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

Author

Listed:
  • 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," Growth Lab Working Papers 83, Harvard's Growth Lab.
    • Handle: RePEc:glh:wpfacu:83
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    File URL: http://growthlab.cid.harvard.edu/files/growthlab/files/rfwp_78.pdf
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    Cited by:

    1. Fernando C√°rdenas Echeverri & Andres GarcÔøΩa-Suaza & Juan Esteban Garzon Restrepo, 2023. "Revisiting the relationship between firm strategic capabilities and productivity in a multilevel analysis: Do labor market conditions matter?," Documentos de Trabajo 20641, Universidad del Rosario.
    2. Daniel Straulino & Mattie Landman & Neave O'Clery, 2020. "A bi-directional approach to comparing the modular structure of networks," Papers 2010.06568, arXiv.org.
    3. Straulino, Daniel & Diodato, Dario & O’Clery, Neave, 2024. "Economic crisis, urban structural change and inter-sectoral labour mobility," Structural Change and Economic Dynamics, Elsevier, vol. 71(C), pages 135-144.
    4. Patricio Goldstein & Timothy Freeman & Alejandro Rueda-Sanz & Shreyas Gadgin Matha & Sarah Bui & Nidhi Rao & Timothy Cheston & Sebastian Bustos, 2023. "The Connectivity Trap: Stuck Between the Forest and Shared Prosperity in the Colombian Amazon," Growth Lab Working Papers 210, Harvard's Growth Lab.
    5. 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.
    6. Hepburn, Cameron & Mealy, Penny, 2017. "Transformational Change: Parallels for addressing climate and development goals," INET Oxford Working Papers 2019-02, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford, revised May 2019.
    7. Mealy, Penny & Teytelboym, Alexander, 2022. "Economic complexity and the green economy," Research Policy, Elsevier, vol. 51(8).
    8. Francesca Froy, 2023. "Learning from architectural theory about how cities work as complex and evolving spatial systems," Cambridge Journal of Regions, Economy and Society, Cambridge Political Economy Society, vol. 16(3), pages 495-510.
    9. Mealy, Penny & Teytelboym, Alexander, 2017. "Economic Complexity and the Green Economy," INET Oxford Working Papers 2018-03, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford, revised Feb 2019.

    More about this item

    Keywords

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    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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