This chapter investigates impacts of labor market distortion on wage inequality by considering the modernization of small-scale agriculture. Owing to small-scale operations, agriculture requires an intermediate sector, an agricultural producer service sector, to facilitate the introduction of non-agricultural intermediate inputs and promote agricultural modernization. Basic model assumes perfect competition in agricultural producer service sector and shows that if the elasticity of substitution between labor and agricultural producer services is sufficiently large (small), mitigating distortion widens (reduces) wage inequality between skilled and rural unskilled labor. In the extended model, the chapter introduces an agricultural producer service sector with monopolistic competition and the main results of the basic model almost hold. Conclusions offer new insights on wage inequality in developing economics.