Demographic pressure, excess labour supply and public-private sector employment in Egypt - Modelling labour supply to analyse the response of unemployment, public finances and welfare

The demographic structure of Egypt has the form of a pyramid, indicating that labour supply will grow at a relatively high rate for many years to come. Unless emigration flows will rise, Egypt needs to create jobs at a much higher pace than most other countries around the globe to absorb the new entrants at the domestic labour market. Adding to this is the currently high share of 30-40% of the Egyptian employees working in the rather inefficient public sector. In order to quantify future developments at the labour market, this paper presents a labour supply model to analyze the impact of the ongoing demographic supply shocks on unemployment, public finances and welfare in Egypt. The findings indicate that the demographic labour supply will increase unemployment in the short term as the Egyptian labour market will not be able to absorb the demographic labour supply, unless the Egyptian economy grows steadily at least at 5% for many years in a row. In the long term, the employment dividend can be reaped by productivity growth increases if the labour market starts functioning. The findings also point out that, for growth to accelerate rapidly, job creation should occur in the private and not in the public sector. The large public sector has been driving up government expenditures disproportionably, not only because of the existence of the high number of people employed in the public sector but also because of excessive public wage increases.