The Agricultural Wage Gap Within Rural Villages

We use unique data on daily labor-market outcomes for Indian casual workers to study labor reallocation between agricultural and non-agricultural activities within rural areas. Controlling for both individual time-invariant attributes and time-varying shocks, we find that workers who switch sectors across years or even within a week can obtain 23% higher wages by taking non-agricultural jobs. The evidence suggests that compensating differentials rather than sorting on ability are important in explaining the wage gap. We then estimate a discrete choice model of daily labor supply that decomposes preferences for jobs into spatial frictions associated with location and sectoral frictions associated with attributes of jobs. We find that while spatial frictions are significant even within rural areas, sectoral frictions are nearly the same in magnitude and have implications for smoothing shocks. Counterfactual analysis shows that the unemployment effect of a one standard deviation decrease in rainfall would be halved in the absence of sectoral frictions.