Do reforms introducing more exibility into the labor markets of developing countries reduce unemployment?
This paper proposes to evaluate the new Egyptian labor market law which was introduced in 2003, aiming to
enhance the exibility of the hiring and ring processes. The Egypt labor market panel surveys (ELMPS 2006 and
ELMPS 2012) are used to measure the impact of this reform on the dynamics of separation and job nding rates,
and to quantify their contributions to overall unemployment variability. Using longitudinal retrospective panel
datasets created from the the 2006 and 2012 cross-sections and by overlapping the two surveys, we estimate
annual and semi-annual transition probabilities of workers among employment, unemployment and inactivity
labor market states. A unique novel model is built to correct for the recall and design bias observed in the
retrospective data, using a Simulated Method of Moments (SMM). Using the "corrected" data , we show that
the reform increases signicantly the separation rates in Egypt but leads to non-signicant eects on the job
nding rates. The combined net eect is therefore an increase in the levels of the Egyptian unemployment rate:
separations increase whereas hirings remain unchanged. This partial failure of the liberalization of the Egyptian
labor market is then explained by an increase in the set-up costs, interpreted as a capture by the corrupt agent
of the new surplus.