56737 July 2010 · Number 65 Labor Markets and School-to-Work Transition in Egypt: Diagnostics, Constraints, and Policy Framework Diego F. Angel-Urdinola1 Young entrants to the labor market have become Introduction: Despite substantial improvements in more educated than ever before: the share of the labor market outcomes in recent years (in raising working-age-population with university education employment and participation and in lowering in Egypt increased significantly between years 1998 unemployment), unemployment rates in Egypt and 2006 (from 14% to 19% among men and from remain exceedingly high among youth 2 entering 9% to 14% among women). However, youth are the labor market for the first time. A slow school- unable to capitalize the time and resources invested to-work transition remains the main reason behind in their education as the labor market is not high unemployment rates. The youth providing enough good-quality jobs for them. unemployment rate in Egypt, at 24% in year 2006, Estimates indicate that out of a total of 750 is high for international standards- though similar thousand jobs created in urban Egypt for university to those in North Africa(Figure 1). Moreover, youth graduates between years 1998 and 2006, the entering the labor market for the first time account majority were informal low quality/low pay for about 82% of the country's unemployed private-sector jobs (about 67%). workers. To cope with scarce formal jobs, young-educated Figure 1: Youth Unemployment rates (%) workers are opting to work in the informal sector 30.0 25.0 and/or withdraw from the labor force. While the 23.6 25.0 21.0 share of young university graduates working in the 20.0 17.5 18.8 informal sector roughly doubled between years 15.2 1998 and 2006 (from 35 to 55%), labor force 15.0 13.0 10.2 11.5 participation rates among women with university 10.0 8.6 education decreased from 73 to 61% in the same 5.0 time period3 . 0.0 Informal sector jobs constitute a way for young/educated workers to enter the labor market, gain experience, and eventually move into formal employment. In Egypt, about half of all new entrants work in the informal sector for many months after having graduated from school. Source: KILMnet and World Bank using Egypt's 2006 LMPS Unfortunately, the longer young workers stay in survey. the informal sector, the less likely they are to find formal jobs. As such, university graduates who stay in the informal sector often suffer an important loss of human capital as returns to higher education in 1 Angel Diego Urdinola, MNSHD. This Fast Brief was reviewed the informal sector are low.4 and cleared by MNA Education Sector Manager Mourad Ezzine and was prepared for the Egypt High Level Round Table. Quality of Education: The Gateway to Employability. Luxor, March 19 ­ 20, 2010. 3 2 Youth are identified as the population between the ages of 15 World Bank data using Egypt's 2006 LMPS survey 4 and 24 years. Ibid Main Constraints Preventing New Entrants from Getting Jobs: 3 - Public Sector still distorts incentives: Egypt's civil There are three key factors that seem to explain service remains large for its levels of development. why school-to-job transition remains low in Egypt: Despite the fact that the employment growth of the public sector has slowed dramatically in recent 1 - Investments in the Private Sector remain low and years and that Egypt's former policy to guarantee capital intensive. Despite great improvements in employment for university graduates has been recent years, private investment remains low in suspended, public sector employment still accounts Egypt (Figure 4). Due to high energy subsidies and for about 65% of all formal sector employment and negative real interest rates, most private 45% of all new formal jobs created in the economy investments in Egypt focus on capital intensive between years 1998 and 2006 (approximately 260 activities. According to the 2008 ICA, there are thousand jobs). Since public sector jobs are still important barriers to greater private investment associated with relatively generous medical and such as corruption, unfair competition, and macro- retirement benefits, relatively short work hours, economic uncertainly (e.g. high inflation, rising and transportation benefits, many educated unemployment, and a contraction of revenues from individuals (mainly women) still queue for private the Suez Canal, tourism and exports). sector jobs. This phenomenon undermines 2- Skills Mismatches. For the first time, results from entrepreneurship among young educated workers enterprise surveys in Egypt (ICA 2008) indicate that and contributes to long unemployment spells. firms identify worker skills and education among Policy Options Facilitating School-to-work Transition: This their top five constraints to business climate. section discusses a series of policy options used Employers not only express their dissatisfaction worldwide to facilitate school-to-work transition. concerning deficiencies in relevant experience and This note, however, does not aim to provide any technical skills but also concerning soft skills such specific policy recommendations: as personality traits, social graces, interpersonal (a) Making Labor Markets more Flexible. International skills, and language and personal habits (Table 1). evidence suggests that more strict employment More than 70% of students in higher education are protection regulation (i.e. requirements/cost of in humanities and social sciences. This pattern of hiring and firing) is associated with higher levels of enrollment is suited for absorbing university informality and youth/female unemployment, graduates in civil services jobs in the public sector, lower productivity, and slow labor market but appears ill suited recent private sector adjustment after economic shocks. Egypt enacted a expansion of the manufacturing and service sectors. new labor law in July 2003 that gave employers Furthermore, despite important efforts in recent more flexibility to adjust the labor force to years to improve TVET5, the system remains economic conditions. The law introduced key largely fragmented (i.e. there are 1,237 vocational provisions, including: fixed term contracts (that can training centers in Egypt, affiliated to 27 ministries be extended indefinitely), relaxed hiring and or authorities, which operate somewhat dismissal laws, the right for workers to strike, and independently in 29 governorates), training introduced rules for collective bargaining and programs are often supply-driven, and the quality worker-employer disputes. Yet, the cost of firing a of training programs remains low. redundant worker in Egypt remains one of the highest in the world. Table 1:Young applicants'skillsassessmentby employers Although labor regulation is not identified as a Skill Very Good Fair Poor leading constraint to business climate according to Required technical skills 18.2 50.5 31.3 the 2008 ICA survey, labor regulations and Practical training at school 10.1 42.4 47.5 mandatory contributions continue to constrain Communication skills 38.6 49.4 12.0 Writing skills 39.2 41.0 19.8 many enterprises from expanding formal Ability to apply knowledge 22.4 37.0 40.6 employment. Manufacturing firms, service firms, Commitment and discipline 62.9 28.9 8.2 and hotels report they would hire a net of 21%, 9%, Overall preparedness 13.5 66.1 20.5 and 15% more workers respectively if there were Source: ILO (2007). no restrictions to hiring and firing workers 6. Reforming unemployment insurance (UI) generally contributes to making labor markets become more 5 6 Technical and Vocational Education and Training Doing Business 2010 July 2010 · Number 65 · 2 flexible, protects workers, and goes hand-in-hand 163,000 to 235,000 new jobs. Subsides like this, with a reform of the severance system. Egypt has however, could be quite expensive. Estimates from an unemployment insurance scheme. In theory, the Turkish Treasury indicate that generating one private sector and public enterprise employees extra job for those benefiting from the program enrolled in the mandatory social insurance scheme could cost between 12 and 17 thousand US dollars. have access to unemployment insurance benefits offering 60% of the prior to lay-off wages for a Youth Programs: Many OECD and Latin American period up to 7 months spent with job search. A 2% countries have moved from an in-classroom model payroll tax is imposed on wages in association with to a more comprehensive training model which the UI scheme. In effect, this mechanism hardly includes the provision of in-classroom and exists; during the period 2001-07 an average of 330 workplace training, plus supplementary services people received benefits. The factors contributing such as counseling and mentoring, job search and to the low utilization are (i) a lack of public placement assistance, and soft and life skills awareness about UI benefits among plan members, training. Youth unemployment rates soared in (ii) restrictive eligibility conditions, (iii) the many Latin American economies during the late difficulty of (and the stigma attached to) 1990s as a consequence of the Tequila and documenting a "just-cause" firing decision, and (iv) Argentina crisis. To address this issue, the Chilean low overall lay-off risk among covered open-ended government designed the so-called "Chile Joven" contract employees. program. The program basically offered comprehensive "demand-driven" training Many countries are relying on unemployment programs to unemployed youth between 16 and 29 insurance savings accounts (UISA). The general years of age. The program was so successful at operation of UISAs is straightforward, transparent, increasing employment and earnings among and less prompt to abuse. With UISAs, employers participants that similar models were customized deposit some specified fraction of each worker's throughout the region in countries like Argentina, earnings in a special individual savings account on Colombia, Dominican Republic, Panama, Peru, and a regular basis. In Chile, for example, workers are Paraguay (Table 2). required to make regular contributions to their accounts and, upon separation, can make Table 2: Cost and impact of youth training programs withdrawals from their savings accounts as they Argentina Chile DR deem fit (some programs allow access before separation for health, education, and housing). Coverage (people) 116,000 165,000 - Although Brazil has used them since the 1960s, Cost per trainee 2,000 730 to 930 - UISAs are a relatively new program for many (US$) countries. More recently, several other Latin Program's Impact American countries (Argentina, Chile, Colombia, (% point increase) Ecuador, Panama, Peru, Uruguay, and Venezuela) Employment 10 21 6 to 8 have introduced UISAs. Earnings 12 26 10 Source: World Development Report (2007) and Vermehren et Al (b) Design Programs Targeted to Youth and Women. (2006) Recent work experiences indicate that subsidies, comprehensive training programs, and early These youth programs are based on five guiding childhood development programs are successful at principles: (i) Public-Private partnerships: training facilitating school-to-work transition: programs are directly linked to an internship with a private employer previously identified by the Subsidies: As part of a broad labor reform package training institution; (ii) Training provides hard and approved by the parliament in Turkey aiming to soft skills: the program provides youth not only reduce non-wage labor costs in the labor market, with technical skills, but also with life skills; (iii) the Government of Turkey designed a subsidy for Training provides practical experience; (iv) new youth and women hires between July 2008 and Flexibility: classes are held during June 2010 consisting of 100% of employers' social nights/weekends and offer different schedule security contributions (at the legal minimum wage) alternatives; (v) Monitoring and Evaluation: most in the first year, with a 20 percentage points decline of the programs rely of experimental techniques to per year in the subsidy in the following four years. monitor the impact of the training program on In times of economic expansion, this program could participant labor market outcomes. contribute to the net creation of approximately July 2010 · Number 65 · 3 Early Childhood Development: Many young conducted through a central institution (The women could be encouraged to work by having International Youth Foundation, IYF) whose main access to affordable care for their children. This role is to assure communication between the public could be achieved by promoting early childhood and private sectors (firms as well as training development programs (ECD), such as preschool providers). OECD countries have introduced the education and public/subsidized childcare National Qualifications Framework (NQF) as a tool programs. Although the Egyptian Kindergarten in order set to out the levels against which program (targeting 4-5 year olds) has grown qualifications can be recognized. By having a NQF, rapidly in the past decade, it covers only a fraction vocationally-related occupational qualifications are of the eligible population and poor children display linked to national occupational standards which set very low enrollment rates. ECD programs targeting out real-world job skills defined by employers. A 0-3 year olds (through e.g. mother at-home well designed NQF could help designing training training) remains next to non-existent. programs that are more responsive to the needs of individuals and employers. Subsidizing childcare and preschool education has several externalities that positively affect the Orientation towards job search assistance and welfare of future generations. International intermediation: Together with demand-driven evidence suggests that high-quality early childhood training, job-search and recruitment services are education and care helps prepare young children to important to bridge inefficiencies in the labor succeed in school and eventually in life. This market related to frictional unemployment. There translates into economic returns because they are are several tools available for achieving this goal. associated with lower repetition and dropout rates One is to increase the capacity of public throughout a student's lifetime. A developed child employment offices to offer job-search assistance, care education industry could be economically such as information about various opportunities in important because it creates jobs and allows education and continued education, specialized job parents (mainly young mothers) to be economically counseling, job placement, and professional active, benefits the overall economic orientation services. Indeed, job-search assistance competitiveness, and creates new job opportunities. programs are found to be the most cost-effective option for youth in OECD countries. In Colombia, the program "community mothers", a network of women who are employed by the state Performance monitoring: Information provides to look after their neighborhood children between directives for adjustments and change. A critical eight in the morning and four in the afternoon need for a well functioning TVET system is to have (Monday through Friday), has managed to create a good Labor Market Information System used for more than 82 thousand jobs. As a rule, mothers are performance monitoring (i.e. to assess program's trained by the Colombian Institute for Family Welfare effectiveness against predetermined objectives). to teach children basic values such as solidarity, This would provide youth with the job market friendship, and respect for differences. In the needs to encourage enrollment in vocations on the United States, a publicly financed network of rise and vice versa. The value of performance childcare centers (Minnesota Childcare) is generating management information is to help organizations more than 28,000 full-time jobs and is contributing and programs to clearly identify its objectives and to annual gross receipts similar to those of other best use its resources to achieve those objectives. major recognized industries in the state. Contact MNA K&L: (c) Reform of the TVET system: To address common Director, MNACS: Emmanuel Mbi problems such as segmentation, low quality, and Manager, MNADE: David Steel low impact of vocational training programs, Regional Knowledge and Learning Team: modern TVET systems need to be built upon three Omer Karasapan, Roby Fields and Aliya Jalloh main pillars: Tel #: (202) 473 8177 MNA K&L Fast Briefs: Coordination among stakeholders: Clear http://go.worldbank.org/OXADZV71I0 mechanisms and institutional settings to coordinate between the public and private sector and between The MNA Fast Briefs are intended to summarize lessons training providers and beneficiaries constitutes a learned from MNA and other Bank Knowledge and key factor of success for the delivery of TVET Learning activities. The briefs do not necessarily reflect the services and programs. In Latin America, "Entra 1" views of the World Bank, its board or its member provides a model whereby coordination is countries. 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