productivity premia (i.e. location premia _after_ sorting) was fastest across rural areas, especially larger ones. In Chile, Colombia, Dominican Republic, and Peru, convergence was faster across rural municipalities. By contrast, in Honduras and Costa Rica, it was faster across urban municipalities. Location premia converged at similar rates across rural and urban areas in Ecuador (Table 7). Thus, in Mexico, Honduras, and Costa Rica, convergence was mainly driven by the urbanization process, while in Brazil, Colombia, Chile, Dominican Republic, and Peru, the commodity boom rather than the urbanization process was behind it. In Ecuador, both forces appear to have played an important role. Convergence reflected both improvements in growth in lagging municipalities and to different extents the slowdown in growth in previously high productivity municipalities. In almost all countries the fastest-growing municipalities were rural, although growth was much more dispersed across rural than urban ones, indicating that some rural areas continued to lag behind.

# _4.4 Income gaps with leading metropolitan areas_

The incomes gaps with the leading Latin American metropolitan areas, identified in (6), were high in many LAC countries in the early 2000s (Figure 4). In Peru, the average per capita household labor income in Lima was almost three times the corresponding income in other parts of the country. Convergence narrowed down to different degrees the income gaps with the leading areas between the early 2000s and the late 2010s (Figure 4). Still, on the eve of the Covid-19 pandemic, sizable differences in per capita household labor earnings with the leading areas were observed in all countries, except in Mexico and Costa Rica. The gaps remained particularly high in Peru, Panama, and Paraguay. In most cases, except Brazil, Colombia, Honduras, Mexico, and Panama, the gaps exploitable through migration, i.e. those that can be attributed to differences in returns to endowments and captured by the second component on the right-hand-side of (6), also declined by the end of the 2010s (Figure 4).<sup>19</sup> As suggested by consistency check (7), we find that in all countries the difference between the place productivity premium (i.e. the location premium after sorting) in the leading area and the median place productivity premium approximately equals the rate-of-return component in the income gap decomposition, shown in Figure 4. The correlation between the right-hand side and left-hand side of (7) is high for the sample of countries included in the paper. It is 0.78 in the first period and 0.73 in the second period. At the country level, differences between the right-hand side and left-hand side of (7) are expected to be larger when the survey years in the location premia estimiation and the income gap analysis are not fully aligned, some municipalities are omitted from the estimation of the location premia after sorting due to missing information on household characteristics, and the households are not evenly distributed across municipalities. For example, if the share of households living in municipalities with below median premia locations is higher than those located in above median premia localities, then the right-hand side of (7) is expected to be higher than its left-hand side. This is the situation in Bolivia, where 62% of all households lived in locations with below median location premia in the last period (see Appendix Figure A1). The opposite is observed in Honduras, where 59% of all households lived in locations with above median location premia (Appendix Figure A1).

> 19 This is consistent with the increase in the difference between the location premium in the leading areas ( ) and the median premium ( ) in Colombia, Honduras, and Panama in Table 8. In the cases of Brazil and Mexico, the periods shown in Table 8 do not align with the periods shown for the two countries in Figure 4, because the table reflects γγ<sup>∗</sup> ll50 information from the IPUMS census data, while the figure shows data from the SEDLAC household surveys.    γγ

27