Job market paper

Rural-Urban Migration and Structural Change: A Reinterpretation

Structural change and rural to urban migration are often seen as a single reallocation process. However, using panel data on Indonesian workers spanning two decades, I present evidence that challenges this standard view. First, I document that workers switch from agriculture to non-agriculture within rural areas, and that most rural-urban migrants are not farmers. Second, I show that aggregate reallocation out of agriculture is primarily driven by the entry of younger cohorts into the labor market, rather than by workers who leave agriculture. Third, I provide evidence that rural-urban migration has intergenerational effects, as the offspring of migrants are less likely to work in agriculture, attain higher levels of education, and earn more. To uncover the forces and frictions giving rise to these patterns of employment reallocation and their aggregate implications, I build an overlapping generations model with two sectors and two locations. In the model, switching sector or location is costly, and access to education differs by location. First, different from the standard view, I find that rural-urban migration has little impact on structural change. While the rural non-agricultural sector is able to absorb most of the workers leaving agriculture, this is detrimental for aggregate growth, as non-agriculture does not develop where it is more productive. Next, I uncover that sectoral switching costs, rather than differences in education, are the main driver of the cohort-level differences in sectoral employment shares. Finally, I show that intergenerational incentives for rural-urban migration are an important driver of urbanization and hence can have a large impact on economic growth.

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