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Agglomeration Economies in the Presence of an Informal Sector. The Colombian Case

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  • Gustavo Adolfo García

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Abstract

This paper analyzes the relationship between agglomeration economies and wages in the context of a developing country, taking into account the marked presence of the informal sector. Using data from Colombia, we investigate the effect of agglomeration economies on formal and informal productivity, inquiring whether the informal sector achieves benefits from agglomeration economies and whether there are differences between the formal and informal sectors in terms of agglomeration returns. We estimate an elasticity of wages with respect to employment density of around -4% for the formal sector, and around 3% for the informal sector. As such, agglomeration has a significantly positive effect on the productivity of the informal sector. The results show that informal workers' productivity in a city twice as dense is 2% greater, implying that wages in denser areas are 14% higher than in less dense areas. In contrast, for the formal sector, the results show that productivity in formal workers in a city twice as dense is of around 3% lower, leading such workers to earn 17% less in denser areas. Factors associated with the constraints relative to the creation of formal jobs, a greater labor supply of formal workers, and des-amenities very common in big cities in developing countries

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  • Gustavo Adolfo García, 2016. "Agglomeration Economies in the Presence of an Informal Sector. The Colombian Case," DOCUMENTOS CEDE 014575, UNIVERSIDAD DE LOS ANDES-CEDE.
  • Handle: RePEc:col:000089:014575
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    Keywords

    Agglomeration gains; employment density; informality;

    JEL classification:

    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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