Hitotsubashi Trade/Urban Economics Workshop – Thomas Monnier (Hitotsubashi University)
2025/09/18
September 18 (Thr) Thomas Monnier (Hitotsubashi University) 17:10–18:40, Place: IER Conference room
Title: The Informality Trade-Off: Wages and Rural-Urban Migration in South Africa
Abstract: In rapidly urbanizing countries, many urban inhabitants work in the informal sector. Should policy makers try to shrink it? To answer this question, I develop a generale-quilibrium model of rural-urban migration based on frictional job search and matching. A key novelty of this approach is to combine migration choice of workers with occupational choice across formal and informal labour markets. I first estimate my model with a South African panel of workers. I find that the urban informal sector serves as a stepping-stone to urban formal jobs. This also makes it a valuable outside option for urban formal workers. Then, I simulate formalization policies by tripling the expected cost of being inspected for urban informal firms. I find a decline in informal employment and wages that is not associated with job destruction, but with wage cuts in the formal sector. This is because urban formal firms now have more labour market power. As a result, cities become less attractive. This is exacerbated by the response of rural firms that offer higher wages and retain potential migrants: the urban population share falls by 4%. Overall, the decline in urban informality improves the allocation of labour, both across sectors in urban areas and towards more productive firms in rural areas, at the cost of lower workers’ welfare.