Our results show that Egyptian firms did see a positive employment response. Figure 1 shows a positive correlation between changes in employment and exports, but at a small scale. Regression estimates suggest that as export sales increased by 10 percent, employment at the firm increased by 2 percent. Accordingly, our analysis rejects the theory that firms hold on to relatively idle workers who can fill rising demand for exports without increasing overall employment.

Figure 1. Higher exports go hand-in-hand with higher employment, albeit on a small scale

Source: Authors’ elaboration using data from the Enterprise Survey for Egypt, 2013, 2016, and 2020.

To explain why trade may not lead to higher employment in the case of Egypt, we find that:

• Exporting firms are too small of a segment of the local labor market to significantly affect Egypt’s overall employment.
• We do not see idle excess worker capacity.
• As is the case for most exporters, Egyptian exporters tend to be in capital-intensive sectors and so might expand production without increasing employment to the same extent as would firms in labor-intensive sectors.
• Even though some firms shift production from the domestic to the foreign market without increasing employment, they account for too small a share to explain a disconnect between export flows and the labor market.

Given these findings, if Egypt is to seize the benefits of trade, it needs to revamp its business environment to incentivize larger exports, especially in labor-intensive non-agricultural industries, and further integrate the economy into global value chains.  This can be done by: (i) lowering barriers to investment, especially foreign direct investment; (ii) promoting private sector attractiveness relative to the public sector in terms of wages and job security; and (iii) lowering costs for firms to formalize.