A fine line: Efforts to address labour market issues

The local labour market has long been viewed with a degree of equivocation by observers, who frequently describe it as both an asset and a potential liability. With 45% of the population between the ages of 15 and 39 and around 200,000 graduates entering the workforce each year, the advantages for domestic and international firms dependent on an easily accessible human resource are obvious. The country has had some success in capitalising on these factors, bundling them with its favourable time zone of GMT +2 and a history of exposure to foreign cultures to market itself as new centre of outsourcing. The government’s efforts, centred in Smart Village and the 1200-agent call centre owned by Xceed, the IT arm of Telecom Egypt, have yielded considerable results. The 2011 AT Kearney Global Services Location Index ranked Egypt as the leader in the Middle East region and fourth worldwide based on 43 weighted measurements grouped into the three categories of financial attractiveness, people skills and availability, and business environment.

The rankings, however, were compiled before the upheavals of 2011, and the heightened country risk that pertains as a result of Egypt’s ongoing political transformation have since caused AT Kearney to advise that the situation needs to be closely monitored. Beyond the small but significant success of Egypt’s outsourcing industry, it is clear that the labour market faces several challenges. The senior economists and sovereign debt analysts of the global banks who make up the respondent base for the World Economic Forum’s Global Competitive Index ranked Egypt 141st out of 142 countries in terms of labour market efficiency in 2011. Labour market reform, therefore, will be high on the list of priorities for the Egypt’s government as it turns its attention to reviving the nation’s economic fortunes.

LABOUR REGULATION: Concerns regarding Egypt’s workforce are not new. In 2003 the government moved to combat labour market rigidities with the introduction of a unified labour law, yet despite its promulgation market rigidities continue to obstruct business development, as the Global Competitive Index shows. Egypt scores particularly poorly in areas such as hiring and firing practices and firing costs. The overtime regulations established by the 2003 law are also more onerous than those seen in comparable markets: the premium on night work is 70%, compared to 0% in Mexico, Kuwait and Lebanon and 23% in Iran, while work carried out on the weekly rest day carries a 100% premium, compared to 25% in Mexico, 50% in Kuwait and Lebanon and 23% in Iran, according to the World Bank’s “Doing Business 2011”. Given these requirements, employers are frequently reluctant to hire. In a 2011 survey conducted by the Egyptian Centre for Economic Research, 44% of the businesses polled cited overtime costs as a hindrance to employing new workers, with the result that many hire informally or increase shift lengths in contravention of the legislation. Similarly, 39% of respondents stated that the social security system, which until 2012 demanded contributions of 26% and 14% of salary from employers and employees, respectively, was a major constraint to hiring.

Issues such as these may be the most significant contributory factors to an unemployment rate that has remained persistently high since the 1990s, staying above 8% for that period and reaching 12.4% in December 2011 according to the Central Agency for Public Mobilisation and Statistics.

MINIMUM WAGE: However, while a holistic strategy to increase the efficiency of the labour market may have been a talking point in industry and government circles for years, the immediate effect of the political events of 2011 was to reduce public discourse on the subject to a single issue: a minimum wage. A number of wildcat strikes over low wages in the northern industrial town of Mahalla in April 2008 were in large part a precursor to the uprising of January 2011, and the transition governments that followed the departure of the Hosni Mubarak administration were faced with calls to implement a minimum wage without delay. A court case brought by an non-governmental organisation (NGO) prior to the uprising found the government negligent in not holding a meeting of the Supreme Council for Wages since 1984, as a result of which the national minimum wage remained at a token LE36 ($6) per month. The victorious NGO issued a report that posited a minimum wage of LE1200 ($201), based on cost of living estimates, which was countered by business associations, which thought LE400 ($67) a more suitable figure. The popular pressure seen during 2011 did much to persuade the transition government to introduce a minimum wage of LE700 ($117) for public sector employees, which it extended to the private sector in January 2012, although an exemption for small and medium-sized enterprises with fewer than 10 employees and firms with “sufficient proof” that they cannot raise salaries has led some labour activists to dismiss the move as an empty gesture.

THE FUTURE: A flat minimum wage with no sectoral or occupation-based rates may have gone some way to answering a growing demand for social justice, but it falls short of the type of labour market reform which many in the business community believe would be in the long-term interest of both employers and employees. Previous governments have taken some steps towards a more liberalised labour market, such as passing (although not yet implementing) a law in 2010 which decreased social security contributions to 16% for employers and 9% for employees, yet many hope that the new, post-Mubarak government will introduce more far-reaching changes. Proposals include a greater degree of nominal wage flexibility through variable pay systems such as the rate-for-the-job model, assessment-based pay or profit sharing policies. Such schemes have the potential to raise the motivation levels of employees and, as a consequence, company productivity, but are likely to be treated with considerable suspicion by a populace primarily concerned with the issue of the minimum wage. Any discussion regarding wage reform might thus find a more receptive audience if it included proposals to enhance employee security alongside an employee flexibility programme.

An unemployment insurance scheme capable of acting as a safety net during periods of unemployment is one proposal that might be made in conjunction with moves to increase labour market flexibility. Another issue that might be addressed is the history of ineffective labour market policies, which have failed to match demand and supply of labour. A re-calibrated and refinanced active labour market policy might be a useful bargaining tool for any government seeking to dismantle the costly and rigid structure of employee rights which exacerbates Egypt’s unemployment problem.

Whatever policies the government chooses to adopt as it addresses the challenges in the labour market, it will be treading a thin line between workers’ rights and flexibility for businesses. Key to the government’s success, therefore, will be its ability to persuade the nation’s workforce that its efforts are in the interests of all.

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The Report: Egypt 2012

Economy chapter from The Report: Egypt 2012

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