Abstract
We use a production function approach to determine the impact of increased labour supply of different skill level on the skill wage premium. In particular, we use data the Brazilian Population Census for 1980 to 2000, for which we have consistent data on cities, to estimate the elasticity of substitution between high and low-skill workers. Unlike the international migration literature, we can estimate the response of out migration from rural areas in response to exogenous shocks, such as rainfall shocks and changes in transportation costs, and use the predicted value from these shocks to construct our instrumental variable. We nd an elasticity of substitution between high and low-skill workers of 0.56, much lower than what has been found in the international migration literature. Our simulations show that migration between 1991 and 2000 had only a small impact of the skill wage gap, a 1.1% decrease in the wage gap between high and low-skill workers in Brazil, explaining only 5% of the changes in relative wages between high and low-skill workers seen in the data during this time period. Though this impact is small is it is 2.5 times larger than what we would have found using the elasticity of substitution between high and low-skill of developed countries.
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