Local Human Capital Development and Firm Resilience: Evidence from the 1997 Indonesian Crisis

Do returns to human capital rise during crises? This paper examines whether human capital accumulation created by Indonesia’s INPRES school construction program in the 1970s improved firm resilience in the 1997 Asian Financial Crisis. I find that each additional school per 1,000 children increased real labor productivity and output during the crisis period by 2.7 and 3.3 percent, respectively. INPRESinduced changes in the local pre-crisis workforce composition that shifted workers toward more skill-intensive production work. I argue that these skills became particularly valuable during the crisis, when firms faced disruptions. Consistent with this mechanism, INPRES had larger effects in sectors with higher import intensity, where adjustment demands were greater. I show that the local abundance of skilled workers in high-INPRES districts kept wages relatively lower, enabling plants to retain more of them when they were most valuable.