Effect of Trade Liberalisation on Wage Inequality in Indonesia

Watekhi, Watekhi; Nachrowi, Nachrowi Djalal; Hartono, Djoni; Damayanti, Arie

doi:10.22452/mjes.vol55no2.4

Cited by 2 publications

(5 citation statements)

References 31 publications

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“…Meanwhile, an increase in FDI inflow in those particular tradable sectors will also decrease the wage-premium for unskilled workers. These values are in line with studies of Mehta & Hasan (2012), Noria (2015), and Watekhi et al (2018) stated that the presence of trade liberalization and FDI liberalization reduced the wage differentials between skilledunskilled workers.…”

Section: Trade Liberalization Fdi Liberalization and Industry Wage Pr...supporting

confidence: 91%

“…Concerning the empirical studies, it was decided to put the main focus of the empirical research on qualitative research methods, which are Ordinary Least Square (OLS) and Weighted Least Square (WLS). Specifically, the estimation strategy in this study will be conducted by using a two-stage estimation method by considering the concept and empirical strategy that was presented by Mehta & Hasan (2012) and Watekhi et al (2018). In the first method, to examine industry-wage-premium for educated and uneducated workers coefficients, OLS is used to regress wages of workers on all industries classification, which are involved in a trade or tradable sectors.…”

Section: Methods Analysismentioning

confidence: 99%

“…It happens because a relative demand for workers who have high skill increases as a result of trade liberalization. However, those studies give mixed results in clarifying the relationship of trade liberalization on skill premium (Amiti & Cameron, 2012;Lee & Wie, 2015;Watekhi et al, 2018). Moreover, a relatively unexplored issue is the determinant of wage differential that has been growing in developing countries (Wang et al, 2017).…”

Section: Introductionmentioning

confidence: 99%

“…Similarly, Lee & Wie (2015) identified that skill premium is increasing because of trade liberalization. Moreover, Watekhi et al (2018) revealed that trade liberalization knowingly subsidizes to increasing wage differentials in Indonesia. Furthermore, Murakami (2021) initiate that a decrease in real tariffs on final goods steers to an upsurge in industry skill and wage premiums.…”

Section: Introductionmentioning

confidence: 99%

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Trade Liberalization, Foreign Direct Investment Liberalization, and Wage Inequality in Indonesia

Astriyany

Takahashi

2021

j. ekonomi & kebijak. publik

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This study purposes to re-examine the relationship between trade liberalization, foreign direct investment (FDI) liberalization, and wage inequality between unskilled and skilled workers by considering international trade theories, the Heckscher-Ohlin-Samuelson model, and The Human Capital theory from labor economics. The panel data sourced from the latest SAKERNAS or National Labor Force Survey of Indonesia between 2015 and 2017 are estimated to determine employment by gender, age, marital-status, wages per hour, level of education, and classification of industry. Wage inequality is examined by using a two-stage estimation strategy. Specifically, in the first stage, using SAKERNAS data at the household level, wages are regressed with their worker characteristics to get coefficients of our interest, which are industry wage premium for unskilled workers and industry wage premium for a skilled worker. In the second stage, in the industrial level, two sets of estimated coefficients are used as dependent variables and regressed with nominal tariff and FDI inflow as proxy variables to trade liberalization and FDI liberalization, respectively. Our estimation showed that trade liberalization and FDI liberalization do have a statistically significant relationship with industry wage premium for unskilled workers. In contrast, there is a positive relationship for the case of an industry wage premium for skilled workers. Overall, the results show that trade liberalization decreases wage inequality between unskilled and skilled workers, which in line with the HOS model. Moreover, FDI liberalization increases wages for skilled workers, which in line with Human Capital theory.Keywords: trade liberalization, FDI liberalization, wage inequalityAbstrakPenelitian ini bertujuan untuk mempelajari kembali hubungan antara liberalisasi perdagangan, liberalisasi penanaman modal asing (PMA), dan ketimpangan upah di Indonesia antara pekerja berkemampuan tinggi dan pekerja berkemampuan rendah dengan mempertimbangkan teori perdagangan internasional yaitu Heckscher-Ohlin-Samuelson model dan teori tenaga kerja yaitu teori Human Capital. Panel data berasal dari data terbaru survei angkatan kerja nasional (SAKERNAS) antara tahun 2015 dan 2017 yang digunakan untuk mengestimasi pekerja berdasarkan jenis kelamin, umur, status perkawinan, gaji per jam, tingkat pendidikan dan klasifikasi industri. Ketimpangan upah diukur menggunakan dua tahap metode estimasi. Di metode tahap pertama, dengan menggunakan data SAKERNAS di level individu, data upah diregresi menggunakan karakteristik pekerja untuk mendapatkan estimasi koefisien ketimpangan upah yang diinginkan yaitu untuk pekerja berkemampuan tinggi dan pekerja berkemampuan rendah. Di metode tahap kedua, hasil koefisien dari metode tahap pertama digunakan sebagai variabel terikat untuk kemudian diregresikan dengan nominal tarif sebagai proksi atau representasi dari liberalisasi perdagangan dan PMA inflow sebagai proksi dari liberalisasi PMA. Hasil penelitian ini mengindikasikan bahwa liberalisasi perdagangan dan liberalisasi PMA memiliki pengaruh yang signifikan terhadap ketimpangan upah untuk pekerja yang berkemampuan rendah, sedangkan untuk ketimpangan upah pekerja berkemampuan tinggi terdapat hubungan yang positif dan linier. Secara keseluruhan, hasil penelitian ini menunjukkan bahwa liberalisasi perdagangan menurunkan ketimpangan upah antara pekerja berkemampuan tinggi dan pekerja berkemampuan rendah yang linier dengan HOS model dan liberalisasi PMA menaikkan upah untuk pekerja berkemampuan tinggi yang linier dengan teori Human Capital.Kata kunci: liberalisasi perdagangan, liberalisasi PMA, ketimpangan upah

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Section: Trade Liberalization Fdi Liberalization and Industry Wage Pr...supporting

confidence: 91%

Section: Methods Analysismentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Trade Liberalization, Foreign Direct Investment Liberalization, and Wage Inequality in Indonesia

Astriyany

Takahashi

2021

j. ekonomi & kebijak. publik

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“…So, this study finds out whether the trade reforms have any impact on the FIFWG or not. Second, our analysis uses import tariff reductions as a proxy for trade liberalizati on, which is a more accurate measure in the case of developing countries [27][28][29]. Third, to the best of our knowledge, our analysis is the first to use three methodologies (log wage gap, wage premium (WP) methodology and residual wage gap) to determine whether or not a formal-informal wage difference is responsive to trade liberalization impacts.…”

Section: Introductionmentioning

confidence: 99%

Does trade liberalization increase the formal-informal wage-gap in Pakistan?

Aslam,

Ul-Haq,

Cheema

et al. 2022

2576-8484

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This study assesses the influence of the 1988 trade liberalization on the formal-informal wage gap (FIFWG) using micro-level manufacturing sector data from 1990 to 2005 in Pakistan. As trade liberalization affects both the formal and informal sectors' production capabilities, wage differentials between the two sectors' workers are expected. We employed Wage Premium Methodology (WPM), Oaxaca-Blinder decomposition, restricted least squares, and weighted least squares (WLS) regression models for empirical analysis. Our study finds that trade liberalization has an impact on the formal-informal wage gap on the observable characteristics as well as on the unobservable characteristics. This formal-informal wage gap in Pakistan has widened as a result of trade liberalization. After controlling for many sector-related variables, our findings are robust. Lagged-trade policy and the formal-informal wage gap are also strongly associated. Our results remain insensitive when using the three different approaches (i.e., the wage premium methodology, the wage gap methodology, and the residual wage gap). To benefit from trade liberalization, sensible labor market flexibility is a prerequisite. This study contributes to existing literature in the case of Pakistan in the following ways: firstly, the reduction in protection rates as a proxy for trade liberalization is used. This proxy is a policy-based proxy that captures the pure effects of trade policy as compared to outcome-based proxies (i.e., trade ratios). Secondly, this investigation considers the whole trade-regime as a study period to inspect the core impacts of the trade regime, as import tariffs radically decreased during this regime. Thirdly, we calculate two variables of FIFWG (i.e., wage premiums, and residual wage gap) for analysis. Fourthly, we employ manufacturing industry panel data for empirical analysis.

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Effect of Trade Liberalisation on Wage Inequality in Indonesia

Cited by 2 publications

References 31 publications

Trade Liberalization, Foreign Direct Investment Liberalization, and Wage Inequality in Indonesia

Trade Liberalization, Foreign Direct Investment Liberalization, and Wage Inequality in Indonesia

Does trade liberalization increase the formal-informal wage-gap in Pakistan?

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