Opening Up, Falling Behind: A Quasi-Natural Experiment for Informal Wages in Egypt

The informal sector is perceived as a buffer in crisis times in developing countries. Yet, it is generally characterized by low wages and high vulnerability. This paper explores how wages of informal workers react in the wake of a trade shock, with a special focus on the Egyptian case. To do so, we use worker and industry-level data for the tradeable sector from the Egyptian labor market panel survey between 1998 and 2006, a period during which Egypt experienced a significant trade liberalization wave. We find a significant effect on the formality wage premium where a 1-percentage point reduction in trade protection leads to 0.45 percentage points rise, on average, in the wage differential between formal and informal workers. The effect holds under different specifications and when the exogeneity assumption of industry protection is relaxed.