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Spatial Wage Differentials and Agglomeration Externalities: Evidence from Indonesian Microdata

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  • Masagus M. Ridhwan

Abstract

This paper aims to examine sources of labor wage differentials and to investigate human capital externalities across Indonesian districts. Our study attempts to fill the gap in the standard literature, which mainly asserts thekey role of labor market characteristics in explaining the disparities. Based on microdata on individual workers from 2006-2015, we found that not only individual (labor) characteristics play a role in explaining the wage variations, but also regional endowments and agglomeration forces. The latter mainly results from spatial proximity of firms to other firms, from labor market pooling, and from knowledge spillovers. In addition, we also found strong evidence of positive human capital externalities, particularly in agglomerated regions. All in all, these findings may suggest the importance of skills and agglomeration for policymakers in boosting local productivity vis-Ã -visreducing income/wage inequality

Suggested Citation

  • Masagus M. Ridhwan, 2020. "Spatial Wage Differentials and Agglomeration Externalities: Evidence from Indonesian Microdata," Working Papers WP/03/2020, Bank Indonesia.
    • Handle: RePEc:idn:wpaper:wp032020
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    More about this item

    Keywords

    Local labor markets; Spatial wage differentials; Panel data analysiS;
    All these keywords.

    JEL classification:

    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers

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