Rich urbanites and poor villagers?: The effect of the urban-rural gap on income distribution

Abstract

This paper analyzes the existence of an urban-rural gap in per capita income. To what extent does the degree of urbanization (urban, intermediate, or rural) of the area where an individual lives affect their income in Spain. I use data from the Living Conditions Survey and the Household Budget Survey in 2020. I estimate a quantile regression to analyze the urban-intermediate and urban-rural gaps in the distribution of log market income and log final income. The regression includes personal characteristics as controls and region fixed effects that ensure that the gaps are not simply driven by regional differences. Results show that the effect on market income of living in a rural area compared with an urban area reduces income by almost 10%. This urban-rural gap is reduced to almost 7% in final income, this is, after fiscal redistribution is accomplished by the state. If we look at the quantiles of the distribution of income, the higher the quantile, the more significant the effect of the urban-rural gap and vice versa. There also exists a gap between the urban and the intermediate areas, but the effect on income is lower (although less reduced by redistribution). Running the same regression for each region, we find that the urban-intermediate and urban-rural gaps are very heterogeneous depending on the region. These findings suggest that in order to reduce inequalities, fiscal policies should take into account not only the income differences, but also the degree of urbanization of the area where the individual lives.