World Development, Vol. 21, No. 6, pp. 92%939,1993. 0305-750x/93 $6.00 + 0.

00
Printed in Great Britain. 0 1993 Pergamon Press Ltd

Formal and Informal Institutions in the Labor

Market, with Applications to the Construction
Sector in Egypt

RAGUI ASSAAD*
University of Minnesota, Minneapolis

Summary. - Urban labor markets that are characterized by the absence or ineffectiveness of
regulation by legal and bureaucratic institutions can nonetheless be subject to powerful
institutional forces based on customary norms, group cohesion, kinship, and social networks.
Using insights derived from the New Institutional Economics, this argument is illustrated with
three examples from the construction labor market in Egypt, where formal and informal
institutions performing similar functions are contrasted. In each case the informal institution is
found to be significantly more important in shaping labor market relations.

1. INTRODUCTION sector and its intimate links with the formal

sector, but also assumes that the absence of legal
Studies of Third World labor markets have and bureaucratic regulation necessarily means
come to distinguish between formal and informal that market forces are allowed to operate un-
labor markets on the basis of whether employ- hindered. I argue instead that even in the
ment relationships are regulated by the legal and absence of such regulation, labor markets are
bureaucratic institutions of society. The formal structured by informal institutions whose role has
sector, which is sometimes referred to as the been obscured by an exclusive focus on formal
covered or protected sector, is said to be the part institutions at least in studies dealing with urban
of the labor market covered by regulations areas of developing countries.
setting the terms of employment contracts, mini- Despite a growing interest in the role of
mum standards for working conditions, minimum institutions in economics, there is still lack of
wages, job security provisions, and social security agreement on a precise definition (Nabli and
and disability protection. In addition, some Nugent, 1989a, 1989b). North (1991, p. 97)
analysts stress the role of trade unions and defines institutions as humanly devised con-
administrative hiring rules used by large bureau- straints that structure political and social interac-
cratic organizations in creating barriers to entry tion. Hodgson (1988, p. 10) builds on Veblens
into the formal sector, thus keeping wages there idea of institutions as settled habits of thought
above their market-clearing level. The informal common to the generality of men to define an
sector, on the other hand, is defined by simply
negating these characteristics. It is not regulated
by the state and characterized by free entry. By *An earlier version of this paper was presented at the
implication, it is perfectly competitive, free of 1990 Annual Meeting of the Middle East Studies
institutional constraints, and subject to the free Association. Cornmen& by Peter von Sivers are grate-
interplay of market forces. fully acknowledged. The research was assisted by
While the notion of informality seems useful to grants from the Joint Committee on the Near and
highlight the absence or ineffectiveness of regula- Middle East of the American Council of Learned
Societies and the Social Science Research Council, with
tion by legal and bureaucratic institutions, the
funds provided by the Flora Hewlett Foundation and
above characterization of an informal sector that
the Ford Foundation, and by a grant from the Ameri-
is simply the mirror image of a formal counter- can Research Center in Egypt, with funds provided by
part seems unjustified in my opinion. Such a the USIA. Additional funding for the sample survey
characterization does not only overlook the was obtained from the Ford Foundation. Final Revi-
internal heterogeneity of the so-called informal sion accepted: December 15, 1992.

925
926 WORLD DEVELOPMENT

institution as a social organization which, ties were embodied in the concrete historical
through the operations of tradition, custom or form of the guilds, there are many possible
legal constraint, tends to create durable and variants such as the caste system, the tribe, the
routinized patterns of behavior. Some defini- clan, or the village community. Like their formal
tions stress the rules aspect of institutions, others counterparts, informal institutions generate dis-
the behavioral aspects, but consensus seems to be tinctive labor market structures that deviate in
emerging about institutions as a set of collectively important ways from the perfectly competitive
defined rules, norms, and constraints that govern labor market model.
the behavior of individuals or groups (Nabli and I illustrate my argument by contrasting three
Nugent, 1989a). These rules and constraints may pairs of formal and informal institutions in the
be formal such as constitutions, laws, property construction labor market in Egypt: institutions
rights, charters, and bylaws, or they may be that define the relationship between workers and
informal such as customs, taboos, traditions, employers, institutions that contribute to skill
codes of conduct, and social sanctions (North, acquisition and training, and institutions through
1991, p. 97). which workers relate to each other and to actual
The weakness or ineffectiveness of formal or potential employers. In each case, I contrast
institutions in large portions of urban labor the formal, officially recognized institution with
markets in developing countries can be attri- its informal counterpart. Besides showing that, in
buted, in my view, to the lack of fit between the each case, the informal institution is clearly the
existing formal institutional framework and the more significant one, both numerically and in its
social and economic structures it is meant to impact on the functioning of the labor market, I
regulate. Instead of evolving concurrently with show that the resulting labor market structure is
the evolution of the production process and the by no means uniformly competitive and characte-
social struggles that accompanied such an evolu- rized by free entry.
tion, regulatory frameworks in much of the Third
World were simply copied from societies at vastly
different stages of social and economic develop- 2. INFORMAL LABOR MARKET
ment. Such wholesale importation of institutions INSTITUTIONS: A CONCEPTUALIZATION
resulted in the creation of caricatures of the
original institutions at the receiving end, carica- (a) The informal sector revisited
tures that formally resemble the originals they
are modeled after but that, in actual fact, are Since it was first proposed by Hart (1973) and
incapable of performing their intended functions. popularized by an International Labor Office
I suggest, therefore, that part of what we now report on Kenya, the notion of the informal
refer to as the informal economy is merely the sector has received a great deal of attention in the
manifestation of aspects of a preexisting institu- development literature. Rather than. review the
tional order that the new order failed to fully vast literature on the subject and the ensuing
displace. debate over the definition of the term, I simply
In Egypt, customary norms, kinship and com- concur with Castells and Portes that a strict
munal ties were the basic organizing principles of definition may not be desirable since it would
the guild system, which was the primary instru- unnecessarily restrict a changing and complex
ment of economic regulation in urban areas until notion that is nevertheless quite intuitive (Cas-
the end of the nineteenth century. With the tells and Portes, 1989, p. 11). Increasingly, the
introduction of alternative regulatory institutions term informal sector is giving way to the notion
by the British colonial authorities in the last part of an informal economy or simply to the general
of the century, the existing regime lost the official notion of informality in the economy. The shift
sanctioning of the state and the elements of the has occurred out of a realization that there is no
guild system that regulated the relationship of sharp divide between a formal and an informal
economic agents to the state disappeared. The sector, but rather that informality is a quality that
guilds also served, however, to organize relation- permeates all sectors of an economy to a greater
ships among guild members and between guild or lesser extent. It refers to the conditions under
members and other groups. I suggest that these which economic transactions are carried out
elements did not disappear with the formal rather than to specific firms and economic
abolition of the guilds as the fiscal and regulatory agents. Accordingly, it can exist in large bureau-
arms of the state. Since they were no longer cratic organizations as well as small family-run
legally sanctioned, however, they, in effect, enterprises. According to Castells and Portes,
became informalized. Whereas in this case insti- the central feature of the informal economy is
tutions based on custom, kinship and communal that the activities it encompasses are unregula-
 LABOR MARKET INSTITUTIONS 927

ted by the institutions of society, in a legal and The increasing informalization of labor market
social environment in which similar activities are relations in the industrialized countries, which
regulated (1989, p. 12). Such institutions include has been richly documented in recent years, is
laws that define the terms of labor contracts and arguably the result of the growing divergence
set minimum standards for working conditions, between the existing regulatory regime - the
rules relating to the payment of social security mode of regulation - and the patterns of
and other employment benefits, accounting pro- production organization emerging in the after-
cedures for purposes of taxation, legal registra- math of the crisis of the 1970s - the regime of
tion and regulation of property rights, admini- accumulation.3 The dominant model of large-
strative registration and licensing of firms, etc. scale integrated industries with highly structured
While I find this definition useful, I would modify relationships between unionized workers and
it slightly by saying that informal activities are corporate employers is giving way to more
those activities that are unregulated by the legal flexible, disintegrated industrial structures where
and bureaucratic institutions of society since the access to labor by large firms is increasingly
whole point of my argument is that other types of achieved through subcontracting to smaller less
institutions are likely to be important in regulat- regulated firms and through contingent workers
ing informal economic activities. who are not entitled to the same protections as
The other major approach to the informal full-time workers (Wood, 1989).
sector in the development literature emphasizes In most Third World societies, the institutions
the nature of production relations rather than the of the capitalist welfare state, or similar institu-
absence of regulation by legal and bureaucratic tions from the socialist countries, were simply
institutions. The proponents of this approach imported wholesale and applied to situations
argue that activities that are typically referred to characterized by distinctly different relations of
as informal are in fact characterized by the production than those in which they evolved. The
perseverance of precapitalist forms of production transplanting of these regulatory regimes to
relations, such as petty commodity production, in Third World societies has simply resulted in the
societies where the capitalist mode of production creation of small islands of protected workers in a
was imposed from the outside (Kahn, 1978; sea of casual and self-employed labor that
Moser, 1978; Lewin, 1985). Some analysts have remains for the most part outside the purview of
even argued that precapitalist enclaves are pre- the regulations.
served by the dominant capitalist order to ensure
the existence of a reserve pool of cheap labor and
to serve as a source of low-cost wage goods for (b) Institutions and the labor market
the capitalist sector (Portes, 1978).
Even though I use the term informal princi- Institutional economics has challenged some of
pally in the sense defined by Castells and Portes the basic tenets of Walrasian neoclassical econo-
(1989), I consider the two approaches comple- mics about the efficiency of market outcomes by
mentary rather than competing. In fact, I argue questioning two of its most crucial assumptions,
that informality in the economy results essenti- namely costless transactions and perfect informa-
ally from the incompatibility between the legal tion. Institutionalist economists have also stres-
and bureaucratic framework regulating the eco- sed the role of institutions in facilitating market
nomy and the level of development of the social exchange by reducing transactions costs, provid-
relations of production. In the industrialized ing a predictable framework for exchange, and
countries, institutions regulating the relations overcoming imperfect information. Hodgson
between workers and employers resulted from (1988, p. 174) goes so far as to argue that the
struggles over workers rights and developed market is itself a set of social institutions in which
concurrently with the emergence of the industrial transactions regularly take place and are facili-
model of production organization. For instance, tated and structured by these institutions.
most of the labor force in the advanced capitalist The New Institutional Economics (NIE)
countries had already been proletarianized when strives to explain the existence of institutions
legislation regulating minimum wages, the length starting from rational, maximizing behavior, but
of the working day, provisions for retirement and acknowledging that rationality is often bounded
disability support, paid vacations, job security, by incomplete information and uncertainty, that
and unemployment insurance were introduced. market transactions are often costly, that indi-
The introduction of these measures, typically vidual property rights are not always well de-
associated with the rise of the welfare state, was fined, and that individuals often need to act in
in large part a response to growing proletarian groups in situations where individual and group
political and economic strength. interest do not necessarily coincide. Accordingly,
928 WORLD DEVELOPMENT

several identifiable but closely related branches to the more recent contributions of the NIE
of the NIE have developed, each stressing one or (Williamson, Wachter, and Harris, 1975). The
more of these aspects, namely, transactions employment relationship involves many of the
costs, imperfect information, property rights, issues raised by the NIE and, as a result, labor
and collective action. The transactions costs institutions play a major role in the labor market.
approach stresses the importance of institutions Contracts between employers and workers are
in reducing the costs of economic transactions, often incomplete since they can rarely specify the
including the costs associated with the negotia- content of the work, the level of effort required,
tion, monitoring, coordination, and enforcement the pace of work, and the working conditions
of contracts (Coase, 1960; Williamson, 1975, that would obtain under all possible contingen-
1985; North, 1991). The transactions costs cies. This situation gives rise to a variety of
approach is primarily concerned with the role of institutional and managerial responses on the
institutions and contractual arrangements that part of employers to control the work process
economize on maladaptation costs resulting from and induce workers to accept their authority, to
bounded rationality and opportunism (William- manage workers demands and elicit their cooper-
son, 1985, p. 32). The imperfect information ation, and on the part of workers, to resist
approach is concerned with ex ante incentive relinquishing control over the content, pace, and
alignment in the presence of uncertainty and intensity of the work. The employer-worker
asymmetric information (Akerlof, 1970; Alchian relationship becomes an arena for intervention
and Demsetz, 1972; Stiglitz, 1974). The property by the state in setting the terms of employment
rights approach addresses the role of institutions contracts through legal and administrative re-
in guiding decision making within the economy gulations. Second, the employment relationship
by specifying and assigning property rights. A does not only involve the exchange of a given
major focus of this literature has been on the amount labor time for a wage, but also the
misallocation of resources resulting from nonex- acquisition of skills specific to the job at hand and
clusionary or mistaken property rights assign- the transmittal of these skills to less experienced
ment (Demsetz, 1967; Alchian and Demsetz, workers. A variety of institutional forms, such as
1973; Runge, 1981). Finally the collective action apprenticeship programs, internal labor markets,
approach focuses on the role of institutions in and seniority-based payment and promotion
overcoming the free-rider and prisoners dilem- practices arise to permit the development and
ma problems in collective action (Commons, transmission of skills learned on the job. Third,
1950; Olson, 1965; Hardin, 1982). institutions such as hiring halls, employment
Bardhan (1989a) criticizes the seeming functio- exchanges, and newspaper advertisements play
nalism of the NIE literature. He argues convinc- an important role in disseminating information to
ingly that just because an institution persists does employers about workers and to workers about
not mean that it is necessarily optimal or effi- jobs. Fourth, sharecropping arrangements,
cient. He points out that institutions can exist labor-only subcontracting, and other methods of
because they serve the interests of particularly tying remuneration to output serve to reduce the
powerful groups by creating barriers to entry and cost of monitoring worker effort. Finally, since
therefore protecting these groups monopoly employment is also a social relation involving
position. Similarly dysfunctional institutions may groups of people with common interests rather
persist because of some path-dependent process than just an economic transaction between indivi-
that first led to their adoption because they were dual agents, it is subject to collective behavior and
beneficial to early adopters but later made it bargaining, giving rise to trade unions, employers
difficult to change course once the institutions associations, and state institutions for the enforce-
were established (Bardhan, 1989a; North, 1991). ment or adjudication of labor disputes such as
Thus the analysis of institutions should not make labor tribunals and industrial relations boards.
a priori assumptions about their optimality but The vast majority of work on urban labor
rather take a critical look at why they persist, markets in bdth developed and developing coun-
whose interest they serve, and whether there tries has focused on formal labor institutions.
are more appropriate ways to structure social While there is a rich literature on informal
interactions that would be more efficient or agrarian institutions (Bardhan, 1989b), informal
equitable. labor market institutions in urban areas have
Labor market analyses have occupied an im- received much less attention. In an excellent
portant position in institutionalist thought start- analysis of such markets, Jagannathan (1987)
ing from the early contributions of Veblen and argues that the absence of legally enforceable
Commons to the post-war work of the institutio- contracts induces transactors to resort to complex
nal labor economists (Kerr, 1954; Dunlop, 1958), multilateral transactions rather than to the simple
 LABOR MARKET INSTITUTIONS 929

bilateral transactions usually considered in neo- bureaucracy can attest to this. In that context,
classical economics. For example, employers can however, because there is an expectation that
ensure a dependable but flexible supply of labor another set of rules should apply, these ties are
at a given wage by tying workers through the termed nepotism, favoritism, and corruption
provision of credit. Alternatively, employment (Jagannathan, 1986).
transactions can be combined with noneconomic In addition to vertical patron-client ties be-
relations, such as kinship, patronage, ethnicity, tween employers and workers, informal labor
or other community ties, which provide sufficient markets are often characterized by horizontal ties
sanctions or incentives for both parties to comply of cohesion between members of the same group.
with the agreement. By resorting to such multi- By excluding outsiders from access to segments
lateral transaction employers secure a reliable of the labor market that they control, group
and dependable source of labor and workers get members can generate monopoly rents that are
a modicum of security in a very insecure environ- redistributed to the members of the group. This
ment. kind of group solidarity was the basis of guild
Informal labor markets are also characterized organization both in Europe and in the Middle
by the absence of a publicly accessible system for East. Even with the dissolution of the guilds,
advertising jobs and for assessing the skills of however, informal ties of group cohesion remain
workers. When information is not publicly acces- through customary norms of conduct. These
sible, personal ties become the primary source of norms are internalized by group members
information gathering. If worker quality is an through inter-group socialization and institutions
issue, such as in the case of skilled labor, labor such as craft apprenticeships, which serve to
market relations become highly personalized. initiate new entrants to the norms of the group.
Employers tend to hire among workers they Deviations from group norms are discouraged
know personally, and workers strive to foster through social sanction and fear of loss of
such personal ties to get jobs.6 The amount of reputati0n.s The exclusion of outsiders does not
information one acquires becomes a function of have to be made explicit, but operates through
ones stock of connections and access to social the recruitment mechanisms used by group mem-
networks. Given that such stocks differ among bers. The following quote from Adam Smith
individuals, there will be asymmetries in informa- helps to illustrate this point:
tion that can be exploited to generate economic
rents. The proliferation of middlemen, labor- and even where they have never been incorporated,
yet the corporation spirit, the jealousy of strangers,
only subcontractors, labor recruiters, and job- the aversion to take apprentices, or to communicate
bers in informal labor markets is a direct con- the secret of their trade, generally prevail in them,
sequence of such information asymmetries. and often teach them, by voluntary associations and
Hiring on the basis of personal ties rather than agreements to prevent the free competition which
through a careful consideration of merit can be a they cannot prohibit by by-laws (Smith, 1828,
rational strategy for employers when merit can- p. 208).
not be readily discerned. By hiring his relatives
Setting aside differences in style, these words
and neighbors an employer may be opting for less
are an accurate description of the behavior of
than the most productive workers willing to work
construction craftsmen in Egypt today. While
at the wage offered, but the usually small craft guilds no longer exist in Egypt, craftsmen
differences in skill between workers are often far
still describe themselves as belonging to taifar af-
outweighed by the advantages provided by me rkar, or the construction guild. Words such as
patron-client ties. A bias against hiring stran-
sir al-mihna, or the secret of the trade, came up
gers is therefore rational given the scarcity of
quite often in my interviews with craftsmen.
information about the strangers reliability and
Thus, while there may not be formal institutions
quality. For workers, patron-client ties provide
designed to restrict access, the corporation
employment security in a very insecure economic spirit prevails in customary rules of conduct and
environment, and assurances that they will be
group norms passed on from master to appren-
paid the wages they are due. tice
Patron-client ties and the complex multilateral
transactions of informal labor markets are clearly
not exclusive to small-scale economic establish- 3. FORMAL AND INFORMAL
ments in what is typically considered the informal INSTITUTIONS IN THE CONSTRUCTION
sector. To a greater or lesser extent they pervade LABOR MARKET IN EGYPT
all segments of the economy, including large
bureaucratic organizations. Anyone who has This section illustrates the ideas presented
worked in or dealt with a large Third World above by looking at three pairs of formal and
930 WORLD DEVELOPMEN

informal institutions in the construction labor contracts are fixed in duration and cannot exceed
market in Egypt. In each case, I compare two one year at a time. They are renewable only once
institutions that serve similar functions in the and, if upon termination of the second term, the
labor market, albeit in somewhat different ways. relationship with the employer is not terminated,
The first pair ~ employment contracts and the temporary contract is automatically con-
casual labor relationships - defines the relation- verted into a permanent contract. Workers on
ship between individual employers and workers. temporary contracts can only be laid off at the
The second pair - vocational training programs close of the contract duration. Like permanent
and traditional apprenticeships - are concerned contract workers, they are entitled to all the
with the process of skill acquisition for skilled employment benefits stipulated by law, which
craftsmen. Finally. the third pair - trade unions include social security coverage, paid vacations,
and construction workers coffee houses - de- disability insurance, sick leave, etc.
fines the relationships among workers, and be- With such strong limitations on the employers
tween workers as a group and employers as a ability to adjust their work force at will in an
group. Moreover, since union hiring halls are in industry characterized by severe fluctuations in
some countries an important mechanism for demand, it is not surprising that only a small
workers to locate jobs and for employers to fraction of the construction labor force is hired
locate workers and since this occurs primarily in on any kind of legal contract. Large construction
workers coffee houses in Egypt, I deemed it firms resort to subcontractors and labor recrui-
useful to compare unions to coffee houses. ters to gain access to a flexible work force rather
The information I present below is based on than hire workers directly on legal contracts.
field research I conducted in Egypt during 1987- Workers hired through subcontractors or labor
X9. The data collection methodology consisted of recruiters do not appear on a companys payroll
a series of in-depth interviews and a sample and thus have no legal relationship with the firm
survey of construction workers. I conducted making ultimate use of their labor.
interviews with workers and subcontractors in all Subcontractors and labor recruiters hire work-
the construction trades, managers of construction ers exclusively on a casual basis. Without legal
firms, trade union representatives, and govern- employment contracts. casual workers have none
ment officials. These interviews were carried out of the employment benefits guaranteed by law to
over a period of one year in 1987 and 1988 at contract workers. They are hired from day-to-
coffee houses frequented by craftsmen, at the day and typically receive no employment benefits
street labor markets where unskilled workers whatsoever. They can be laid off at any time,
congregate. on a variety of construction sites. have no provisions for retirement or disability
and in the offices of construction companies, compensation, and have no legal recourse in case
trade unions, and the relevant government agen- of disputes with their employers.
cies. According to the CWS, 90% of manual con-
The sample survey was carried out on a struction workers are either hired on a casual
national random sample of just over 800 con- basis as wage workers or are self-employed.
struction workers. The sample was derived by Among casual wage workers, 70% have no
selecting all households containing at least one attachment to a regular employer and move
manual construction worker from the 12,000 frequently among employers. The remaining
household sample of the quarterly round of the 30% work with a given employer on a regular
Labor Force Sample Survey. The following basis, in the sense that they have some kind of
discussion relies primarily on information col- long-term relationship with that employer but
lected in the in-depth interviews and from still no legal contractual agreement. In most
secondary sources. The results of the overall cases they are not employed continuously but get
study and analyses of data from the Construction priority in hiring when their employer has work.
Workers Survey (CWS) are reported in detail in The social security administration acknow-
Assaad (1991). ledges that the present system of legal employ-
ment contracts is inappropriate for the construc-
tion industry. As a result, a special ministerial
(a) Contract and casual labor decree (No. 255 of 1982) was devised to deal with
the social security needs of casual construction
Egyptian labor regulations allow for two types workers. For a specific set of occupations, tem-
of employment contracts: permanent and tem- porary workers in the private sector are entitled
porary. Permanent contracts entitle workers to to receive social security benefits if they under-
lifetime employment security after a initial pro- take the following actions: (i) pay a monthly
bationary period of three months. Temporary contribution to the social security administration
 LABOR MARKET INSTITUTIONS 931

based on one of three skill categories, and (ii) tained from their physical appearance. Common
get the signature and tax file number of all the laborers can therefore spread their job search
employers they worked for during the month, or, activities over a wide area. They often congre-
alternatively, get the numbers of the social gate in large numbers outside the well-known
security files on the building permits of all the coffee houses from which subcontractors and
buildings they worked on during the month. A craftsmen operate or flock to the workers
worker needs to have paid up and certified markets, the major intersections in large cities
employment for at least 10 years to qualify for where common laborers congregate to offer their
the minimum pension level after he reaches the labor services for sale. Many are not full-time
age of 60. The social security administration construction workers, but small peasant farmers
collects the employers contribution to the social and farm workers who work occasionally in
security fund as a standard 2.5% deduction on construction. Alternatively, they find employ-
the gross value of all construction contracts. The ment on large construction sites through labor
employers contribution is paid at the point of recruiters who hire them directly from their
applying for a building permit. home villages.
As it is currently applied, the social security
system is totally unworkable for casual construc-
tion workers. If a contracting firm is involved in (b) Traditional apprenticeships and formal
the construction process, it usually acquires most training programs
of its labor needs through small subcontractors
who typically refuse to sign the workers social (i) The traditional apprenticeship system
security card since most do not pay all the taxes The vast majority of craftsmen (83.5% accord-
they owe the government and many are not even ing to the CWS) acquire their skills through the
officially registered as subcontractors. In cases traditional apprenticeship system. Under this
where there is no main contractor and the system, which dates back to the guild system that
workers are hired directly by the building owner, dominated economic activities in Egypt until late
either as self-employed artisans or as wage into the 19th century, craftsmen are trained on-
workers, the building typically does not have a the-job by serving as apprentices with an estab-
building permit and so it is impossible to record lished member of the trade. A boy is typically
the required social security file number. As a sent by his family to a master craftsman in his
result, few if any casual workers take the neighborhood for training. The relationship
necessary steps to get social security coverage. between the master and his apprentices is quite
In the meantime, the balance of the casual informal and is usually based on long-standing
construction workers account at the social secur- ties between the master and the apprentices
ity administration has been growing steadily as family.16 After an initial training period, the
the employers contributions are being paid in, at apprentice begins to receive wages that vary
least for large contractors, but no funds have proportionately with his level of skill. At first,
been flowing out for benefits. these wages are substantially lower than those of
Even though both craftsmen and common common laborers, but gradually increase as the
laborers are hired on a casual basis, the operation trainee becomes more productive. The appren-
of the labor market for the two types of workers tice performs tasks, such as handing out mortar,
differs in may important respects. Craftsmen extracting nails and cleaning tools that keep him
acquire skills in one of the construction trades in close proximity to his master. Gradually he is
over several years of on-the-job apprenticeships. allowed to perform the easier tasks of his
Because there are no ready ways to ascertain the masters trade, under the latters supervision,
skill level or reliability of a craftsman, subcon- eventually qualifying him to become an assistant.
tractors prefer to hire craftsmen that they know At the point when the master feels that the
personally or that have been recommended to trainee is ready to take on work on his own, he is
them by someone they trust. Consequently, promoted to the rank of journeyman. Historic-
craftsmen rely heavily on their stock of personal ally, under the guild system, for the trainee to be
contacts and networks to find jobs. This effec- promoted to the rank of journeyman, an applica-
tively limits their job search efforts to their local tion had to be made by the master to the guild
area, often to a particular coffee house that they chief, the shaykh. Before he approved the
frequent on a regular basis. In contrast, the promotion, the shaykh sought the opinion of
market for common laborers is highly impersonal other guild members as to the skills of the
and wide open. As far as employers are con- candidate (Baer, 1964, pp_ 51-52). While there
cerned all common laborers are alike, or at least are no longer any guild shaykhs and no formal
differences between them can be easily ascer- approval of this sort is required at present, a
932 WORLD DEVELOPMENT

journeymans skill has to be informally recog- that of the Training Organization of the Ministry
nized by his peers for him to be able to get work of Housing and Reconstruction (TOMOHAR).
in his specialty. In response to the severe shortage of craft labor
Many of the rules of the guilds, while no longer at the start of the reconstruction of the Suez canal
explicit, have been internalized by contemporary cities after the October 1973 war, TOMOHAR
craftsmen. Limitations on entry into the craft embarked on an accelerated plan to produce
trades work through customary rules and norms semi-skilled craftsmen. Under this plan, work-
transmitted from master to apprenticeship. ers were to be trained in one of 10 construction
These norms include discipline and absolute occupations for a period of three months in
loyalty to onels master, the willingness to tolerate existing training facilities, such as the training
harsh disciplinary measures, verbal and physical centers of public sector companies and vocational
abuse, and the willingness to work for an secondary schools. Trainees were to receive a
extended period of time at very low wages. While small stipend, a pair of overalls, and work shoes.
there are no longer any ritual ceremonies mark- While the program succeeded in attracting some
ing a novices passage through the different ranks trainees, the quality of its graduates was so poor
of his trade as in the guild days, apprenticeships that until now they are pejoratively known
continue to serve more than just a training among construction workers as October crafts-
function. Besides learning the necessary skills, men in reference to the October 1973 war.
the apprentice is socialized into becoming a In an ambitious five-year plan for 197680,
member of the fraternity of craftsmen by learning TOMOHAR proposed to establish 62 new train-
the values and behavioral patterns that make him ing centers with a total capacity of 50,000
an insider. graduates per year, as well as three training
Family ties and social networks are still crucial centers for the formation of trainers, with a
for a boy (it is almost always a boy) to gain access capacity of 600 graduates per year.lx Under the
to an apprenticeship. According to the CWS, plan, applicants to these centers had to be literate
over 37% of craftsmen had relatives in the men of 1630 years. They were to be trained for a
construction trades at the time they entered into period of six months, four of which were to be
the sector. whereas only 19% of common labor- spent at one of the training centers and the
ers did. There is also a strong correlation remaining two at a construction site for on-the-
between entry into the craft trades and residence job training [TOMOHAR, n.d., pp. 7-81.
in a community that has a high concentration of During 1975-87, 50 of the 62 training centers
construction workers, in support of the hypo- called for in the 197680 five-year plan were
thesis that neighborhood networks are crucial in established at a rate of approximately four new
providing access to apprenticeships. centers per year. Three more centers have begun
Another important determinant of access to operation in 1988. After a period of decline
apprenticeships is age at entry. Most craftsmen 1 during 1978-81, the number of graduates per
interviewed agree that it is very difficult to train year, according to TOMOHAR, has been in-
an adult of over 18 or 20 years of age. The creasing steadily from approximately 7,000 per
justification they typically provide is that beyond annum in 1981 to 18,000 in 1987; a figure that is
this age, the trainee losses the necessary dexterity still well below the 50,000 graduates originally
to learn a new skill and would not tolerate the planned for (TOMOHAR, n.d.). The rate of
harsh disciplinary measures used in the training training seems to be accelerating in recent years
process. The informal rule on age at entry means despite the severe recession in the industry and
that arrangements for an apprenticeship have to the fact that existing workers are severely under-
be made early in life, providing further advant- employed.
ages to those whose families have the requisite To evaluate the numerical impact of the
ties and social networks to place a son in an TOMOHAR training program on the construc-
apprenticeship. tion labor market. I computed the proportion of
TOMOHAR graduates to the total size of the
(ii) The formal vocational training system construction labor force engaged in manual
A wide variety of organizations offer vocatio- occupations. Using CWS data, I also computed
nal training programs for construction occupa- the average gross rate of entry into all craft
tions in Egypt. These include the Ministry of occupations over the five-year period 198347. A
Housing and Reconstruction, vocational secon- comparison of these two figures should give an
dary schools, public sector contracting firms, indication of the net impact of the training
local government authorities, the armed forces, program on the supply of new entrants to craft
and private voluntary organizations. The most occupations. According to the CWS, the average
organized and ambitious of these programs is gross rate of entry into craft occupations over the
 LABOR MARKET INSTITUTIONS 933

five-year period was approximately 4.4% per traditional apprenticeship system. While this
year. Over the same period, TOMOHAR claims perception may correspond to reality, given the
to have graduated 2-3.5% of the manual con- quality of many of the vocational training pro-
struction labor force every year depending on the grams, it may also reflect a well-internalized
year. If these figures are accurate and if these value system that aims at protecting insiders
graduates actually remain in the industry, the from excessive competition from outsiders. As
training program would be contributing 45580% I discussed earlier, the traditional apprenticeship
of new entrants into craft occupations; a large system is the primary means by which a worker
proportion indeed. gets socialized into the fraternity of craftsmen.
Since the CWS inquired into the training It would not be suprising that members of this
experience of craftsmen, I am in a position to fraternity would strongly favor someone who
assess the above claims. CWS results indicate has undergone an apprenticeship over someone
that only 5.3% of current workers participated in with formal training even if both candidates were
any kind of formal training. Among workers who equally good from a technical standpoint.
entered in the five-year period 1983-87, only Officials of large companies are somewhat less
4.5% had acquired formal training; a very diffe- dismissive of formal training.2 They complain
rent figure from that implied by TOMOHAR that while workers trained in the traditional
data. Moreover, this figure includes all types of system are often good at what they do, it is very
formal training not just programs sponsored by difficult to get them to acquire new skills or to
TOMOHAR. This large discrepancy between have them work with modern technologies. They
the two figures may be due to overreporting of also fault the traditional system for excessively
the number of TOMOHAR graduates, but it subdividing the trades and not training workers
could also be due to very high attrition rates to easily cross trade lines. This tends to inhibit
among graduates of formal training programs. the deployment of flexible teams of workers that
Since there is no way to independently check can participate in several stages of the construc-
TOMOHAR figures on graduation rates, I ex- tion process. Since it is craftsmen-subcontractors
plore the attrition hypothesis further. trained in the traditional system rather than these
Interviews with experienced craftsmen indicate company officials who do most of the recruiting
that graduates of formal training programs find it and hiring in the Egyptian construction industry,
difficult to gain acceptance from their peers in it is their opinion that matters in the final
the informal labor market. They apparently lack analysis.
the breadth of experience gained by apprentices
in several years of on-the-job training.tY They
also lack the contacts that are necessary to get (c) Trade unions and construction workers
jobs in the informal market once they complete coffee houses
their training. As I argued earlier, apprentice-
ships not only provide the trainee with practical A great deal of stress is placed in the institutio-
skills, but also socialize him into the culture of nal labor economics and labor market segmenta-
construction craftsmen. The formal training sys- tion literatures on the role of formal workers
tem fails to supply its trainees with the socializa- organizations and collective action in structuring
tion that is so essential to surviving in the hustle the labor markets.2 Similarly, some analysts of
and bustle of informal markets. CWS data show labor markets in developing countries attribute
that 55% of the workers in the sample who had the segmented structure of the labor market to
formal training work for either a government the presence of unions in some sectors and not in
agency or a public sector contracting firm, as others. In Egypt, union membership per se is
compared to 16% for the sample as a whole. practically irrelevant for most construction work-
Formally trained workers are thus much more ers and has little if any consequence in the
likely than their informally trained counterparts construction labor market. This does not mean,
to end up in formal jobs. With the limited that collective behavior is not important, but that
number of formal jobs in the construction indus- an exclusive focus on formal labor market
try, many formally trained workers may simply institutions would bring one to such a conclusion.
drop out of the construction labor market when I suggest that craftsmen, in particular, have a
they do not find such jobs. This may well be the strong sense of belonging to a solidary group.
explanation for their apparently high attrition They refer to themselves as being members of a
rate from the industry. taifa, or guild. This group cohesion, however, is
None of the subcontractors and craftsmen I developed and strengthened through socializing
talked to thought that formally trained workers in the workers coffee houses rather than through
were as good as those trained through the formal union membership. In many countries the
 934 WORLD DEVELOPMENT

union hiring hall is the primary means for union from the paycheck of public sector employees.
members to find jobs. In Egypt, the coffee house Casual workers automatically become members
is the locus of job search and hiring for construc- whenever they need to update their occupational
tion craftsmen. status on their national identity cards.-3 Until
recently, the union was responsible for certifying
(i) Trade unionism in the construction industry2 the trade and skill level of those who wished to
Since the 1952 revolution, the trade union have a construction occupation marked on their
movement in Egypt has been subject to substan- card. Before a worker could get such a certifica-
tial government control. The right to strike was tion, he was required to pay three years of union
outlawed in 1953 and remains illegal to this day. dues. Since early 1988, the Ministry of Labor has
To bring the unions under greater government taken over the certification function, but union
control in 1959, existing firm-level unions were dues must still be paid before the papers can be
consolidated into 64 industry-wide general processed. Since identity cards need to be
unions. Among them, there were three obtained only once, unless one needs to replace a
construction-related unions: a union of building lost or damaged card or to document a change in
workers, a union of road construction workers, occupation, most casual workers deal with the
and a union of workers in the construction union on very rare occasions throughout their
materials and porcelain industries. In 1964, a careers. This means that once the three years of
further consolidation was imposed by the govern- membership are up, their membership in the
ment; the 64 unions were merged into 34 and the unions lapses until they are required to obtain
three construction-related unions were merged new identity papers.
into a single union, the General Union for Virtually all the workers I interviewed have
Workers in the Building Industries. In 1973, a had no interaction or involvement with the union
final consolidation took place merging the ex- other than the occupational certification test and
isting 34 unions into 23. The wood workers union the payment of the required three years of dues.
was merged into the General Union of Workers Most do not even know what the union is. As far
in the Construction Industries to yield the current as most of them are concerned, it is simply
configuration: the General Union of Workers in another arm of the bureaucracy. In fact, this
the Building and Wood Industries. perception is quite justified since virtually all the
As currently structured the General Union union leadership is composed of administrators
includes all workers in the public sector contract- and middle managers from public sector firms.
ing, road construction, construction materials, Of those who were aware of their forced union
porcelain, and woodworking industries. Both membership, many complained that the union
blue collar and white collar workers are included took their money and provided them with no
up to the level of general manager. Public sector services in return. Many thought, however, that
firms are represented by union committees, or an effective union could greatly improve their
@zn nip&z. Independent workers (this is the position in the labor market. When asked what
way the union refers to casual workers) in role an effective union would play, they men-
construction and wood-working occupations are tioned the following: it could help resolve dis-
represented by geographically based occupatio- putes between workers and clients or employers;
nal committees, or ligan mehania. Both self- it could help them locate jobs; it could guarantee
employed and wage workers can become union the quality of workmanship by certifying the
members, but registered subcontractors cannot. skills of workers; it could provide some kind of
As of January 1, 1988, total union membership an unemployment insurance scheme; and it could
was 406.000 workers subdivided as follows: provide loans for working capital so that they can
102,000 in the public sector contracting industry, work on their own account.2
29,000 in the construction materials industry, While the union boasts rather large numbers of
20,000 in the road construction industry, 4,000 in members from among casual construction and
the wood industry, 200,000 independent workers wood workers, in actual fact it is an organization
in occupational committees, and 54,000 indepen- whose primary role is representing and serving
dent workers affiliated directly with the general the interests of workers on legal work contracts,
union. The last group consists of the independent the majority of whom work for public sector
workers from Cairo and Giza governorates - the firms. It intervenes on their behalf. both adminis-
two main constituents of the greater Cairo tratively and, if necessary, legally in cases involv-
Metropolitan area - who are not organized in ing dismissals or termination. It participates in
occupational committees. tripartite adjudication of labor disputes. It spon-
Union membership is, in theory, obligatory for sors some limited social service projects, such as
all workers. Union dues are subtracted directly medical clinics and summer resorts. Tradition-
 LABOR MARKET INSTITUTIONS 935

ally, the union has played a very limited role in A coffee house is frequented by a stable group
wage negotiation and bargaining. In essence, its of craftsmen who usually live nearby and who
role has been to act as a watchdog to ensure that rely largely on relationships they forge in the
labor laws, which are quite favorable to workers coffee house to get work. Most craftsmen agree
in Egypt, are properly enforced. Since such laws that there is no point extending their job search
are for the most part irrelevant for casual beyond the local coffee house. The coffee house
workers, who constitute 90% of the construction is where potential clients come to look for
labor force, the union itself is also irrelevant. workers. It is where the subcontractors they are
After lengthy discussions with union officials in acquainted with are located. It is also where
June 1988, the only significant role the union craftsmen can team up with colleagues in the
played on behalf of casual workers, that I could same trade or in closely related trades to under-
ascertain, is that of representing them in negotia- take jobs as labor-only subcontracting teams.
tions with the social security administration. The Elsewhere, they are unknown quantities.
union was attempting, at that time, to get the The coffee house is not only the locus of a
administration to modify the social security craftsmans job search efforts, but also where he
regulations in such a way that casual workers no spends most of his waking hours outside work.
longer need the signature and tax file number of Since subcontractors and wage workers socialize
their employers to qualify for benefits. together they perceive themselves to be members
of a unitary group of craftsmen, despite their
(ii) Construction workers coffee houses different roles. Unless a subcontractor is regis-
While trade unions are totally irrelevant for tered, there is in fact little functional distinction
most construction workers, the coffee house is an between him and a craftsman working on wages
institution that affects most workers lives on a since self-employment and wage work are simply
daily basis. Construction workers coffee houses two strategies to choose from depending on the
are the primary locus of interactions among circumstances.
craftsmen and between craftsmen and Common laborers are not accepted as equals in
subcontractors.26 Each of these coffee houses is the coffee house. They usually congregate out-
known for having a clienteVe that is predominant- side the coffee house in the morning waiting to be
ly composed of construction workers in certain picked up by potential employers from among
trades. In the past, coffee houses used to be the coffee house clients. Craftsmen clearly dis-
specialized by trade. Some are still known for tinguish themselves from common laborers. For
having mostly plasterers and tile layers, others example, I was told by a group of craftsmen that
are known for being frequented predominantly they consider it shameful to accept an offer for a
by reinforced concrete workers, but for the most job that starts the same day because they are not
part the specialization by trade has broken down common laborers that can just be picked up.
in recent years. According to this group, a craftsmen has to agree
As an institution, the coffee house serves many with the client or employer on the terms of
functions in the construction labor market. It is employment at least one day before the start of a
the equivalent of a union hiring hall, where job. In some cases, the craftsman would go to the
potential employers or building owners come to site to assess what is needed. If agreement is
recruit the workers they need. Coffee houses are reached, the evening prior to the start of the
often used by subcontractors in lieu of offices. It work, the craftsman is paid an advance, called a
is there that they conduct their hiring, meet their biyatu, that covers at least one days wage for him
crews prior to heading to the work site, and pay and his helpers, if any are needed. Whether or
their workers at the end of the work day or week. not this account conforms to reality, it illustrates
Most importantly, however, the coffee houses the craftsmens perception of their status as
are the arenas where networks and contacts skilled artisans, which distinguishes them from
among craftsmen and between craftsmen and other groups of workers.
subcontractors are cemented. A craftsman has to
be recognized by his peers as an insider to be able
to get work. This is typically done through 4. CONCLUSION
socializing at the coffee house. After long discus-
sions with craftsmen and subcontractors, I dis- My,objective in juxtaposing formal and infor-
covered that besides having their own jargon, mal institutions performing similar functions in
craftsmen also had secret signs that they would the labor market is twofold: first, to demonstrate
not reveal to me as an outsider. There were clear that an exclusive focus on formal institutions is
indicators that there was an insiders culture to inadequate for understanding how the labor
which one had to be initiated in order to belong. market functions and, second, to show that even
 936 WORLD DEVELOPMENT

when unregulated by formal institutions, labor cannot be assumed a priori to be perfectly

markets can be highly structured. competitive just because they escape regulation
In evaluating the functioning of the three by the legal and bureaucratic institutions of
formal institutions, one can clearly attribute their society. I argued that because of differences in
ineffectiveness to their incompatibility with the information requirements and the absence of
situation on the ground. Labor contracts guaran- institutions to disseminate information about
teeing life time job security or even temporary labor quality, the markets for craftsmen and
job security in a situation characterized extreme- common laborers function in an entirely different
ly unstable demand are clearly not workable. The fashion. Because of the information constraint
current design of employment contracts is suited and the need to maintain a flexible but reliable
for situations where there is long-term employ- supply of workers, employers prefer to hire
ment with large corporate employers. If this is craftsmen to whom they have previous personal
not the case, as for the majority of construction ties. They often rely on patron-client relation-
workers and, arguably, for workers in many ships or ties of kinship and residential proximity
other industries as well, the employment rela- to secure the workers they need. This effectively
tionship is left totally unregulated. The model subdivides the market for craftsmen into a series
upon which trade union rules are conceived is not of internal labor markets, centered around the
much different. While, on paper, their member- local construction workers coffee house, where
ship reflects a much larger constituency, their workers and employers forge and maintain the
primary purpose is to represent the interests of necessary relationships. In contrast, the market
permanently employed workers in the public for common laborers is wide open, fiercely
sector. Finally, the vocational training system has competitive, and highly impersonal.
also failed because its designers have attempted Besides vertical relationships between crafts-
to build an entirely new modern training men and their employers, there are strong
system that would simply be superimposed upon horizontal ties of solidarity among craftsmen.
the existing system of skill acquisition through These ties cut across the distinction between
traditional apprenticeships. If the existing system subcontractors and wage workers, all of whom
was deemed inadequate to meet the demand for perceive themselves as members of the same
skilled workers and too inaccessible, an alterna- group. The sense of group solidarity, and the
tive policy could have been to work on modifying group culture and norms that go with it, are
it so as to make it more open and universally internalized by group members, first through the
accessible, rather than seek to replace it al- apprenticeships they undergo at a young age and,
together. later, through intergroup socializing at the coffee
My second point is that informal labor markets houses.

NOTES

1. This description of labor markets in developing 6. Ben-Porath (1980) refers to this sort of transac-
countries is prevalent throughout the development tion as the F-connection, in reference to the preference
literature. See Berry and Sabot (197X) for a survey of given to transacting with family and friends. He
the literature on labor markets in developing countries. suggests that these transactions economize on transac-
See also Merrick (1976), and Mazumdar (1976). tions cost by making use of what he calls specialization
by identity, meaning that individuals deal only with
2. Hart (1973), IL0 (1972). See Bromley and Gerry people with whom they have personal ties.
(1979) and Bromley (1985) for collections of articles on
the topic and Richardson (1985) for a review article. 7. This stock of personal relations is sometimes
referred to a social capital. See Coleman (1988).
3. This terminology is due to the French regulation
school. See Aglietta (1979) and Lipietz (1986). The 8. Akerlof (1984) has built models to show how
increasing informalization of advanced countries labor group behavior and socialization can result in the
markets is well documented in the collection of articles persistence of socially suboptimal institutions. See also
in Portes, Castells, and Benton (1989). discussion in Bardhan (1989a). p. 1391.

4. See Rodgers (1991) for an exhaustive discussion 9. The Construction Workers Survey (CWS) was
of labor institutions. carried out in conjunction with the Central Agency of
Public Mobilization and Statistics, which also carries
S. See Bardhan (1980, 1983); Braverman and Stiglitz out the Labor Force Sample Survey on a regular basis.
(1982); Braverman and Srinivasan (1984); Hart (1986)
for analyses of such interlinked transactions in agrarian 10. Some employers are able to get around this
labor markets. provision by temporarily laying off workers at the end
 LABOR MARKET INSTITUTIONS 937

of their contract period and rehiring them some time 18. The total stock of manual construction workers in
later. Egypt in 1980 was approximately 500,000 workers.

11. In 1988, the monthly contribution was LE 9 for 19. Interview with Said Ali Ismail, Plumbing fore-
skilled workers, LE 6 for semi-skilled workers, and LE man, Shemto complex construction site, January 31,
3 for unskilled workers. LE 1 was worth $0.40 in 1988. 1988.

12. This section is based on an interview on June 20, 20. See GOHBPR and the World Bank (1981, Annex
1988 with Mounir El Derghami and Sayed Taha, G), p. 33.
President and General Secretary of the General Union
of Workers in the Construction and Wood Industries, 21. See Kerr (1954), Dunlop (1958) for institutional
respectively. Further information was obtained from an approaches to the role of trade unions. See also Rubery
interview with Hassan Ahmed Mostafa, the Chairman (1978), Elbaum and Wilkinson (1979), Lazonick
of the occupational committee of the union in Suez on (1979), and Villa (1986) for segmentation approaches
October 25, 1988. to the role of trade unions.

13. Over 75% of all housing units built in Egypt 22. This section is based on data provided by the
are
built without building permits (GOHBPR and the General Union of Workers in the Construction and
World Bank, 1981, Annex A8. p. 15). Wood Industries and on interviews with union officials
at the union headquarters on June 14 and June 20,
1988.
14. Of over 100 casual workers I interviewed in some
depth, none had social security coverage nor had heard
23. Under Egyptian law, every man above the age of
of any one of their peers who did. It therefore seemed
16 has to carry an identity card. Identity cards are
pointless to include a question on social security
optional for women.
coverage in the CWS questionnaire.
24. Union membership rose sharply in the late 1970s
15. The average age at entry for those who have and early 1980s when a large number of construction
undergone apprenticeships is 15.7 years with a standard workers sought to get official certification of their
deviation of 5.9 years. occupations so as to obtain visas to oil-rich Arab
countries seeking foreign construction workers.
16. This was no different under the guilds. Raymond
(1973), p. 545 ascribes the informal nature of the 25. Interview with a group of craftsmen in the Sayeda
master-apprentice relationship in Cairo in the 18th Eisha coffee house, May 22, 1988.
century to the fact that there were usually close kinship
and friendship ties between the master and the appren- 26. There are usually too few construction workers in
tices family. most villages to have a coffee house of their own, so
workers coffee houses are primarily an urban pheno-
17. In Assaad (1991), I formally demonstrate that menon.
kinship and community networks are important deter-
minants of access to apprenticeships and the craft 27. Interview with a group of craftsmen in the Sayeda
trades. Eisha Coffee House, May 22, 1988.

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