Herrendorf and Schoellman on Labor Allocations

NOTE: The Growth Economics Blog has moved sites. Click here to find this post at the new site.

The next post on the NBER growth session. Berthold Herrendorf (ASU) and Todd Schoellman (ASU) looked at the (surprise!) misallocation of labor between agriculture and non-agriculture. They look at the wage gap between ag and non-ag in a panel of 39 countries. The question is how much of the gap is due to human capital differences between ag and non-ag workers.

Across their sample, the average wage premium for non-ag is 1.79. That is, non-ag workers earn about 79% more than ag workers per hour. If you control for human capital using a standard Mincerian return to years of schooling of 10%, then this average premium falls to 1.36. The wage \textit{per unit of human capital} in non-ag is 36% higher than in agriculture. The raw wage premium is 1.79 because non-ag workers have higher average education levels.

What Todd and Berthold do to advance on this is to consider the possibility that the returns to education are different between sectors. They provide evidence that this is in fact the case. For each year of schooling, agricultural workers get a smaller bump in wage than do non-ag workers. Thus non-ag workers have even higher implied human capital than ag workers. They have more years of schooling, and those years of schooling provide them with more human capital. If you make this adjustment, then the average wage premium for non is 0.92, or non-ag workers earn about 8% \textit{less} per unit of human capital than in ag. Essentially, Todd and Berthold can account for the entire observed wage gap.

This is intriguing because it suggests that the labor markets in these countries are getting things roughly right. This doesn’t mean ag workers earn the same as non-ag workers, they don’t. But this is because ag workers provide less human capital to the market than non-ag workers, not because ag workers are underpaid for their human capital. I’ll do some self-promotion in that their work complements my own finding that wage gaps between sectors in developing countries are not a big source of aggregate productivity losses.

One conclusion from their work is that movements of workers between sectors are not by themselves a source of growth. With the marginal return to HC being the same across sectors, there is no boost to productivity coming just from moving workers around. If we do observe shifts of labor from ag. to non-ag then that represents shifts due to differential productivity growth in the sectors or to non-homothetic preferences.

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