Wage Differentials between Foreign Multinationals and Local Plants and Worker Education in Indonesian Manufacturing

This paper reexamines the extent of wage differentials between medium-large (20 or more workers) foreign multinational enterprises (MNEs) and local, private plants in Indonesia’s manufacturing industries in 1996 and compares them to corresponding differentials in 2006. Mean, unconditional differentials were quite large when the 17 industries sample industries are combined, and declined from 144 to 69 percent for production workers and from 201 to 84 percent for non-production workers. Conditional differentials that account for the tendency of MNEs to hire relatively educated workers, use relatively large amounts of energy and material inputs per worker, and be relatively large, were positive and statistically significant, but much smaller, falling from 26 to 3.5 percent for production workers and from 34 to 15 percent for non-production workers. Industry-level, conditional differentials were also positive in 10-11 industries in 1996, but tended to decline and most became insignificant by 2006. Both aggregate and industry-level results also suggest that differentials were relatively large for non-production workers, but the industry-level results were again relatively weak for 2006. Finally, the size of MNE-private differentials did not depend significantly on the extent of foreign ownership in most of the samples examined.