Abstract
Agglomeration boosts economic growth. A vast literature has empirically assessed the effects of agglomeration by estimating the city population elasticity on wages. This conventional approach is not necessarily suitable for analyzing urbanization at the early stage in developing countries, where a majority of urban workers engage in self-employment and/or informal jobs. Focusing on one of the poorest and largest among those countries, this paper sheds light on an aspect of urbanization and agglomeration: the transition in the mode of labor from self-employment/informal jobs to wage employment/formal jobs. Applying the instrumental variable approach to national labor force survey data sets, the analysis underscores several labor market transitions across space in urban Ethiopia. First, the town population size and the share of workers with wage employment are strongly correlated. The probability of engaging in wage work increases by 4.5 percentage points with a log increase in population size. Second, this relationship is particularly strong among disadvantaged workers, such as the female, young, and/or less educated population. Finally, the study documents higher labor force participation and lower underemployment in larger towns.
Highlights
Urbanization potentially stimulates economic growth and poverty reduction through facilitating sectoral shifts and enhancing productivity gains
The baseline result with no controls in column 1 shows the coe cient estimate for the log of population as -0.067, meaning that a log increase in population size is associated with a 6.7 percentage point decrease in the chance of individuals engaging in self-employment as opposed to wage employment
The results confirm that the town population size is negatively correlated with the probability of workers taking on self-employment jobs
Summary
Urbanization potentially stimulates economic growth and poverty reduction through facilitating sectoral shifts and enhancing productivity gains. This study reveals whether the transition of self-employment to wage employment, as well as other labor outcomes, is associated with the town population at the early stage of urbanization. Our study is unique as it bridges two lines of literature that have not conversed: urban economics on agglomeration economies and the literature on informality in the labor markets of developing countries. The urban economics literature expects agglomeration e↵ects on labor productivity in developing countries as well (Duranton 2015). It is not clear if its conceived channels, such as sharing, matching, and learning, are present in low-income and least-urbanized countries, where a majority of urban workers still engage in informal non-wage jobs.
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