Skills and rural-urban wage differences in Australia

Growing research on the urban wage premium shows that workers in urban areas earn more than workers with similar skill levels in rural areas. In Australia, little is known about whether the urban wage premium exists or the magnitude of the premium. Using a panel approach, the study finds that differences in cognitive ability and personality traits have little impact on rural-urban wage differentials. When other differences in individual characteristics are considered, Australian workers in large urban centers still earn around 7.5% more than workers in rural areas. The relationship between local economy size and local wages is robust when endogeneity issues are accounted for by instruments. It is not evidenced from the study that stayers in urban areas enjoy higher wage growth than stayers in rural areas as the learning hypothesis suggests. It is more likely that rural-to-urban migrants go through a period of social acclimatization when they do not receive a full urban wage premium upon arrival but experience high wage growth the following year. The analysis undertaken in this dissertation suggest that in Australia, like in other countries, how much we earn depends not only on our abilities but also external factors.