This project highlights the interaction between trade liberalization and labor market rigidities as drivers of informality. The research also looks at the extent to which informality reduces short run unemployment, which accompanies trade liberalization due to wage rigidities in the formal sector coupled with adjustment of contracting and expanding sectors. It also examines the implications for welfare, given the lower productivity associated with increased informal employment. In this respect, the research seeks to assess the overall balance of the costs and benefits of informality, filling in an important gap in the empirical literature on trade liberalization and informality in general, and in Egypt in particular. The project also examines the implications of trade liberalization for informal employment and the formal-informal wage gap in the presence of rigid wages in the formal labor market.
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