Wage differentials and labour market segmentation in Indonesian manufacturing

Abstract

This thesis examines the nature and causes of wage differentials in Indonesian manufacturing. It is mainly concerned with the impact of recent 'modern' sector growth on the wage structure. It especially concentrates on the influence of new technology and foreign ownership on wage differentials. Several hypotheses are investigated. These attempt to evaluate the effect of internal labour markets, human capital and institutional influences (government and trade union) on wage differentials according to capital intensity. The empirical analysis is based on an examination of secondary data and more general influences on the wage structure, and a field survey of three industries - weaving, kretek and cigarettes - in Java. Three major conclusions emerge from the study. First, the labour market in Indonesia appears to be quite highly segmented. Labour market segmentation was reflected in large wage differentials, different worker characteristics and low levels of mobility between various segments of the labour market. These were closely related to capital intensity and foreign ownership. Second, variations in wages according to capital intensity and foreign ownership in the three industries were a consequence mainly of the influence of internal labour markets and human capital factors. These two groups of factors were closely interrelated in their effect on wages. It may not be meaningful to pose the question whether human capital or internal labour market factors mainly contribute to wage differentials because of these interrelationships. Third, the study suggests that institutional influences may have been given too much attention in the literature on wage differentials in less developed countries. These differentials may be inherent in patterns of economic development in which rapid technological change and foreign ownership play a central role.