Rural Migrants and Urban Informality: Evidence from Brazil

This paper studies the economic effects of rural-urban migration on Brazilian cities. Using a shift-share IV design, we show that immigration lowers formal and informal wages, increases the number of formal firms and jobs, reduces the share of informal workers, and has no effect on unemployment. These findings contradict the traditional “Harris-Todaro-Fields†view that rural-urban migration contributes to urban informality and unemployment. To explain these surprising results, we develop and estimate a model of firm dynamics and informality. The model generates “Harris-Todaro-Fields†predictions if we impose formal wage rigidity but, once we allow formal wages to adjust, the model replicates the IV results. It also reveals that many new formal firms come from the informal sector, which serves as a “stepping-stone†. However, the economic benefits of immigration are higher in a counterfactual with no informality.