institutions that determine the provision of local public services (Acemoglu and Dell, 2010),<sup>7,8</sup> and migration frictions in the form of high trade costs (Acemoglue and Dell, 2010) and migration barriers (Skoufias and Lopez-Acevedo, 2009), Using household surveys from the early 2000s and Oaxaca’s (1973) decomposition, Skoufias and Lopez-Acevedo (2009) contribute a comprehensive study of spatial differences in welfare and their determinants within and across geographic regions above the first administrative level in 8 LAC countries.<sup>9</sup> Within any given region, they find that rural areas are poorer than urban areas primarily because of differences in education levels, and not differences in returns to education. Hence, they conclude that migration within regions has equalized these returns. By contrast, across geographic regions, differences in returns explain a larger share of the welfare gap, signaling that mobility barriers tend to grow with distance. Skoufias and Lopez-Acevedo (2009) also characterize the profile of domestic migrants, their incentives to migrate, and the characteristics of sending and receiving regions. Migrants are typically well-educated, young, and relatively well-off, come from regions with relatively low stock of skills, and therefore tend to drain the lagging regions from skilled workers, potentially exacerbating territorial inequality. Migrant remittances may have an offsetting effect (Acosta, Fajnzylber and Lopez, 2008), but research suggests that this effect is less likely to occur if most migrants are skilled workers. The latter tend to migrate on a permanent basis and are more likely to be affluent (Skoufias and Lopze-Acevedo, 2009). Kanbur and Rapoport (2005) also question the quantitative importance of remittances for reducing territorial welfare differences.

In sum, the existing literature relies on disparate data sources – either national accounts or household surveys – and looks at issues of territorial income differences and dynamics separately. Therefore, it provides an incomplete or inconsistent regional picture on the sources and evolution of territorial income differences in Latin America. By differentiating between households and localities and by combining analyses of territorial labor and local productivity differences and dynamics, this paper builds a region-wide assessment of the spatial patterns in local productivity levels and growth. It also identifies the main factors behind the territorial income differences with leading metropolitan areas and therefore opportunities to lift welfare through migration to these areas.

# **3. Analytical approach**

We first present the methodology employed to estimate labor and place productivity by location, the approach for assessing productivity dynamics, and the estimation technique for decomposing the income gap with leading areas into an endowment component and a rate-of-return component. The latter allows us to determine the extent to which households can increase their incomes by relocating to the leading metropolitan area.

> 7 In countries with federal systems (e.g. Mexico and Brazil), state and local governments have the authority to change laws, including taxes, and de jure and de facto institutions, e.g., the degree of enforcement of national laws, the functioning of the judiciary, and the degree of de facto control by local elites.

> 8 Dell (2010) links the poor outcomes for some communities to the long-run effect of the mita – an extensive forced mining labor system in effect in Peru and Bolivia during the colonial era – which lowered incomes and access to education and infrastructure. Acemoglu et al. (2007) emphasize the link between political inequality in 19<sup>th</sup> century Cundinamarca, Colombia and its current economic outcomes. Similar conclusions are drawn by Naritomi, Soares, and Assuncao (2007) for Brazil.

> 9 These countries are Bolivia, Brazil, Colombia, Ecuador, Guatemala, Mexico, Nicaragua, and Peru.

6