Understanding the impact of export shocks on Indonesia’s labor market
Indonesia’s economic profile underwent a major transformation in the 1980s when it shifted from an import-substitution to an export-oriented development strategy. This transition was accompanied by deregulation to better connect Indonesia to the global economy. This prompted major structural changes, with agriculture’s share of the workforce falling from two-thirds in 1993 to roughly half by 2014, services expanding from 18% to 24%, and manufacturing expanding from 14% to 20%. China’s rise played a key role, increasing Indonesia’s share of exports from less than 5% to more than 15%. Meanwhile, Japan, which accounted for almost a third of exports at the beginning of the period, fell to less than 10% by the end.
One of the key findings is the transformation of Indonesia’s labor market. In this paper, we take a closer look at how Indonesia’s export transformation, particularly the impact of the export demand shock, has affected various labor market indicators in Indonesia.
methodology
To unravel the complex interplay between export shocks and labour market outcomes, we simulate different scenarios using a robust quantitative spatial model. By leveraging a comprehensive multi-year dataset (our main analysis is based on a combined dataset of Indonesia’s Labour Force Survey and UN Comtrade industrial exports from 1993 to 2014), we provide a nuanced understanding of how export shocks spread to Indonesia’s labour market.
A key aspect of the analysis is the examination of regional disparities based on reliance on export-oriented industries. For instance, certain regions in Indonesia such as West Papua and Sumatra emerge as focal points due to their significant contribution to the country’s overall exports. Understanding these regional nuances is essential in formulating targeted policy interventions aimed at mitigating the adverse effects and capitalizing on opportunities arising from export shocks.
Key findings
According to the analysis, The response of Indonesia’s labour market is consistent with what the quantitative spatial model predicts, with Indonesian districts with larger export growth experiencing greater increases in employment, labour force, real wages and total real wages. We show that these shocks persist even six years after the external demand shock. Moreover, formal employment has increased more than informal employment in these regions, suggesting gradual formalization driven by the expansion of export-oriented industries. Also, in terms of employment growth, skilled workers tend to gain more from export shocks than unskilled workers. The results highlight the importance of skills development and education in capitalizing on the opportunities offered by export-led growth.
