# **1. Introduction**

The Egyptian labor market, since structural adjustment in the 1990s, has been characterized by a sharp decline in formal employment and growth of the informal economy. The public sector shrank from 39% of employment in 1998 to 26% in 2018 (Assaad, AlSharawy, & Salemi, 2019). The private sector was unable to replace the shrinking public sector with good, formal jobs (jobs with social insurance or contracts). From 1998 to 2018 the share of formal private wage employment in total employment grew from 8% to just 12%, while the share of informal private employment grew from 53% to 62% (Assaad, AlSharawy, & Salemi, 2019).<sup>6</sup> Lack of formality and its associated benefits, such as protections afforded through the labor code, paid leave and retirement benefits, are a key impediment to women’s participation in the labor force. Despite rising education, women in the Arab Republic of Egypt have increasingly withdrawn from the labor market (Assaad, Hendy, Lassassi, & Yassin, 2018). Women particularly exit at marriage, in the face of informal employment opportunities in the private sector that are irreconcilable with their domestic responsibilities (Assaad, Krafft, & Selwaness, 2017; Selwaness & Krafft, 2018). Access to formal employment and its associated benefits has come to increasingly rely on class and connections for the younger generation (Assaad, Krafft, & Salemi, 2019; Assaad & Krafft, 2020). Frustrations with the lack of good jobs among young people and the middle class were a key component of the Arab Spring protests (World Bank, 2013; Gatti, Angel-Urdinola, Silva, & Bodor, 2014).

On top of the challenges informal employment presents to Egyptian workers, informal firms are a challenge to the macroeconomy. Informal firms do not pay taxes, which creates a difficult fiscal situation for Egypt (AfDB, 2016). The ongoing growth of informal firms in the economy compounds this issue (Elshamy, 2015). Informal firms, facing lower costs, may out-compete formal firms, creating a particular challenge for growing the formal sector (Ali & Najman, 2016). Informal firms may also stay small and not create jobs in order to avoid the attention of authorities (AfDB, 2016). There have therefore been longstanding calls in policy circles in Egypt to formalize micro and small firms to expand the tax base, increase access to formal employment with its various benefits and protections, and facilitate firm access to finance and international trade opportunities (Egyptian Center for Economic Studies, 2005; World Bank, 2014).

Yet formality may create challenges for job creation overall, if the process of formalizing or the requisites of formality include burdensome regulations and substantially higher costs (Sparks & Barnett, 2010). Micro and small enterprises play a critical role in employment creation and dynamics (Li & Rama, 2015). Individuals may start firms more out of necessity or survival (primarily self-employment) than entrepreneurial opportunity (Naudé, 2008, 2010; Brixiova, 2010; Krafft & Rizk, 2018). If the costs of formality are sizeable and fixed in nature, they may prove particularly burdensome for the smallest firms. There are heterogenous results across countries and studies in terms of whether informal firms are

> 6 This percentage may include a small fraction of formal self-employment, but it is unlikely to exceed a few percentage points.

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