International economic integration and labor markets : the case of Indonesia

Abstract

Indonesia changed its development strategy from an inward-looking import substitution to an outward-looking export orientation in the mid 1980s. Deregulation measures introduced during this period have made the Indonesian economy become more integrated with the world economy. This study examines the impact of a more globally integrated Indonesian economy on its labor market. The findings indicate that increasing economic openness is associated with growing outputs, which has resulted in an expansion of employment and growing real wages of both skilled and unskilled workers. Employment of skilled workers, however, has grown faster than that of unskilled workers. On the other hand, unskilled wages have grown faster than skilled wages, resulting in declining wage inequality. This is consistent with the theoretical prediction from the Heckscher-Ohlin-Samuelson model. However, this pattern of change in relative employment and wages is also consistent with the prevailing long-term trend of a growing relative supply of skilled workers.