A Test of the Worker Quality Explanation for the Urban/Non-Urban Wage Gap

Abstract

We conduct a test to determine whether the observed urban/nonurban

wage gap is a return to unobservable ability. A new measure

of worker quality is added to wage regressions, and the estimated

urban premium is compared with the results from the standard

human capital measures. This new measure of unobserved ability

refers to workers literacy as assessed by the International Adult

Literacy Survey (IALS). Using data from three countries with different

population densities and scope of human capital spillovers, we

find that controlling for literacy levels does not reduce the size of

the urban wage premium, implying that the wage gap is not due to

previously unobserved worker quality. We also test whether literacy

affects interaction between the urban wage premium and experience,

which may proxy for learning-by-doing, and find similarly insignificant

changes in the estimates.