Research
Working Papers
The Informality Trade-Off: Wages and Rural-Urban Migration in South Africa [JOB MARKET PAPER]
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 general-equilibrium 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 makes it a valuable outside option for urban formal workers. Then, I simulate formalization policies by tripling monitoring costs on 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. However, the aggregate impact is reduced by the reallocation of workers in less productive areas.
Assessing Urban Policies Using a Simulation Model with Formal and Informal Housing (joint with Basile Pfeiffer, Claus Rabe, Harris Selod, Vincent Viguié, and Paolo Avner) [Submitted]
Abstract: Building on a two-dimensional discrete version of the standard urban economics land-use model, this paper presents a tractable urban land-use simulation model that is adapted to developing country cities, where formal and informal housing submarkets coexist. The dynamic closed-city framework simulates developers’ construction decisions and heterogeneous households’ housing and location choices at a distance from various employment subcenters, while accounting at the same time for land-use regulations, natural constraints, exogenous amenities, and dynamic scenarios of urban population growth and of State-driven subsidized housing. Designed and calibrated for Cape Town, South Africa, the model is used to assess the impact of an urban growth boundary, showing that restricting the possibility of urban expansion makes formal housing more expensive and results in a growing informal housing sector. Another simulation assesses the impacts of changes in the scale of subsidized housing schemes, showing a shift from residences in informal settlement to the backyards of the newly constructed houses.
Work in Progress
Can the Urban Poor Avoid Flood Risks? The Case of Cape Town, South Africa (joint with Paolo Avner, Charlotte Liotta, Basile Pfeiffer, Claus Rabe, Harris Selod, and Vincent Viguié) [Online documentation]
Abstract: In developing country cities, poor households often reside in unattractive locations, including flood-prone areas. This can be due to poor information about flood risks or acceptance of these risks in the face of lower housing prices. Poor households are also more vulnerable to floods than richer ones given the low-quality housing they occupy. Does information on flood risks help households make better location and housing choices? To what extent will these choices be revised with increased exposure from climate change? To answer these questions, we develop a polycentric urban economics model with heterogeneous income groups, formal and informal housing, and three types of flood risks (fluvial, pluvial, and coastal). The model is calibrated to the city of Cape Town and simulations are run to assess the impact of flood risks on land values and income segregation. Although total damages from floods are greater for rich households, they represent a larger relative share of poor households’ incomes. Better information and climate change encourage the relocation of households outside flood-prone zones, but the poor have more inertia due to more stringent financial constraints.
Optimal Spatial Policies with Robust Skill Spillovers (joint with David Gomtsyan)
Abstract: Existing evidence points to substantial positive and negative externalities on local amenities and productivities depending on the skill mix of the resident population in a given local labour market. This leads to inefficient spatial sorting of workers at the national scale. However, the policy recommendations associated with the optimal allocation of workers are very sensitive to the estimation of the underlying spillover elasticities. In this paper, we propose a meta-analysis of local population composition shocks studied in the literature to estimate a statistically robust range for those values, and discuss how this affects current evaluations. Preliminary results suggest that not accounting for asymmetric mobility responses of high- vs. low-skilled workers in the face of positive vs. negative shocks may be an important source of bias in existing models.