Structural Labor Market Transitions and Wage Dispersion in Egypt and Jordan

This Discussion Paper has been presented as a part of the workshop called The Social-Economic Situation of Middle East Youth on the Eve of the Arab Spring, hosted on December 8 - 9th, 2012 at the American University in Beirut. In this paper we determine the feasibility of using data from the Egyptian and Jordanian Labor Market Panel Surveys (ELMPS2006, ELMPS2012 & JLMPS2010) to estimate the Burdett-Mortensen job search model. The data contain sufficient information on wages, labor force states, durations, and transitions to generate estimates of the model’s structural transition parameters which eventually enable us to explain the persistent high unemployment rates in the region. By extracting different 10 years employment panels for Egypt and Jordan from the available cross-sectional datasets, results indicate that arrival rates of offers for workers are generally higher when unemployed than when employed. When a worker is already employed, the arrival rates of offers for highly educated workers tend to be higher than their uneducated peers. We therefore find that they consequently move faster up the job ladder. Both countries have extremely low job destruction rates. When comparing the two MENA countries, Egypt’s labor market tend to be much more rigid than its Jordanian peer, where extremely higher search frictions force labor market entrants and on-search workers to accept what they are offered. We therefore observe a peculiar high monopolistic power exerted by the employers. Although, we were able to calculate a firm-specific productivity distribution, we choose to rather focus on the supply side of the equilibrium job search model. We therefore study labor market differentials across the different educational groups in Egypt and Jordan, showing that the wide Variation in frictional transition parameters across these groups helps to explain persistent unemployment and wage differentials especially among the very high educated youth. Fit Analysis Tests and policy implications are performed based on the obtained results. The paper is a preliminary endeavor to explore the dynamics of the MENA region labor markets (particularly Egypt and Jordan) and test for their extent of rigidity.