# **1. Introduction**

Territorial differences in labor earnings are expected to diminish with economic development as barriers to capital mobility decline and technology diffuses within countries. However, they may persist due to poverty traps<sup>1</sup> reflecting delays in subnational institutional development (Galvis and Meisel Roca, 2021) and in economies where mobility frictions are high. By making it costly to trade goods and relocate workers, frictions generate spatial misallocation and slow down aggregate economic growth. Yet, a decline in mobility frictions may not result in measurable improvements in aggregate economic growth when territorial income differences are not exploitable through migration, but rather reflect difference due to the sorting of more productive workers into urban agglomerations. If people lack the endowments that could enable them to earn higher real wages after relocating to high-income areas, migration may contribute to congestion there, and ultimately lower the local productivity premium (Grover, Lall, and Maloney, 2022). Importantly, even in the absence of mobility barriers, territorial income differences may persist and even grow due to market-driven agglomeration forces (Duranton and Puga 2020), which may lead to labor shortages in fast-growing urban centers. Conversely, leveling up may occur as local productivity in leading regions deteriorates and conditions in smaller lagging areas improve. Hence, a priori, it is unclear how large within-country territorial income differences are, how much they have changed over time, and to what extent income differnecs can be exploited through migration.

This paper answers these questions by documenting the territorial differences in labor earnings in fourteen Latin American countries<sup>2</sup> and their evolution between the early 2000s and the late 2010s, using millions of observations from recently released, harmonized micro data from population censuses and household surveys. Exploring this topic in the Latin American context is important for several reasons. First, prior to the mid-2000s, large territorial income differences within the Latin American counties have been documented in the literature, including between Mexico’s North and South (Aroca, Bosch, and Maloney, 2005; Gonzalez Rivas, 2007), Colombia’s peripheral and core regions (Galvis and Maisel Roca, 2010 and 2012; Burger, Hendriks and Ianchovichina, 2022), and Peru’s coastal and internal areas (Escobal and Ponce, 2011). Many studies conducted in the first half of the 2000s also question the idea of territorial income convergence in the region (Aroca et al. 2005; Bosch, Aroca, Fernandez, and Azzoni, 2003) or show that convergence has occurred at a very slow pace (Serra, Pazmino, Lindow, Sutton and Ramirez, 2006; Soto and Torche, 2004).

Second, territorial differences in income may explain a sizable share of overall inequality in a country (Elbers, Lanjouw, Mistiaen, Özler and Simler, 2004). Using survey data for eleven Latin American countries for the 2000s, Acemoglu and Dell (2010) investigate the sources of labor income inequality within and between countries in the Americas. They show that the within-municipality differences in labor income are five times the between-municipality differences, which in turn are twice the size of the between-country differences in labor income in the region. Skoufias and Lopez-Acevedo (2009) also find large differences in poverty rates and household incomes across geographic regions,

> 1 In turn, poverty traps may influence territorial growth through increased social fragmentation, underinvestment, and political instability and conflict (Alesina and Perotti, 1996).

> 2 The countries are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Honduras, Mexico, Panama, Paraguay, Peru, and Uruguay.

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