Urban versus Rural Return to Human Capital in Portugal, A Cook-Book Recipe for Applying Assignment Models

The Portuguese economy has been characterised by modernisation sincethe post-war period. Lisbon and the Tagus Valley is a centre of thisprocess. Hence, this region faces a high demand for highly skilledlabour. This paper analyses rates of return on human capital in theregion of Lisbon and in the rest of the country in the period 1982-1992. An assignment model of heterogeneous workers to heterogeneousjobs is discussed. We also develop a cook-book recipe for itsestimation. The main implication, a high return being associated withsimilar workers being assigned to more complex jobs, is born out bythe data. Apparently new technology in Lisbon triggers the demand forhuman capital, not the other way around. The estimation procedureallows us to obtain a simple, free dimension, parameter that measuresthe heterogeneity in jobs and therefore the ease of substitutionbetween worker types. This is called the complexity dispersionparameter. Calculations suggest that paying half the optimal wagelevel is about to double the cost per efficiency unit of labour.