Urban-Rural Wage Gaps, Inefficient Labor Allocations, and GDP per Capita

Using a newly compiled data set from household surveys from 101 developed and developing countries, we decompose observed urban-rural log wage gaps for each country into the portion explained by skill differences and the unexplained portion. Larger unexplained wage gaps are evidence of labor market distortions that lead to inefficient allocation of labor across sectors and lower country production relative to its potential. We find that on average, eliminating unexplained urban-rural wage gaps raises per capita GDP by 13.9%. Unexplained urban-rural wage gaps are larger in countries with less democratic political systems, higher marginal tax rates, and higher average urban education levels, but are lower in countries with larger government shares of GDP.