Abstract
The growing income inequality in the U.S. is widening the gap between rural and urban returns to labor. Most income inequality studies to date have focused either on international or inter-state wage differences. There is a continued need for improved understanding of the increasing rural urban wage differentials at a localized (i.e. county level) geography. This study identifies a method of delineating the factors contributing to the rural urban wage gap. Both Fixed Effect and Ordinary Least Square (OLS) models are utilized in defining the county wage functions for the contiguous U.S. counties. The Blinder Oaxaca decomposition method is employed to decompose the contribution of the explanatory variables of the wage models in explaining the rural urban wage differentials. The decomposition results of the county wage models suggest that physical, social, natural, economic and location attributes explain a major portion, but not all, of the rural-urban wage differentials. Controlling for industry mix variables only slightly improves the model. However, controlling for variation in human capital endowments (e.g. expected education) yields a model that explains almost all of the wage differences between urban and rural regions. The results inform that identifying and focusing on the key reasons behind the growing differences in rural-urban average returns are likely to help formulate proper policies for rural poverty alleviation.