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

Utilizing an Intertemporal General Equilibrium model for Egypt, this paper seeks to analyze the interaction between informality of labor and trade liberalization. Although it is documented in the literature that trade liberalization can be associated with short run transitional unemployment, we find that in the presence of informal labor markets this seizes to occur. Informality thus reduces the adjustment costs to trade liberalization. Policy makers are thus encouraged to exploit the benefits of informality. Issues related to the sequencing of formalization and trade liberalization were also explored. In this regard, we find that it is not advisable that formalization precedes trade liberalization as the gains foregone by delaying trade policy reform are likely to dominate the outcome. See above See above