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The Path to Labor Formality: Urban Agglomeration and the Emergence of Complex Industries

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  • Eduardo Lora

    (Center for International Development at Harvard University)

Abstract

Labor informality, associated with low productivity and lack of access to social security services, dogs developing countries around the world. Rates of labor (in)formality, however, vary widely within countries. This paper presents a new stylized fact, namely the systematic positive relationship between the rate of labor formality and the working age population in cities. We hypothesize that this phenomenon occurs through the emergence of complex economic activities: as cities become larger, labor is allocated into increasingly complex industries as firms combine complementary capabilities derived from a more diverse pool of workers. Using data from Colombia, we use a network-based model to show that the technological proximity (derived from worker transitions between industry pairs) of current industries in a city to potential new complex industries governs the growth of the formal sector in the city. The mechanism proposed has robust strong predictive power, and fares better than alternative explanations of (in)formality.

Suggested Citation

  • Eduardo Lora, 2016. "The Path to Labor Formality: Urban Agglomeration and the Emergence of Complex Industries," CID Working Papers 78, Center for International Development at Harvard University.
  • Handle: RePEc:cid:wpfacu:78
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    File URL: http://growthlab.cid.harvard.edu/files/growthlab/files/rfwp_78.pdf
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    2. Andres Gomez-Lievano & Vladislav Vysotsky & Jose Lobo, 2018. "Artificial Increasing Returns to Scale and the Problem of Sampling from Lognormals," Papers 1807.09424, arXiv.org, revised Jul 2020.

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    More about this item

    Keywords

    labor formality; complexity; city size; diversification; networks;
    All these keywords.

    JEL classification:

    • B5 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J4 - Labor and Demographic Economics - - Particular Labor Markets
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics

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