Economic Development and the Spatial Allocation of Labor

Low-income countries are less productive than their high-income counterparts. Is one reason because labor in high-income countries can more easily move to where it is most productive? We use detailed individual data combined with a spatial general equilibrium model of worker selection to study the determinants of labor productivity growth in Indonesia and the United States over the last 40 years. We find that while improvements in in situ labor productivity and the spatial allocation of human capital resources account for about 55% of Indonesian labor productivity growth, improvements in spatial mobility, due to lower costs of movement and improvements in the amenity of high productivity locations, account for nearly as much: 45%. In a comparison to the US, higher costs of movement in Indonesia account for 10% of the labor productivity gap between the two countries. These results suggest an important role of migration to explain aggregate productivity gaps both across and within countries.