Wages, Human Capital, and Structural Transformation

Average wages are considerably lower in agriculture than in the other sectors. We document this fact for thirteen countries ranging from rich (Canada, U.S.) to poor (India, Indonesia). We develop a measure of human capital that accounts for the selection of workers with different unobserved skills into sectors. We find that differences in human capital account for most of the wage gaps. We develop a model that rationalizes this finding and that allows us to quantify the distortions to the allocation of labor. We find that they are considerably smaller than typically claimed in the literature.