Regional labour markets during deregulation in Indonesia: have the outer islands been left behind?

Abstract

Indonesian labour markets have undergone a major transformation over the past 30 years, especially on Java since liberalisation gathered pace in the mid 1980s. The paper focuses on regional dimensions of these changes. In contrast to emerging interregional disparities in some other countries, it finds that employment structure has changed markedly and real wages risen in most Outer Island provinces since 1987. While wage growth has been more rapid in Java-Bali, labour in the Outer Island provinces has enjoyed large gains from rapid economic growth during the deregulation period. Among Outer Island provinces, Northern Sumatra and the poorer Eastern Island provinces have experienced substantial growth, while the Kalimantan provinces have lagged in manufacturing employment and wages. Labour market outcomes have also been less favourable in land abundant provinces which received large numbers of assisted migrants during the earlier oil boom period. It is concluded that export-led industrialisation concentrated in Java-Bali has contributed to labour market transformation and income growth outside Java-Bali. In addition, improvements in wages and the shift of labour outside agriculture have been supported by continuing government support for infrastructure and human resource development in the Outer Island provinces.