Trade Liberalization and the Costs and Benefits of Informality: An Intertemporal General Equilibrium Model for Egypt

This research aims at assessing the costs and benefits of informality for the Egyptian Economy as trade is liberalized. The analytical framework for this assessment is an intertemporal general equilibrium model. The key questions this research will address include: to what extent will informality reduce the transitional unemployment to trade liberalization in the short run –which typically arises due to wage rigidities in the formal sector coupled with asymmetric adjustment of contracting and expanding sectors- and what are the implications for welfare given the lower productivity associated with increased informal employment? In this respect the research will seek 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 the literature on trade policy reform in Egypt in particular. Second: what are 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? The purpose of this exercise is to highlight the interaction between trade liberalization and labor market rigidities as drivers of informality.