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Globalization and Wage Inequality in Indonesia: A CGE Analysis

  • Asep Suryahadi

    ()

    (SMERU Research Institute)

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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Paper provided by East-West Center, Economics Study Area in its series Economics Study Area Working Papers with number 26.

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Length: 38 pages
Date of creation: May 2001
Date of revision:
Handle: RePEc:ewc:wpaper:wp26
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  1. Donald R. Davis, 1996. "Technology, Unemployment, and Relative Wages in a Global Economy," NBER Working Papers 5636, National Bureau of Economic Research, Inc.
  2. Colin Johnson, 1998. "Survey of Recent Developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 34(2), pages 3-59.
  3. Hanoch, Giora, 1975. "Production and Demand Models with Direct or Indirect Implicit Additivity," Econometrica, Econometric Society, vol. 43(3), pages 395-419, May.
  4. Hertel, Thomas, 1997. "Global Trade Analysis: Modeling and applications," GTAP Books, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, number 7685, March.
  5. Edward E. Leamer, 1994. "Trade, Wages and Revolving Door Ideas," NBER Working Papers 4716, National Bureau of Economic Research, Inc.
  6. George E. Johnson, 1997. "Changes in Earnings Inequality: The Role of Demand Shifts," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 41-54, Spring.
  7. Donald R. Davis, 1996. "Technology, Unemployment and the Relative Wages in a Global Economy," Harvard Institute of Economic Research Working Papers 1767, Harvard - Institute of Economic Research.
  8. Diwan, Ishac & Walton, Michael, 1997. "How International Exchange, Technology, and Institutions Affect Workers: An Introduction," World Bank Economic Review, World Bank Group, vol. 11(1), pages 1-15, January.
  9. Adrian Wood, 1995. "How Trade Hurt Unskilled Workers," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 57-80, Summer.
  10. Wood, Adrian, 1997. "Openness and Wage Inequality in Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom," World Bank Economic Review, World Bank Group, vol. 11(1), pages 33-57, January.
  11. Pissarides, Christopher A, 1997. "Learning by Trading and the Returns to Human Capital in Developing Countries," World Bank Economic Review, World Bank Group, vol. 11(1), pages 17-32, January.
  12. Eli Berman & John Bound & Zvi Griliches, 1994. "Changes in the Demand for Skilled Labor within U. S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 367-397.
  13. Tan, Hong & Batra, Geeta, 1997. "Technology and Firm Size-Wage Differentials in Colombia, Mexico, and Taiwan (China)," World Bank Economic Review, World Bank Group, vol. 11(1), pages 59-83, January.
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