Migration, roads and labor market integration: Evidence from a planned capital city

Abstract

Wages in developing countries differ greatly across sector and across space. In Brazil, the average wage in a municipality at the 90th percentile of the wage distribution is 3.2 times larger than the average wage in a municipality at the 10th percentile of the wage distribution. Adjusting for individual characteristics, industry, and the cost of living, the 90/10 municipality wage gap is 2.1. These large differences in returns to labor present a spatial arbitrage puzzle: why do people not migrate to equalize wages across space? We propose one explanation: it is costly to move. We use the construction of a planned capital city, Brasilia, to generate plausibly exogenous variation in the national road network, and examine the role of roads in facilitating labor market integration. Using a database of gross inter-municipality flows, we construct and estimate a spatial equilibrium model where migration is costly. The results yield that access to roads is a key determinant of migration. Reducing the marginal cost of traveling by 50% would increase migration rates to 13%, from a base of 9.5%. This would yield an increase in mean welfare of 8.1%, and a reduction in the dispersion (standard deviation) by 6.2%. The effect is reduced by 4.3% once the general equilibrium effects of migration are computed.