Barriers to Mobility or Sorting? Sources and Aggregate Implications of Income Gaps across Sectors and Locations in Indonesia (with Tomasz Święcki)
Existence of large income gaps between agricultural and non-agricultural workers in developing countries is well known, but the exact source of the gaps is debated. The two main hypotheses, barriers to labor mobility and sorting of workers based on unobserved comparative advantage, have distinct predictions for aggregate efficiency but are difficult to distinguish using only cross- sectional data typically available for developing countries. We use panel data from Indonesia Family Life Survey to document that workers who move out of agriculture see an income gain of around 20% while those who move into agriculture see a similar income loss, even if they stay in the same location. These premia are difficult to reconcile with efficient sorting of workers and suggest a presence of substantial barriers to mobility. Without controlling for individual heterogeneity the income premia are even larger, suggesting that some sorting is taking place as well. To evaluate the contribution of barriers to mobility and sorting to the observed income gaps more clearly, we are working on developing a model of sectoral and migration decisions.