# **1 Introduction**

Three questions have each launched a thousand papers. First, how large are the gaps in compensation caused by various types of labor market discrimination? Second, how large are the relative price differentials in global markets caused by international borders? Third, how can public policies raise the incomes of poor households?

We bring these literatures together with an estimation of the differences between the wages of workers in 42 low- and middle-income countries and the wages those same people would earn in the United States. This calculation at once documents an enormous form of wage discrimination, measures a massive cross-border price wedge, and suggests a policy that could dramatically raise the earnings of many low-income families.

The first section of the paper creates baseline estimates of wage gaps controlling for individual observable traits. It does so with a unique harmonized database on the purchasing power price-adjusted wages and other traits of over two million workers in 43 countries, including the United States. This allows us to predict wages of observably identical workers on either side of the US border for each of these countries. Crucially, the US data identify the individuals’ country of birth and, for the foreign-born, year of arrival in the US. This allows our definition of “observably identical” to go beyond standard covariates such as years of schooling, age, sex, and rural/urban residence. We can also compare workers of the same country of birth—implicitly controlling for culture, language, and social networks—and same country of schooling—which adjusts for the quality and relevance of schooling.

The wage gaps that emerge from these initial estimates are large. For instance, in our preferred econometric specification,<sup>1</sup> a Bolivian-born, Bolivian-educated, 35 year-old urban male formal sector wage worker with 9-12 years of schooling earns an average of US$1,831 per month working in the United States but US$460 (at purchasing power parity) working in Bolivia. Hence the earnings ratio between these observably identical people is 3.98. We produce estimates of the wage ratios of observably identical workers for each of 42 countries—we call these ratios _Ro_ , where the subscript signifies “observably identical”.<sup>2</sup> Bolivia’s ratio _Ro_ of 3.98 is near the median, while the lowest such ratios we observe are from the Dominican Republic, at 1.37–1.43 (depending on the regression functional form) and the highest are for Nigeria, at 11.3–13.6.

But wage gaps for observably equivalent workers do not necessarily reflect wage discrimination. The second part of the paper grapples with the fact that, no matter how many individual traits are controlled for, wage differentials for observably equivalent workers do not necessarily constitute evidence of wage differentials across workers of

> 1 We test the sensitivity of the results to econometric specifications, in particular relaxing key assumptions imposed in the standard Mincer functional form of wage regression specifications that have recently received important criticism (e.g. Heckman, Lochner, and Todd (2006) in the US context and Rosenzweig (2007) for international comparisons). 2 Rosenzweig (2007) estimates country specific skill price differentials comparing the same individuals on both sides of the United States border using the observations of wage changes of individuals from the US New Immigrant Survey. Those calculations heavily influence ours, but the results reported here are the first we know of that pool individuallevel survey data across countries to estimate the impact of borders.