Does Industry Affiliation Influence Wages? Evidence from Indonesia and the Asian Financial Crisis

Abstract

We exploit panel data and large, abrupt, and unusual dislocations of Indonesian workers in the wake of the Asian Financial Crisis to investigate the robustness and persistence of inter‐industry wage differentials (IWDs). Unobserved worker characteristics explain 36% of IWDs. IWDs persist through the post‐crisis decade, although, consistent with a rent‐sharing explanation, they shift alongside sectors’ terms of trade in the wake of the crisis. Agriculture pays a wage penalty, and manufacturing offers a statistically significant but small premium. Most IWDs do not seem to be driven by minimum wage laws, worker monitoring costs, the disagreeability of the work, job‐ specific skills, industry‐specific human capital, non‐wage benefits or contracting terms.

Keywords: Inter‐industry wage differential; competitive labor market; Indonesia; financial crisis; employment

JEL Classification: J31, O15, J63