Export Shocks Boost Local Labor Markets in Indonesia

The World Bank's study on Indonesia reveals that regions with higher export exposure experience significant, sustained improvements in employment and wages, especially benefiting skilled workers in the formal sector. This research underscores the importance of export-driven policies for economic growth.

How Increased Exports Are Transforming Indonesia's Job Market

Indonesia has long been a nation defined by its rich natural resources and bustling trade routes. A recent study titled "Local Labor Market Dynamics and Export Shocks: Theory and Evidence from Indonesia" by Carlos Góes, Juan Segnana, Raymond Robertson, and Gladys Lopez-Acevedo, published by the World Bank, offers a deep dive into the ripple effects of export growth on the nation's local labor markets. The findings are revealing: that regions exposed to foreign demand shocks experience significant and sustained improvements in employment and wages.

The Shift in Strategy

Indonesia's journey from an import substitution strategy to an export-oriented approach in the mid-1980s marked the beginning of its transformation. This strategic shift, coupled with deregulation efforts, aimed to integrate Indonesia more seamlessly into the global economy. By the 1990s, Indonesia's labor and trade patterns had evolved, with agricultural employment giving way to manufacturing and services.

The research team combined data from Indonesia’s national labor force survey (Sakernas) and industry export records from UN Comtrade, spanning from 1993 to 2014. This comprehensive dataset allowed the authors to analyze how different regions within Indonesia responded to increased export activity, specifically focusing on labor market indicators such as employment, wages, and labor force participation.

The Impact on Employment and Wages

The results are compelling. Districts with higher exposure to foreign demand shocks—regions where exports saw a significant increase—experienced notable gains in employment, labor force participation, and wages. The study found that employment elasticity concerning exports was 0.1 in the short run and 0.3 in the long run. This means that a 1% increase in exports results in a 0.1% increase in employment shortly after the shock, growing to 0.3% over time.

Moreover, real average wages and the real wage bill also saw significant increases. Real wages exhibited a long-run elasticity of 0.6, while the real wage bill elasticity reached 1.2 six years after the shock. These findings suggest that not only do more people find jobs, but the quality of those jobs, reflected in higher wages, also improves.

Skilled vs. Unskilled Workers

One of the more nuanced findings of the study is the differential impact on skilled versus unskilled workers and formal versus informal employment. The employment response was more pronounced among skilled workers and in the formal sector. Skilled workers, typically employed in larger, more formalized firms, benefited more from increased export activities. This aligns with the nature of exporting firms, which are often larger and more likely to operate within the formal economy.

Conversely, while unskilled workers and informal employment also saw gains, these were less substantial. The elasticity of formal employment peaked at 0.93 four years after the shock, compared to a peak of 0.4 for informal employment. This highlights the existing disparity in how different segments of the workforce benefit from globalization and trade liberalization.

Sustained Growth and Policy Implications

The positive effects of export shocks on local labor markets are not fleeting. The study found that these benefits persisted for up to six years post-shock, indicating that regions exposed to increased foreign demand continue to thrive well beyond the initial boost.

These findings have profound implications for policymakers. They underscore the importance of fostering an environment conducive to exports, particularly in regions less exposed to foreign demand. Policies that support skill development and formalization of employment can help amplify the positive impacts of export growth, ensuring that benefits are more evenly distributed across the workforce.

In conclusion, the study "Local Labor Market Dynamics and Export Shocks: Theory and Evidence from Indonesia" provides valuable insights into how export-driven growth can significantly enhance local labor markets. By leveraging foreign demand shocks, regions within Indonesia can achieve sustained improvements in employment and wages, particularly for skilled workers in the formal sector. As Indonesia continues to navigate its path in the global economy, these findings offer a roadmap for maximizing the benefits of trade liberalization.