Urban wage premium in a labor market with informality

Few studies analyze how the urban wage premium is different for informal workers, and their results are controversial. This paper aims to clarify the reason for this mixed evidence, evaluating how workers’ heterogeneity in terms of labor contract - formal or informal - and occupational position - as wage-earner or self-employed - may impact the magnitude and direction of the UWP estimates. We address this investigation by analyzing the Brazilian labor market using the PNADC (IBGE) longitudinal database for the period from 2012 to 2019. The results show that formal workers present an increasing UWP according to the urban scale, as seen in many previous studies for developed or developing countries. In its turn, informal workers UWP is double the formal ones but is reduced in denser areas. Thus, our study shows previous UWP studies that focus only on formal workers could underestimate the magnitude of this premium for the whole labor market and that disregarding the groups of workers hides the complexity inherent of their insertion in the large urban labor markets. Also, different estimations highlight some mechanisms on the UWP explanation, such as sorting and matching. These results add new insights to the UWP in Brazil, signaling the importance of analyzing the whole labor market.