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May 2, 2018

Explaining agriculture's wage gap

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Education can help to explain the wage gap between agricultural workers and those in other industries.

Worldwide, the agricultural sector tends to have the lowest incomes. And yet, many farmers do not switch jobs.

There’s a popular view about why people stay in agriculture: the barriers to switching jobs are just too high. A new paper in the  American Economic Journal: Macroeconomics disagrees. Authors Berthold Herrendorf and Todd Schoellman find that these barriers are relatively small and fall short of explaining the wage gap between agriculture and other industries.

Instead, the authors stress the role of education. They examine data from 13 countries, ranging from Indonesia to the United States, and find that agricultural workers have fewer years of schooling than workers in other industries. Moreover, agricultural workers get a lower return on their education, as shown in the figure below.

Figure 3 from Herrendorf and Schoellman (2018)

These two differences combined are large enough to account for most of the wage gap. The authors also look at data from job switchers and find that moving from agriculture to non-agriculture only results in small wage gains. This also suggests that farmers earn less because they lack valuable education.

Overall, the results suggest that schools – not barriers in the labor market – are the main source of much of the wage gaps. For the remaining barriers, the authors recommend looking at the role of subsidies and distortions to the land market in future research.