Earnings, productivity and inequality in Indonesia

Abstract

This article examines real wage-earning, productivity and earning inequality in Indonesia, focusing on differentials among provinces and economic sectors. The post-1997 Asian crisis and democratic Indonesia mimic the global trend of disconnection between wages and productivity: labour productivity continues to rise while real wage-earning stagnates or declines. This disconnection has three consequences. First, it affects income or earning distribution as confirmed by rising overall earnings inequality. Second, while it explains the conventional wisdom of an economy-wide negative relationship between real wages and employment, it is of concern that these two variables do not move in the same direction as the productivity improvements that have occurred in large and medium establishments in the manufacturing sector. Third, the disconnection between productivity and earnings growth opens a new discussion on the broader issue of quality of growth, as the data show that robust economic growth in the post-crisis Indonesia has not been accompanied by parallel improvements in the quality of employment.

Effect of Trade Liberalisation on Wage Inequality in Indonesia

“…The Gini coefficient of wage increased from 0.41 to 0.45 between 2001 and 2012, and from 0.39 to 0.43 for formal workers (World Bank, 2014). The average Gini wage coefficient is 22 percent higher than the Gini coefficient of income from 2001 to 2012 (Tadjoeddin, 2016).…”

IS LABOR PRODUCTIVITY LINKED to REAL WAGES? AN EMPIRICAL STUDY of the TURKISH MANUFACTURING SECTOR

“…For example, many studies observe a significant relationship between productivity and wages such as Katowich and Maia (2018) for Brazil, Dostie (2006) for Canada, Fedderke and Mariotti (2002) for South Africa, Özmucur (2003) for Turkey, Marquetti (2004) for the United States, Strauss and Whoar (2004) for US manufacturing industries, Güneş (2007) for the Turkish manufacturing sector, Sharpe et al (2008) for Canada, Goh (2009) for Malaysia, Klein (2012) for South Africa, Bhattacharya et al (2009) for the Indian manufacturing sector and Meghan (2002) whose study covers multiple industrialized countries. On the other hand, Tadjoeddin (2016) found a post-crisis disconnect between wages and productivity in Indonesia. Later, Tadjoeddin and Chowdhury (2019) also found a similar disconnect in Indonesia's manufacturing sector between productivity and wages.…”

Why do low‐skilled foreign workers have a wage advantage? Evidence from the palm oil plantation sector in Malaysia

“…Several factors, such as geographical proximity, language and culture similarity, and high unemployment rates in their home country, are the main drivers for Indonesian foreign workers to migrate to Malaysia (LPPKN, 2014). 3 For example, the real wage earnings in Indonesia have remained stagnant or declined in recent years (Tadjoeddin, 2016). Moreover, those Indonesian workers who are already working in the Malaysian plantation sector are more likely to influence their friends and family members in Indonesia to join them.…”