The Determinants of Employment and Earnings in Indonesia: A Multinomial Selection Approach

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The Determinants of Employment and Earnings in Indonesia: A Multinomial Selection Approach

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Margherita Coloma
Luiz de Mello

Abstract

This paper uses household survey (Sakernas) data from the 1996 and 2004 to estimate the determinants of earnings in Indonesia. The Indonesian labour market is segmented, with a majority of workers engaged in informal-sector occupations, and earnings data are available only for formal-sector workers (salaried employees). This posed problems for the estimation of earnings equations, because selection into different labour market statuses is likely to be non-random. In order to describe selection into different labour market statuses we use the most general version of the method proposed by Dubin and McFadden (1984), which Bourguignon, Fournier and Gurgand (2007) proved to be preferable to other available multinomial selection methods. We also deal with reverse causality between education attainment and earnings by estimating the selection equations using an instrumental variable technique. Our findings cast doubt on the use of a binomial selection rule and suggest that workers with higher levels of educational attainment are most likely to find a job in the formal sector, and that the informal sector is perceived by those workers who cannot obtain a job in the formal sector as an alternative to inactivity. This Working Paper relates to the 2008 OECD Economic Assessment of Indonesia (www.oecd.org/eco/surveys/indonesia).

Les facteurs déterminants de l’emploi et des revenus en Indonésie : Une approche de sélection multinomiale
Ce document estime les revenus en Indonésie sur la base des donnés des enquêtes auprès des ménages (Sakernas) de 1996 et 2004. Le marché du travail indonésien est segmenté, avec une majorité des travailleurs occupée dans le secteur informel, et les données sur les revenus sont disponibles que pour les salariés du secteur formel. Ceci présente des problèmes pour estimer les équations sur les revenus, car la catégorisation en fonction du statut sur le marché du travail doit être non-aléatoire. Pour décrire cette catégorisation, nous utilisons une version plus générale de la méthode proposée par Dubin et McFadden (1984), que Bourguignon, Fournier et Gurgand (2007) ont montré comme préférable à toutes autres méthodes de sélection multinomiale. Nos conclusions mettent en doute l’emploi d’une règle de sélection binomiale, et impliquent que les travailleurs ayant les plus hauts niveaux d’éducation sont les plus susceptibles de trouver un travail dans le secteur formel et que le secteur informel est perçu comme une alternative à l’inactivité par les travailleurs qui n’ont pas eu de travail dans le secteur formel. Ce Document de travail se rapporte à l’Évaluation économique de l’OCDE de l’Indonésie, 2008 (www.oecd.org/eco/etudes/indonesie).

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Paper provided by OECD, Economics Department in its series OECD Economics Department Working Papers with number 690.

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Date of creation: Apr 2009
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Handle: RePEc:oec:ecoaaa:690-en

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Find related papers by JEL classification:
J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-04-13 (All new papers)
NEP-DEV-2009-04-13 (Development)
NEP-LAB-2009-04-13 (Labour Economics)
NEP-SEA-2009-04-13 (South East Asia)

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