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Labor productivity gaps between agricultural and non-agricultural sectors in low-income countries are smaller than previously thought. Accounting for individual worker differences significantly reduces estimated productivity gains from sector mobility.

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Area of Science:

  • Development Economics
  • Labor Economics
  • Agricultural Economics

Background:

  • Existing research highlights significant labor productivity disparities between agricultural and non-agricultural sectors, and rural versus urban areas in low-income countries.
  • Current estimates often rely on national accounts or cross-sectional data, which struggle to control for individual selection bias when analyzing sector mobility.

Purpose of the Study:

  • To investigate labor productivity gaps between sectors and locations using individual-level panel data.
  • To assess the impact of accounting for individual fixed effects on estimated productivity gains from labor reallocation.

Main Methods:

  • Utilized long-run individual-level panel data from Indonesia and Kenya.
  • Employed fixed-effects estimation to control for unobserved individual heterogeneity.

Main Results:

  • Accounting for individual fixed effects substantially reduces estimated productivity gains from moving to the non-agricultural sector or urban areas by 67%-92%.
  • No significant productivity gaps were observed up to five years after individuals changed sectors.

Conclusions:

  • Findings suggest a re-evaluation of conventional wisdom on sectoral productivity gaps and the benefits of labor reallocation.
  • The study reconciles new findings with existing cross-sectional estimates and discusses implications for labor market policies in low-income countries.