Labor Market Impact of Export in a Commodity-Dependent Nation: The Case of Indonesia

Does export lead to improvement in labor market outcomes? The answer to this is not always clear from the literature. Despite the rising role of export markets, informality is still high, and inequality is worsening in many developing economies. In addition, export expansion driven by commodities has also been linked with the Dutch disease phenomenon. Using the case of a major commodity-dependent nation, namely Indonesia, we assess the labor market effect of a broader export expansion, which includes manufacturing exports apart from commodities. We examine Indonesia’s export expansion during the early 2000s, which was triggered by the import demand shock in the People’s Republic of China (PRC) following its accession to the World Trade Organization (WTO). We find that more exposure to export expansion improved individuals’ formal employment opportunities in cumulative terms by 2014. Export expansion, however, does not appear to improve individuals’ earnings growth in general, but only in specific cases. We further find this export expansion episode to be relatively progressive as it raises more formal employment opportunities and earnings growth for individuals in the lower- and middle-income brackets. As we cover all tradable goods, we are able to produce distinct impacts of different export categories. We show that the improvement in labor market outcomes in our findings is mainly underpinned by manufacturing export expansion, rather than commodities.

WORKING PAPER 1481