Rural-Urban Migration, Informality and Firm Dynamics

Abstract

We investigate the aggregate effects of rural to urban migration on receiving local economies. We proceed in three steps. First, we develop a model of firm dynamics that combines heterogeneous growth-profiles with the extensive and intensive margins of informality. Guided by the model, we use a shift-share IV design to identify the causal effects of immigration on local labor market outcomes and firm dynamics at destination. We use data on the universe of formal firms in Brazil between 1995 and 2017, combined with employment and migration data from two population censuses. We find that internal immigration leads to an increase in the number of formal firms, in the number of formal jobs, and in the share of formal employment. The effects are driven by the entry and growth of firms in the middle of the productivity distribution. Finally, we structurally estimate the model and perform counterfactual simulations to assess the equilibrium effects of immigration. Output and income increase, but by less than the increase in labor supply. This is rationalized by the fact that labor is reallocated away from the most productive firms and towards the middle of the productivity distribution. These reallocation effects are improved under stricter enforcement and lower informality, which translates into larger effects on total output and income in the receiving economy. (joint with Gabriel Ulyssea)