Globalization and Wage Inequality in Indonesia: A CGE Analysis
A multi-region computable general equilibrium model is developed in this study to examine Indonesia's trade regime and its labor markets. This model enables the labor market impacts of shocks to trade policy, the capital stock, and technology to be examined individually as well as collectively. The results suggest that the dominant factor in affecting wage inequality in Indonesia is total factor productivity growth. This strong role of productivity gains is distinctive, considering the prevailing view that East Asia's strong growth was driven primarily by capital accumulation. The model is also used to examine possible policy measures to reduce growth-induced wage inequality, including a return to some trade protection and the use of domestic taxes and subsidies. All are found to be costly to the economy as a whole and most to unskilled workers. The last price of analysis addresses the Asian financial crisis and its effects on Indonesian labor markets. The effects of contractionary shocks prove the opposite of the growth-related shocks of the previous decade. All workers are made worse off, the unskilled less so. Raising the elasticity of skilled labor supply through education, training, and migration is seen as the best approach to addressing the inevitable wage inequality increase that will accompany Indonesia's eventual recover.
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