Informality and the City Size Wage Premium: Evidence from Brazil

Cities in middle and low income countries are rapidly urbanizing, generating important economic opportunities and challenges. Among the key potential benefits are higher individual earnings in larger cities. However, informal labor markets are a prominent feature in these contexts that may alter the scope of agglomeration benefits. How does informality affect the relationship between wages and city size? Using Census data for Brazil, I find that higher levels of informality in the local economy reduce the city size wage premium. This is because formal and informal workers benefit from density differently according to which type of worker is contributing to it. In particular, I show that productive benefits of cities seem to be mainly driven by the presence of formal workers. Agglomeration in terms of informal workers on the other hand crowds out some of these benefits for formal workers. Thus, informality seems to play an important role in shaping the benefits from working in larger cities in less developed countries.