Informal employment is significant and persistent in cities in developing and emerging economies. Informality rates, however, need not to be constant across city sizes. Larger agglomerations can be expected to host a relatively smaller informal economy, as formal firms operating under increasing returns to scale benefit from density. Nevertheless, the speed of formalization in large cities can be slowed by the existence commuting costs differentials between formal and informal workers.

Informal Employment in the City

AQMEN USIRP Seminar

(Joint with the Glasgow Social Statistics Group and the Housing and Urban Economics Research Group; Sponsored by the School of Social and Political Sciences)

Title: Informal employment in the city: the role of social insurance, home-based work and differences in commuting costs

Speaker: Dr Ana Moreno-Monroy (University of Groningen)

Date: 2^nd October 2013

Time: 12.00pm

Venue: Teaching Room, Urban Studies, Ground Floor in 25 Bute Gardens, Glasgow G12 8RS

Abstract: Cities in developing and emerging economies often feature high levels of socio-economic segregation, with higher-income formal workers residing closer to employment centres, and lower-income informal workers relegated to peripheral areas. Informal workers often have to bear not only longer commuting distances and costs, but also longer commuting times for the same distance travelled.

In Bogotá, for instance, it takes informal workers on average half an hour longer than formal workers to travel the same distance within the city. As a result of commuting costs differences, many workers opt for carrying out productive informal activities within or near home. In this respect, the decision to be informal in a large city is not only related to income-related factors, such as the existence of social insurance subsidies, but also to accessibility.

In this paper, we investigate the relationship between location choices, labour market outcomes and socio-economic segregation within cities. We build a spatial search model that integrates an informal sector. In the model, formal and unemployed workers live close to Central Business District, where formal economic activity is centralized. Informal workers live in the periphery of the city, undertake some of their productive activities at home, and receive transfers from the government in the form of social insurance. Using the case of Bogotá as point of reference, we use this model to compare the impact and efficiency of four policy options available to local governments: a subsidy on formal firms’ hiring-costs, a transport subsidy for formal workers, a transport subsidy for informal workers, and a transport subsidy for all workers.

Unlike previous papers, we find that a hiring-costs subsidy is more efficient than transport subsidies at increasing urban formal employment. We also find that a transport subsidy targeted at informal workers -a policy that has actually been implemented in Bogotá recently- has the undesirable effect of increasing informality. These results open the debate of the adequacy of certain policy options available to local governments once the urban labour and land markets are considered simultaneously. Finally, we discuss the strengths and limitations of spatial search models for the study of urban segregation and discuss possible empirical applications.

About the speaker: Dr. Ana I. Moreno-Monroy is a Lecturer, Global Economics and Management Department, University of Groningen, formerly a postdoctoral researcher, Groningen Growth and Development Centre GGDC, University of Groningen.  She has published in leading international journals (including Urban Studies, Spatial Economic Analysis and Paper in Regional Science) on the role of informal processes in shaping the urban economy. The paper being presented is co-authored by Héctor Mauricio Posada (University of El Rosario).

Professor Gwilym Pryce
Co-Director of AQMEN