In this paper, we study the relationship between informal employment and city structure, in the presence of informal housing. We build an urban search-matching model incorporating informal labor, informal housing, and rural–urban migration. We find that a greater decentralization of informal jobs leads to a higher informality rate in the labor market. This, in turn, pushes the expected income in the city downward and reduces incentives for rural workers to migrate. Surprisingly, rural–urban migration increases. This happens because greater decentralization relaxes the competition for land throughout the city, which reduces urban costs for all urban residents and effectively increases the expected income in the city.
