On average, rural wages account for two-thirds of urban wages

Exploring regional inequality: determinants of the rural-urban wage gapAugust 2014John Nye, Jeff Williamson, Karl Chua, and Louie Limkin

Respectively, Professor at George Mason University, and Executive Director at the Angara Center for Law and Economics, Professor Emeritus at Harvard University and Wisconsin University, Senior Economist at World Bank Philippines, and Research Analyst at World Bank Philippines.1Why Do Poor Regions Stay Poor?Regions have very different average income levelsThere is also a big gap in wages between rural and urban areasMost work shows that these gaps have been quite persistent over many yearsDo workers move to where opportunities exist?Why arent greater opportunities created where wages and costs are low?Why dont firms invest to create more jobs to use workers in these areas?Identifying structural problemsHow flexible are Philippine labor markets?What factors influence rural-urban differences?What role do individual characteristics play? Skilled vs. unskilled?What role do regulatory or institutional constraints play? Which are due to poor infrastructure?Persistent inequalities often made worse by protection, lack of domestic competition, bad land laws, and subsidies to agriculture that make it inefficient3The rural-urban wage gapThe biggest differences are observed between the countryside and the city.In the developed world, commercial areas are most productive.Historically, the speed with which people can be transitioned from rural to urban areas (with jobs) determines overall development.Why cant more people move out of poor rural areas?Why cant agriculture be more productive?Why dont urban jobs increase, especially in non-central regions?4On average, the gap between rural and urban wages is around 30 percent.

5Skilled vs. unskilled gapsThe nominal gap is larger for unskilled workersThe nominal gap is smaller for skilled workersBut the skilled worker averages dont take into account different types of jobs and different educations of workers.The gap declines to 12 percent for skilled occupations and is hardly changed for unskilled occupations at around 31 percent.

7BUT the gaps are stable over time, though the skilled gap fell between 2006 and 2011.8Increases in New Provincial Jobs for Skilled WorkersThe decline in the skilled gap roughly coincides with the decline in between-province inequality.This means that for skilled labor, there has been an uptick in skilled or semi-skilled jobs in secondary areasProbably the rise in outsourcing (call centers and similar) has played a role in thisDifferences between provinces have decreased slightly

10But averages hide the true storyFor example: secondary cities have lower skilled wages than in rural areas.More important: scarcity of skilled jobs in semi-urban areas.This mostly means that there are too few good jobs in urban areas outside of Metro Manila and vicinitySo its less rural vs. urban and more about NCR vs. the rest

12Second reason: lack of convergence.

Convergence in wages across provinces is more local than national.13Most convergence is at the province levelCapuno (2010) finds evidence of systematic spatial clustering of land values in the Philippines.

However, clustering is more local (in particular groups of provinces/cities like Metro Manila, Laguna, and Cavite with high population densities) than national.Major regions behave like separate countriesThis means that jurisdictions across the country face significant costs and physical barriersDifficulty in starting businesses, transporting goods, creating infrastructure to support local investment, and generally taking full advantage of lower costs.

14Most convergence is at the province levelFood prices appear to be locally clusteredThe Philippines is not well integrated economically making it hard to increase opportunities and decrease inequality.Mindanao produces around 25 percent of the countrys rice but its provinces has among the highest rice prices.Causes: unrest, political uncertainty, poor infrastructure, and weak institutions = little economic integration with the rest of the country.

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18What About Education?Skilled jobs pay at least 50% or more than unskilled jobs.Much of the skilled-unskilled difference is about educationHigh school graduates earn 40% more than no HS.College graduates 126% more than those with no attainments. But college graduates have higher unemployment.Unemployment diminishes with lower education.19But What About Real Wages?We should correct for cost of livingBut these data are unreliable and may not be accurate for different social classesSome economists feel that nominal comparisons are more accuratePeople willingly accept a lower standard of living to live in more desirable areas and therefore pay to live in Metro Manila, etc.

Real wage gap: Wage gap declines when nominal wages are price-adjusted.

21However, there are cases where more urban areas have lower real wages than semi-urban areas.

22Real wage gap

Amenities compensate for lower real wages in highly urbanized areas. (Better schools, community effects, more public goods, political connections, etc.)In North America, we observe that desirable areas have LOWER real wages than less desirable areas because we dont observe all the benefits of good areas.We should expect small differences in real wages in integrated economies. Big real differences mean inefficiency. Good areas pay more & are more desirable.Persistent problem of insufficient private investment in the provinces.

23Decomposing the wage gapThe variables used in the regressions explain about 93 percent of the urban-rural nominal wage gap. Using real wages, this goes up to 98 percent.This means that those who are capable of earning high wages mostly move to areas with higher wages. This is especially true for unskilled workers. BUT less true for skilled workers where gap is unexplained.Market for skilled workers is less efficientWorkers in good areas earn more and educated workers in poor areas dont earn as much.

24Skilled markets are poorly integratedGaps in skilled wages dont fully match differences in age, experience, or education.This suggests that rigidities and inefficiencies that are industry specific impede skilled worker employmentThis is consistent with the outflow of skilled workers abroad (OFWs)Educated workers accept higher risks of unemployment to gain the coveted jobs in the protected sectorsUnprotected workers in services, rural areas, or the informal sector find low paid work easilyWhy Isnt the RP More Integrated?Unlike in developed economies, RP unemployment rates are higher the more education you have (Esguerra)The bigger, more productive firms are more regulated yet face weak competitionConstraints on hiring and firing Most rules that increase benefits and security in the unionized sector weaken the incentive to hire or expand the labor force (e.g. high minimum wages, no firing of longer term workers, etc.)This means lower turnover but also less hiring

Summary of main pointsThe rural-urban wage gap is around 33 percent and has been relatively stable over many years.But this average hides the lack of convergence across provinces. No true national market.Education explains the biggest part of wage gaps.

Structural policies (e.g., labor regulations, tax policies), inefficiency of land markets, and infrastructure appear to play important roles in maintaining regional inequality.27PuzzlesInvestigate the role of commercial land market inefficiencies in hindering convergence. What limits the choice of commercial land?Why cant firms relocate to cheaper areas? Why dont local firms use excess skilled labor?What keeps the agricultural sector unproductive and inefficient? How does land policy prevent rural improvement while keeping workers on the farm?

28Policy IdeasHuman capital aid in early childhood and develop skills relevant to service economy (e.g. English). Streamline conversion of land for commercial use. Encourage new local and foreign investment.Create genuine property rights and full title for small farmers. Reform CARP. Gradually liberalize agriculture. Abolish the NFA. Experiment with genuine enterprise zones (not just low taxes) in regions such as Leyte (post Yolanda regions) or Bangasmoro. Learn from experiments in China and elsewhere.Reduce corruption by cutting unnecessary regulations and intrusive taxation that prevent new businesses.

ENDThank you30