The urban wage premium in a labor market with informality

This paper aims to evaluate how workers’ heterogeneity in terms of the formality of labor contracts may impact the magnitude of the urban wage premium (UWP). Few studies have considered the presence of informal workers when identifying the UWP, which may limit the applicability of their findings in labor markets with a significant proportion of informal employment. We address this investigation by analyzing the Brazilian labor market using a longitudinal database from 2012 to 2019. The results show that formal workers present a positive UWP, as seen in many previous studies of developed or developing countries. However, surprisingly, the UWP of informal workers is double that of formal workers. Therefore, the previous UWP studies that focused only on formal workers could underestimate the magnitude of this premium and hide the complexity of the insertion of these workers in large urban labor markets. Additionally, we investigate the heterogeneity of the UWP according to workers’ occupational position, i.e., as wage earners or self-employed workers. These results add new insights into the UWP in Brazil, signaling the importance of analyzing the whole labor market.