EXPLORING REGIONAL INEQUALITY:

DETERMINANTS OF THE RURAL-URBAN WAGE GAP

August 2014
John 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.
Why Do Poor Regions Stay Poor?
Regions have very different average income levels
There is also a big gap in wages between rural and urban
areas
Most work shows that these gaps have been quite
persistent over many years
Do 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 problems
How 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 inefficient
The rural-urban wage gap
The 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?
On average, the gap between rural and
urban wages is around 30 percent.
367.3
242.7
0
100
200
300
400
500
600
700
urban rural
P
H
P

p
e
r

d
a
y
Average nominal urban and rural wages in 2011
or 67%
of urban
125
or 34%
Source: Labor Force Survey
Skilled vs. unskilled gaps
The nominal gap is larger for unskilled workers
The nominal gap is smaller for skilled workers
But 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.
628.8
554.1
0
100
200
300
400
500
600
700
urban rural
P
H
P

p
e
r

d
a
y
Average nominal urban and rural wages in 2011
(skilled)
Source: Labor Force Survey
or
88%
of
urban
75 or 12%
276.6
190.2
0
100
200
300
400
500
600
700
urban rural
P
H
P

p
e
r

d
a
y
Average nominal urban and rural wages in 2011
(unskilled)
Source: Labor Force Survey
or 69%
of urban
86 or 31%
BUT the gaps are stable over time,
though the skilled gap fell between 2006 and 2011.
0
5
10
15
20
25
30
35
40
45
50
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
p
e
r
e
n
t

Rural-urban, r-u unskilled and r-u skilled wage gaps
r-u r-u unskilled r-u skilled
Source: LFS
Increases in New Provincial Jobs for
Skilled Workers
The 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 areas
Probably the rise in outsourcing (call centers
and similar) has played a role in this
Differences between provinces have decreased slightly
23
25
27
29 29 28
23 23
22
20
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1
9
8
5
1
9
8
8
1
9
9
1
1
9
9
4
1
9
9
7
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Contribution to inequality at the province level
Between province Within province
Source: Family Income and Expenditure Survey
But averages hide the true story
For 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 vicinity
So its less rural vs. urban and more about
NCR vs. the rest



648.1
495.2
549.4
0
100
200
300
400
500
600
700
NCR 11 other metros elsewhere
P
H
P

p
e
r

d
a
y
Average nominal wages in 2011 (skilled)-
Urban: NCR
Semi: 11 other metros
Rural: elsewhere
159 or
23%
Source: Labor Force Survey
112 or
16%
Second reason: lack of convergence.
(271,438] (20)
(235,271] (21)
(220,235] (20)
[170,220] (21)
Average Wage (2010)
Convergence in wages
across provinces is
more local than
national.
Most convergence is at the province level
Capuno (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 countries
This means that jurisdictions across the country face
significant costs and physical barriers
Difficulty in starting businesses, transporting goods,
creating infrastructure to support local investment,
and generally taking full advantage of lower costs.



Most convergence is at the province level
Food prices appear to be locally clustered
The 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.


(33,36] (19)
(32,33] (20)
(30,32] (20)
[28,30] (20)
No data (3)
Retail Price of Regular Milled Rice (2012)
(271,438] (20)
(235,271] (21)
(220,235] (20)
[170,220] (21)
Average Wage (2010)
(271,438] (20)
(235,271] (21)
(220,235] (20)
[170,220] (21)
Average Wage (2010)
(139,155] (19)
(128,139] (20)
(121,128] (20)
[110,121] (20)
No data (3)
Retail Price of Chicken (2012)
(271,438] (20)
(235,271] (21)
(220,235] (20)
[170,220] (21)
Average Wage (2010)
(111,134] (15)
(100,111] (16)
(90,100] (16)
[49,90] (16)
No data (19)
Retail Price of Tilapia (2012)
What About Education?
Skilled jobs pay at least 50% or more than unskilled jobs.
Much of the skilled-unskilled difference is about education
High 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.
But What About Real Wages?
We should correct for cost of living
But these data are unreliable and may not be accurate for
different social classes
Some economists feel that nominal comparisons are
more accurate
People 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.
367.3
242.7
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
urban rural
P
H
P

p
e
r

d
a
y
Average nominal urban and rural wages in 2011
Source: Labor Force Survey
125 or 34%
276.6
201.6
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
urban rural
P
H
P

p
e
r

d
a
y
Average real urban and rural wages in 2011
Source: Labor Force Survey
25 or 11%
However, there are cases where more urban areas
have lower real wages than semi-urban areas.
439.6
351.6
0
100
200
300
400
500
600
700
Manila Ilocos Norte
P
H
P

p
e
r

d
a
y
Average nominal wages for
Manila and Ilocos Norte
Source: Labor Force Survey
272.7 278.1
0
100
200
300
400
500
600
700
Manila Ilocos Norte
P
H
P

p
e
r

d
a
y
Average real wages for
Manila and Ilocos Norte
Source: Labor Force Survey
Real 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.

Decomposing the wage gap
The 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 efficient
Workers in good areas earn more and educated
workers in poor areas dont earn as much.




Skilled markets are poorly integrated
Gaps 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 employment
This 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 sectors
Unprotected workers in services, rural areas, or the
informal sector find low paid work easily
Why 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 competition
Constraints 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 points
The 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.
Puzzles
Investigate 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?



Policy Ideas
Human 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.


END
Thank you