Weathering the Storm: How Climate Change Encourages Labor Formalization

Paper Abstract

What explains persistent urban informality in developing contexts, despite state efforts to register and tax populations? Contrary to conventional individualized economic explanations (e.g., income constraints), we argue that formalization is a collective decision: when most marketers sell in informal markets, formalized market spaces are not a competitive place to sell. Exposure to the effects of climate change, however, allows for a shift away from this equilibrium of persistent labor informality. Unpredictable weather patterns circumscribe informal marketers’ ability to protect their goods and sell in the streets, thereby generating demand for stability, shelter, and greater coordination with peers. A survey experiment with 2,400 marketers in urban Liberia revealed that formalization is (a) a critical form of adaptation, and (b) desirable when informal sellers view formalized peers as more trustworthy—particularly important for collective activities such as price coordination. These findings highlight the need to consider the sociopolitical context of markets when developing formalization policies.

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