Estimation of the elasticity of substitution between skilled and unskilled men in agglomerations between 1980 and 2000 in Brazil and the simulation of the impact of migration on the skill wage gap

We use a production function approach to determine the impact on the wage skill premium of increased labor supply of different skills levels. In particular, we use data from the Brazilian population censuses for 1980 to 2000, for which there is consistent data on cities, to estimate the elasticity of substitution between high and low skill workers. We address the endogeneity of labor supply in urban areas by constructing an instrumental variable using the rural-urban migration response to exogenous shocks, such as rainfall shocks and changes in transport costs in rural areas. We find an elasticity of substitution between high and low skill workers of 0.56, so that high and low skill workers are gross complements and not gross substitutes as has been found previously in the international migration literature. Our simulations show that migration between 1991 and 2000 had only a small impact on the wage skill gap, specifically, a 1.1% decrease in the wage gap between high and low skill workers in Brazil. This explains only 5% of the changes in relative wages between high and low skill Our simulations show that migration between 1991 and 2000 had only a small impact on the wage skill gap, specifically, a 1.1% decrease in the wage gap between high and low skill workers in Brazil. This explains only 5% of the changes in relative wages between high and low skill workers seen in the data during this time period. Although this impact is small, it is 2.5 times larger than what we would have found using the elasticity of substitution between high and low skill workers of the international migration literature.