Trade and Development Workshop & Microeconomics Workshop with Jorge de la Roca (USC)

The literature on agglomeration effects is heavily focused on developed countries. Less is known regarding the productive advantages of cities in developing countries and the sorting patterns of workers across city sizes. We show that the elasticity of wages with respect to city size in Peru is much larger for informal sector workers than for formal ones. This finding counters the strong complementarity observed in developed countries between skills (i.e., formal sector workers) and city size. We conjecture that formal workers have a limited choice set of cities and decide to locate in a few big ones. Small and medium cities do not have the amenities and quality of services that formal workers demand, and hence, they need to be compensated with higher earnings to move there. We model the services that formal workers demand as a non-tradable good that requires some fixed production cost (e.g., building a private school or museum). The relatively few formal workers who live in small and medium cities cannot cover the fixed costs and require a higher compensation due to the lack of adequate services. In equilibrium, most formal workers decide to locate in a few big cities, and given this concentration, wages adjust downwards.

Speaker =  Jorge de la Roca (USC)

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