Rural Migrants and Urban Informality: Evidence From Brazil

This paper studies the economic effects of rural‐urban migration on Brazilian cities. Using a shift‐share IV design, we show that, over a decade, drought‐induced immigration reduces informality, has no effect on unemployment, and increases the number of formal firms and jobs. Downward formal wage adjustments play a key role, as these long‐run effects are weaker in regions with stronger wage rigidity. In the short run, when wage rigidity is strongest, we replicate the informality‐increasing effects documented in the literature. We develop and estimate a model of firm dynamics and informality that rationalizes these results. The counterfactuals reveal that, in the short run, the informal sector absorbs the expanding labor force and acts as a “stepping‐stone” to formality for firms and workers. In the long run, however, it reduces the aggregate benefits from immigration by allowing the least productive firms to survive.