Informality in the City: A Theoretical Analysis

Looking for theoretical guidance in the urban economics literature when analyzing problems of cities with large informality rates can be quite challenging. Most models have been designed for urban realities where there is no informal employment or informal housing, both of which are hard to ignore in cities in emerging and developing countries. The outstanding doctoral thesis of Héctor Mauricio Posada explores innovative ways in which informality can be incorporated into existing theoretical urban models to study questions related to urban expansion, transport provision and migration, among others. The thesis leads to many interesting insights that serve as basis for much needed future theoretical work, and identifies relevant connections that can be translated into empirically testable predictions.

On transport subsidies and employment

The current mayor of Bogotá, Gustavo Petro, launched last week a transport subsidy program for the poor. At least 300,000 people covered by the nationwide health subsidy program (Sisben) can now obtain a transport card allowing them to travel in the integrated transport system of the city at a reduced rate. According to the mayor, the subsidy is the flagship policy for poverty reduction of his administration, as it will allow the poor to access more job and income generation opportunities, even if these opportunities are at the bottom of the informal economy (nivel de rebusque).

While this policy may be good news for poverty reduction, my co-author Héctor Mauricio Posada and I have found in our recent paper that a policy that offers transport subsidies for informal workers only will imply an increase in the share of informal employment, and a decrease in overall welfare in the city. In our theoretical model, informal workers have the possibility to engage in home-based work and save in transportation costs, while formal workers commute every day to work in the city center. A subsidy targeted only for informal workers means that formal firms have to offer higher wages in order to compensate workers for higher transportation costs, which implies a reduction in formal employment creation.

We find that investing the money of the subsidy in alternative policies aimed at reducing the frictions in the job market, such as a the recently created Public Management Agency for Employment  (Bogotá Trabaja), or expanding the coverage of the transportation network, implies a reduction in the informality rate, and an increase in overall welfare.

While our findings rely on a very stylized model that does not consider many other relevant elements, such as access to basic services and their impact on poverty reduction, they highlight the importance of considering the unintended effects of policies targeted at the poor on the labor market at large. Sustainable urban policies require not only better physical access, but also an increase in the share of higher quality jobs offered in the city.


A visual example of home-based work

This video of the national anthem of Colombia contains good examples of home-based (informal) activities. It depicts a typical afternoon in Santo Domingo, one of Medellin’s poorer neighborhoods. People are involved in different productive activities, such as simple manufacturing and retail selling.

Dense neighborhoods are typically very lively, and many people conduct their occupations near or at their homes. In my current research I am trying to incorporate these features of cities in developing countries in order to understand the link between commuting patterns and job status.