Evidence from Brazil shows that drought-driven rural-urban migration reduced urban informality over a decade, contradicting conventional wisdom.
Editor’s note: For a broader synthesis of themes covered in this article, check out Issue 2 of our VoxDevLit on Informality.
The urban population in developing countries grew by 12.5% between 2015 and 2020, and it is projected to grow by 64.7% by 2050 (UNCTAD 2021). Rural-urban migration flows account for a substantial fraction of this population growth (Jedwab et al. 2017), which are likely to intensify due to climate change (Rigaud et al. 2018). Whether urban developing economies will be able to generate enough good jobs to accommodate this fast-growing workforce is a fundamental question for economic development (World Bank 2013).
Conventional wisdom, rooted in the influential works of Harris and Todaro (1970) and Fields (1975), suggests pessimism is warranted. When formal sector wages cannot adjust downward due to minimum wage laws or other frictions, theory predicts that migrants end up in informal jobs or unemployed. Recent empirical evidence has largely confirmed this view: research on Indonesia, Thailand, and Brazil shows that rural-urban migration increases urban informality or unemployment in the short run (Kleemans and Magruder 2018, El Badaoui et al. 2017, Corbi et al. 2021).
But, what happens over longer time horizons? In new research (Imbert and Ulyssea 2026), we challenge this pessimistic consensus by examining the decade-long effects of drought-induced migration on Brazilian cities between 2000 and 2010. Our findings reveal a striking pattern: immigration substantially reduces informality, has no effect on unemployment, and sparks the creation of thousands of new formal firms and jobs.
The long-run effects of migration driven by droughts
To identify the causal effects of migration, we need variation in migration flows that is unrelated to destination labour market conditions. For that, we use a shift-share IV design combining: (i) detailed information on previous migration patterns across municipalities; (ii) a monthly measure of dryness in each municipality based on the Standardized Precipitation-Evapotranspiration Index (SPEI, see Vicente-Serrano et al. 2010); and (iii) detailed agricultural census information on which crops are grown where and when. When droughts hit during growing seasons in sending regions, they trigger outmigration to urban destinations where there were stronger migration networks from the previous decade. This approach allows us to isolate the impact of migration from other confounding factors. We track nearly 3,600 municipalities over the decade, combining census data on workers with administrative records covering the universe of formal firms and employees.
Our results overturn conventional expectations. A one percentage point increase in a city's immigration rate increases formal employment by 0.27 percentage points (a 1.2% increase). This effect is entirely driven by a movement of workers from informal to formal jobs, with no change in wage employment overall, unemployment, or self-employment. Wages in the formal sector fall by 0.6% while informal wages are unaffected. We find similar results if we look at migrants and non-migrants, or high- and low-skilled workers separately. The latter is consistent with the fact that immigration induced by droughts does not change the skill composition of the workforce at destination in our setting.
On the formal firm side, we find that an increase in the immigration rate by one percentage point leads to a 1.6% increase in the number of firms and a 2% increase in the number of formal jobs. There is also greater churn, with more formal firms entering and exiting every year (2.8% and 3%, respectively). We show that these new firms are not created by the migrants themselves. When we examine effects over time, we find that they remain constant or increase slightly throughout the 2010s (until 2018).
Time horizon and downward nominal wage rigidity
Why do our findings differ so sharply from previous research showing migration increases informality? We propose two complementary explanations. First, the time horizon. When we adopt the short-run, year-to-year specification typically used in the evidence base, we replicate earlier findings: migration increases informal employment in the immediate aftermath. The formalisation effects we document emerge only over longer time horizons. Why would the time horizon matter?
This relates to our second explanation: downward nominal wage rigidity (DNWR) in the formal sector. We show empirically that in municipalities with high DNWR, the formalisation effects of immigration are smaller or even completely muted, and non-employment increases. Importantly, DNWR matters more in the short than the long run, as inflation and worker turnover allow real wages to adjust downward over time. These findings also echo the ‘Harris-Todaro-Fields’ view that when formal wages are rigid rural-urban migration leads to higher urban unemployment and informality.
Further understanding mechanisms: a model of firm dynamics
To dig deeper into mechanisms, we develop a new model of firm dynamics and informality that rationalises these surprising findings. In the model, the informal sector can be a ‘stepping-stone’ to formality for firms and workers, as it introduces greater de facto flexibility in the presence of burdensome regulations and rigidities in the formal sector. However, it also allows less productive firms to survive and compete with more productive formal firms, weakening the natural selection process in the economy.
The counterfactuals reveal that, in the short run, the informal sector absorbs the expanding labour force, indeed acting as a ‘stepping stone’ that allows workers and firms to enter the urban economy even when formal wages cannot adjust. About 40% of the increase in formal firms we observe comes from previously informal firms that formalise as they grow – a mechanism that would be impossible to capture in a static framework or one that has a ‘dual view’ of informality, treating formal and informal sectors as disjoint economic spaces.
However, in the long run, informality reduces the aggregate economic benefits of migration by allowing the least productive firms to survive. When we simulate an economy with much stricter enforcement against informal firms, the same migration shock generates stronger positive effects on productivity and output, though at the cost of displacing many low-productivity businesses.
Policy implications: Managing the transition
Our findings carry important messages for policymakers managing rapid urbanisation and climate-driven migration.
First, the immediate labour market disruption from migration – which previous research has documented – represents a transitional phase. Cities that can weather the short-run adjustment may reap long-run benefits from an expanding labour force that generates new formal employment opportunities.
Second, labour market flexibility is crucial. Our results show that formalisation effects are strongest where formal wages can adjust downwards. This poses a difficult trade-off: wage floors protect existing workers but may prevent the formal sector from absorbing new arrivals, pushing them into informality or unemployment instead.
Third, the informal sector plays a complex role. While it constitutes an employment buffer during adjustment periods – absorbing workers when formal wages cannot adjust downwards – it also shelters low-productivity firms. The latter substantially distorts the allocation of resources in the economy and dampens the aggregate economic gains from migration.
Finally, our research suggests that urban developing economies may experience demographic dividends from climate migration, even as climate change poses severe challenges. The key is creating labour market conditions that allow cities to translate population growth into formal job creation rather than swelling informal sectors.
References
Corbi, R, T Ferraz, and R Narita (2021), “Internal migration and labor market adjustments in the presence of nonwage compensation,” Unpublished manuscript.
El Badaoui, E, E Strobl, and F Walsh (2017), “Impact of internal migration on labor market outcomes of native males in Thailand,” Economic Development and Cultural Change, 66: 147–177.
Fields, G S (1975), “Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs,” Journal of Development Economics, 2(2): 165–187.
Harris, J R, and M P Todaro (1970), “Migration, unemployment and development: A two-sector analysis,” American Economic Review, 60(1): 126–142.
Imbert, C, and G Ulyssea (2026), “Rural migrants and urban informality: Evidence from Brazil,” Econometrica, forthcoming.
Jedwab, R, L Christiaensen, and M Gindelsky (2017), “Demography, urbanization and development: Rural push, urban pull and… urban push?,” Journal of Urban Economics, 98: 6–16.
Kleemans, M, and J Magruder (2018), “Labour market responses to immigration: Evidence from internal migration driven by weather shocks,” Economic Journal, 128(613): 2032–2065.
Rigaud, K K, A de Sherbinin, B Jones, J Bergmann, V Clement, K Ober, J Schewe, S Adamo, B McCusker, S Heuser, and A Midgley (2018), Groundswell, World Bank.
UNCTAD (2021), "Handbook of statistics."
World Bank (2013), "World development report 2013: Jobs."