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The persistence of a significant urban–rural wage gap challenges the notion of competitive equilibrium. This paper examines the earnings gap between urban and rural workers in Sweden between 1865 and 1985. Proper measurement by cost-of-living, working hours and unemployment causes most of the nominal gap to disappear. What remains is a longrun equilibrium that was interrupted by major external shocks in the interwar years when the urban wage premium soared. The increase in the wage gap stemmed from asymmetric
labor market responses to the external shocks, explained by the dissimilar institutional configurations of the two labor markets.
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