Do returns to schooling and on-the-job training differ between informal and formal workers in Indonesia?

This study examines the differences in returns to schooling and on-the-job training between informal and formal workers in Indonesia using two-wave panel data from the Indonesian Family Life Survey (IFLS). Employing fixed-effects regression on an extended Mincer equation to control for unobserved individual characteristics, the analysis reveals no statistically significant differences in returns to education and training between worker types—contrary to findings from other countries. However, informal workers earn 19.6% less than formal workers after controlling for non-random selection of being informally employed, indicating that the earnings gap stems from worker characteristics rather than different returns to human capital. The study suggests that informal workers gain valuable initial experience complementing their schooling and sacrifice more working hours for training to achieve similar returns as formal workers. These findings suggest targeted interventions enhancing human capital among informal workers could support upward mobility and potential transition to formal employment within Indonesia's dual economy structure.