Urban wage premium and informal agglomeration in Vietnam

Abstract

ABSTRACT Despite the ongoing debate on the interaction between the informal sector and agglomeration economies in cities, little is known about whether informal agglomeration generates the wage premium in cities in developing countries. This paper provides empirical evidence on the impacts of urbanization and localization, separated from formal and informal sources, on the earnings of informal workers and how the concentration of informal workers affects the wages of formal employees in cities in Vietnam. Using data from the 2013-2020 Vietnam Labor Force Surveys, this paper shows higher wages in bigger cities. In addition to workers’ skills and local non-human endowment, agglomeration generates the wage premium in cities. Nevertheless, the impacts are different between small and large cities. Our results show that while informal workers benefit from urbanization and localization in large cities, their existence is over-concentrated in small cities and crowds out the formal sector in large cities of Vietnam. Thus, urban development policies should focus on the over-concentration of informal sector workers in cities.