The Effect of the Minimum Wage on Employment and Inflation in Egypt

Abstract

The main goal of this dissertation was to assess the impact of raising the minimum wage on employment and inflation in Egypt. Standard Neoclassical theory suggested that minimum wages would negatively affect the employment of low wage workers. However, some empirical studies have found insignificant or positive employment effects. There are several potential justifications for these empirical results including price-pass-through effects. We first analyzed the feasibility of assessing minimum wage employment and inflationary effects based on historical data. We found that the existing minimum wage system is ineffective for both private sector and government employees. We concluded that the official national minimum wage rate is not binding and cannot be used as an independent variable in an ex-post regression analysis. We suggested a new framework for minimum wage determination and proposed three hypothetical hourly minimum wage rates. Using micro-data from Egypt’s Labor Force Survey (2013), we projected the hourly wage distribution for regularly and irregularly employed workers in 2016. We found that more than 50% of our minimum wage workers were employed by the private sector and were not covered by a legal contract or social insurance. Assuming full compliance, our results suggest that a minimum wage of 8.6 L.E./hour would result in a decline of 16.4% in regular minimum wage jobs in the private sector. This represents around 9.8% of total regular minimum wage jobs, and 3.2% of total regular employment. When the minimum wage is increased to 9.3 L.E./hour and 10.6 L.E./hour, around 16.5% and 17.7% of regular minimum wage jobs are expected to be lost, respectively. Assuming partial compliance due to absence of formal contracts, we conclude that the negative employment effects will not exceed 1.4% of total regular employment. Finally, we used industry-level panel data on producer prices, average wages, intermediate consumption and worker productivity to estimate the effect of wages on the price level. Assuming mark-up pricing, our results have shown that the three proposed minimum wage rates are expected to increase the average annual producer price index by 0.77% to 1.52%. Our predictions are in line with estimates from other developing countries. Our study suggests that the National Minimum Wage Council must redesign the existing minimum wage setting mechanism, especially for private sector workers. We also recommend a regular update of minimum wage rates given economic conditions and feedback from follow-up studies and public consultations. Greater efforts are also needed to improve work conditions for low wage workers.

Keywords: Minimum wage, Employment, Inflation, Egypt.