Empirical Research on Impact of Trade Liberalization on Wage Inequality in Indonesia
Abstract
Indonesia initiated the tariff liberalization since the late 80s up to the early 2000s. However, even though poverty within the country has been reduced, ever since the early 2000s, Indonesia experienced an increase in income inequality. In this paper, the effects of tariff reduction on wage inequality from 2003 to 2013 using bi-annual National Labor Survey data on individuals held by Indonesian Central Statistics Bureau that is representative on a province level is studied. Under the framework of Stolper-Samuelson theorem, considering labor market adjustment that take time as well another mechanism such as improvement in productivity by reduction in trade cost that is supported by importation, two mechanisms might appear: The effect of tariff imposition that leads unskilled labor to benefit in short and medium term as well as the productivity enhancing quality of lower input tariff that is supposed to increase wages among workers within these sectors.
The effect of trade liberalization on wage inequality is examined and it is found that reduction in tariff has a significant impact that increase skill premium in the urban part and manufacturing-heavy regions of Indonesia.
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