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Trade Liberalization and Employment in Indonesia: A CGE Analysis

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  • Cheong, David
  • Sonnenschein, Xiaohong

Abstract

Computable General Equilibrium (CGE) models of trade liberalization often invoke the assumption of frictionless labor markets and full employment for simplification. This prevents a proper analysis of the interaction between labor market institutions and the opening up of an economy. This paper develops a national CGE model of trade liberalization with specifications of different labor‐market institutions such as union activity, efficiency wages, and a minimum wage. The CGE model is applied to the case of Indonesia in order to simulate the aggregate and sectoral effects (i.e., changes in employment and wages of different categories of labor) of a potential free trade agreement (FTA) with the European Union. The model is calibrated to the official Indonesian Social Accounting Matrix (SAM) from 2008. Certain structural parameter values are obtained by calibration or imputation from the literature. The paper shows that labor market frictions, particularly union activity, can result in aggregate and sectoral economic effects that are different from models with frictionless labor markets. The paper quantifies the difference caused by each labor market friction vis‐à‐vis a benchmark model with no labor market frictions. In addition, the paper sheds some light on the distributional consequences of trade liberalization in the presence of these labor market frictions.

Suggested Citation

  • Cheong, David & Sonnenschein, Xiaohong, 2012. "Trade Liberalization and Employment in Indonesia: A CGE Analysis," Conference papers 332278, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332278
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    References listed on IDEAS

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