Imbert, Clément; Ulyssea, Gabriel; (2023) Rural Migrants and Urban Informality: Evidence from Brazil. (CEPR Discussion Paper 18160). Centre for Economic Policy Research (CEPR): London, UK.

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Abstract

This paper studies the long-run effects of rural-urban migration on Brazilian cities. Using a shift-share IV design, we show that immigration reduces informality and wages, has no effect on unemployment, and increases the number of formal firms and jobs over a decade. These results are in sharp contrast with the short-run, informality-increasing effects previously documented in the literature. To rationalize these surprising results, we develop and estimate a model of firm dynamics and informality that can quantitatively replicate the long-run IV results. Assuming sluggish formal wage adjustment in the transition between equilibria, immigration shocks increase firm and labor informality in the short-run, but they gradually decline to lower long-run levels, consistent with our IV results. A large share of new formal firms come from the informal sector, which serves as a “stepping-stone”. However, the overall economic benefits of immigration are higher in a counterfactual with no informality.

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