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Authors: John Nye, Jeff Williamson, Karl Chua and Louie Limkin
Income inequality is higher in the Philippines than in most of its Asian neighbors, and spatial inequality accounts for a fairly large share of it. Individual attributes of workers and households explain the majority of the urban-rural gaps, and schooling, skill, and experience are the three individual characteristics that matter most. Provincial variables like typhoon incidence, government corruption, school crowding, and access to health facilities matter far less. Workers born in the cities and immigrants to the cities invest more in human capital than do rural workers, but this paper cannot tell us how much of that is due to better human-capital-building infrastructure supply in the cities and how much is due to higher urban demand for that infrastructure, and if the latter how much is due to market incentive. There is little evidence of labor market failure in the Philippines since, when properly measured, wage gaps by skill level are modest. Unequal endowments account for most of the urban-rural income gaps.
Originaltitel
Exploring Regional Equality: Determinants of the Rural-Urban Wage Gap
Authors: John Nye, Jeff Williamson, Karl Chua and Louie Limkin
Income inequality is higher in the Philippines than in most of its Asian neighbors, and spatial inequality accounts for a fairly large share of it. Individual attributes of workers and households explain the majority of the urban-rural gaps, and schooling, skill, and experience are the three individual characteristics that matter most. Provincial variables like typhoon incidence, government corruption, school crowding, and access to health facilities matter far less. Workers born in the cities and immigrants to the cities invest more in human capital than do rural workers, but this paper cannot tell us how much of that is due to better human-capital-building infrastructure supply in the cities and how much is due to higher urban demand for that infrastructure, and if the latter how much is due to market incentive. There is little evidence of labor market failure in the Philippines since, when properly measured, wage gaps by skill level are modest. Unequal endowments account for most of the urban-rural income gaps.
Authors: John Nye, Jeff Williamson, Karl Chua and Louie Limkin
Income inequality is higher in the Philippines than in most of its Asian neighbors, and spatial inequality accounts for a fairly large share of it. Individual attributes of workers and households explain the majority of the urban-rural gaps, and schooling, skill, and experience are the three individual characteristics that matter most. Provincial variables like typhoon incidence, government corruption, school crowding, and access to health facilities matter far less. Workers born in the cities and immigrants to the cities invest more in human capital than do rural workers, but this paper cannot tell us how much of that is due to better human-capital-building infrastructure supply in the cities and how much is due to higher urban demand for that infrastructure, and if the latter how much is due to market incentive. There is little evidence of labor market failure in the Philippines since, when properly measured, wage gaps by skill level are modest. Unequal endowments account for most of the urban-rural income gaps.
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
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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
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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
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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
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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
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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
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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
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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
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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.
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