Of Cities and Slums

The emergence of slums is a frequent feature of a country's path toward urbanization, structural transformation, and development. Based on salient micro and macro evidence from Brazilian labor, housing, and education markets, we construct a simple dynamic model to examine the conditions for slums to emerge. We use the model to determine whether slums are barriers or stepping-stones for the ascension of low-skilled households and the development of the country as a whole, exploring the dynamic interaction of slums, housing costs and sectoral productivities with the human capital formation and structural transformation of a country. We calibrate our model to Brazilian data, and use it to conduct counterfactual experiments. We find that cracking down on slums could slow down the acquisition of human capital in the low-end of the skill distribution, the growth of cities proper (outside slums) and induce even larger slums in the future. We find that the impact of housing costs in the city depends crucially on the human capital distribution of the country. Finally, procuring slum-dwelling children some access to schools in the city would eventually lead to larger cities and smaller slums.