Egypt’s demographic pressure – Where and how to create jobs?

Marga Peeters 02 June 2011

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Demographic developments place Egypt among the group of countries around the globe with the highest labour-supply growth for many years to come. The Egyptian economy can reap a demographic dividend from this human capital potential if the new entrants find a job (see also Noland and Pack 2008). In recent research (Peeters 2011), we use different assumptions on migration, fertility, and mortality to quantify the size of the labour supply shocks and their impact on unemployment, public finances, and welfare. The main questions that remain, however, are where – and how – to create jobs that benefit the Egyptian economy most.

Demographic pressure and the size of the labour supply shocks

The demographic structure of Egypt is comparable with that of India (see Figure 1). About 30% of the population is currently under 15 years old, and the expectation is that in 20 years time when the current young generation is part of the working-age population, this share of young will have only slightly lowered to 25%. In comparison with developed economies, see for instance Greece in Figure 1, the population is not shrinking and the inflow in the labour market remains high.

Figure 1. Population of Egypt in comparison with India and Greece

Source: Made based on UN’s Population Information Network projections 2011.Note: India’s figures and prospects are illustrated in light blue lines that, as follows, almost coincide in population cohort share with each of Egypt’s cohorts in 2010 as well as in 2030.

Taking the definition of the working-age population to be those between the age of 15 and 65, Egypt’s labour supply grew 11.5% from 2005 to 2010 and is projected to grow 7.0% from 2025 to 2030. Although the numbers are declining, this additional potential labour supply remains high, even in comparison with other countries at similar development stages (Table 1). Only Libya is expected to have higher labour-market growth rates after 2010. Libya is, however, a far smaller economy in population size and is, moreover, oil rich.

Table 1. Growth rates of the working age population

Five-year growth in percentages, population in millions

 

Egypt

India

Iran

Libya

Indonesia

South Africa

Greece

2010

11.5

10.2

10.6

9.6

7.6

6.6

0.9

2020

8.8

7.2

3.8

10.2

5.8

2.9

-1.0

2030

7.0

5.4

2.5

7.7

2.3

2.6

-1.3

working age population '30

71

1,034

62

5

194

37

7

young and old '30

36

489

22

2

86

18

4

 

 

 

 

 

 

 

 

 

Source: Own calculations based on the UN POPIN 2011. Note: The young are below 15 years old, the old above 65, and the working age population are those in between.

Egypt is not that rich. It has some main economic and financial problems.

  • First, there is the persistently high level of unemployment around 9% according to official statistics (see also Hassan and Sassenpour 2008 on this issue). The ongoing large labour supply shocks, ceteris paribus, are not going to help lower this unemployment. Even in the years just before the global crisis, when the Egyptian economy grew at 7% for three years consecutively, the unemployment rate remained high.
  • Second, the social safety net is below standards. The working-age population should be aiming to pay taxes and social security contributions that can cover old-age pensions, family support, education, food and energy subsidies, health costs, and unemployment benefits intended for the elderly, the young, and the jobless. The gap between the collected funds and the needs has, however, not narrowed much.

How much should the Egyptian economic grow to absorb the new entrants?

The Egyptian economy needs to grow by at least 5% for many years in a row. Although this outcome depends on several assumptions – among others on the rate of migration and the employment elasticity -- it is a lower rather than an upper bound (see Peeters 2011). If economic growth is less than 5%, which is likely in view of the historical tracking of Egypt, unemployment will increase further with all its negative effects on the social security system.

To be more precise on these projections, under a baseline scenario of no economic growth, the unemployment rate will more than triple during the period 2011-2030 implying an increase of 10 million jobless people. There will thus be 500,000 more unemployed persons each year. These daunting outcomes hold under the assumption of labour supply rates as presented in Table 1 with no-change in migration (Peeters 2011, and Hassan and Sassenpour 2008).

Figure 2. Effects of simulated labour supply and demand shocks

Sources: Own calculations (see Peeters 2011). Note: The simulated supply shock is a 1.75% year-on-year growth of the labour force, which is equivalent to the projections of the working-age population by the UN (see the green bars). The simulated size of the demand shock is 5% year-on-year during each of the years 2011-2020 (blue line). The right graph shows the development of GDP per capita, also in case of demand shocks of 3% and 7%.

If the economy were to grow at 5% for ten years in a row, the supply shocks would be counteracted by the creation of jobs (Figure 2). In view of Egypt’s current high level of unemployment, its large public sector and its fiscal stance, job creation better take place in the private sector.

Where to create jobs?

Jobs should be created in the private sector. The private sector is still too small in comparison with the public sector for the economy to start functioning as a market economy. Just before the global crisis, public to private-sector employment had fallen to around 30% (see Figure 3), due to strong performance of the economy. In comparison with countries worldwide, developed but also developing economies, the Egyptian public sector is large and inefficient. If the economy can succeed in accelerating private-sector job growth – in that it picks up the pre-crisis trend -- productivity will reach a far higher level and this will help spur new growth in small, medium-sized, and large companies.

Figure 3. Public and private sector employment in Egypt

Sources: Made based on information from the Ministry of Economic Development in Egypt.

While private-sector employment benefits public finances, the current public-sector employment imposes heavily on the budget. Not only is the quantity of public-sector employment relevant in this respect, being around 6 million employees, so is their remuneration that has been growing fast at 30% in nominal terms for some years (Figure 4). The total compensation of public sector employment makes up around 25% of the total public expenditures (see Youssef 2007), which is high by international standards.

Figure 4. Public spending and public and private wages in Egypt


Sources: Made based on information from the Central Agency for Public Mobilization and Statistics (CAPMAS), the official office of statistics in Cairo.

Adding to the two problems mentioned above, there is the third main one:

  • Third, public finances must not deteriorate further. The public debt is high at around 70% (depending on the definition that we use) and the current public expenditures, mainly consisting of debt interest payments and the compensation of public employees, have always exceeded the public revenues despite privatisation revenues. For this reason, although the debt improved over the period 2004-2008 thanks to reforms, the fiscal deficits have remained high at around 7%-8% of GDP.

Creating jobs in the private sector, while reforming the public sector, will benefit public finances in two ways, i.e. via the so-called numerator effect – that is, with higher tax revenues and lower government expenditures on public sector remunerations – but also via the denominator effect – the boost in GDP, due to the higher labour productivity than in the public sector.

How to create jobs?

More foreign direct investment will be needed. It is still at low levels. The good thing, however, is that the Egyptian economy is diversified, well connected with the Middle East, the US, Asia and Europe, and there are thus ample opportunities. From 2000 to 2009, Egypt had on average 3.9% of GDP provided through inwards foreign direct investment, while other countries in the region received more (see Figure 5). According to the Doing Business listing Egypt still ranks low on the ease of doing business in comparison with other countries (Worldbank 2011). Out of 183 countries worldwide, it ranks 94th, implying that there is room for improvement in the regulatory environment to make it easier for firms to emerge.

Further to this, Egypt must improve its market system (quote from Tabellini 2005 in Democracy comes second). All government actions should be geared towards facilitating and attracting foreign investors and helping the private sector create jobs.

Figure 5.  Foreign direct investment during 2000-2009

average, in percentage of GDP


Source: Own calculations based on the UNCTAD and IMF WEO April 2011 figures.

Conclusions

Although easier said than done, the situation in the labour market and for public finances in Egypt needs to improve – and quickly. The current and future generations of workers can bring about major positive changes to the economy if and only if they get job opportunities in the private sector. To make this possible, the government needs to attract more inflows of foreign direct investment, improve the private business climate, make the public sector leaner, and gear its efforts to make market mechanisms function.

References

Hassan, Mohamed and Cyrus Sassanpour (2008), Labor market pressures in Egypt: Why is the unemployment rate stubbornly high?, Journal of Development and Economic Policies, 10(2).

Noland, Marcus and Howard Pack (2008), “Looking beyond the boom”, VoxEU.org, 1 August.

Peeters, Marga (2011), “Demographic pressure, excess labour supply and public-private sector employment in Egypt – A labour supply to analyse the responses of unemployment, public finances and welfare”, Working Paper MPRA 31101.

Youssef, Hoda A (2007), “Towards inflation targeting in Egypt – Fiscal and institutional reforms to support disinflation efforts”, European Commission Brussels, European Economy Economic Papers No. 288.

Worldbank (2011), Doing Business. 

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Topics:  Development Labour markets Politics and economics

Tags:  unemployment, Arab uprising, Egypt

Research Fellow, Netherlands Institute for Advanced Study, Royal Netherlands Academy of Arts and Sciences

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