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

Using a newly compiled data set from household surveys from 92 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. Controlling for urban-rural differences in living costs, larger unexplained wage gaps are evidence of labour market distortions that lead to inefficient allocation of labour 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 9.3 per cent. We also find that measured restrictions on labour mobility are large enough to account for much of the unexplained urban-rural wage gaps. Countries with the largest unexplained gaps tend to have the most severe mobility restrictions and greater religious fractionalisation.