Abstract
What are the sources of wage growth in developing countries? In the USA, general labor market experience is the key source of wage growth, with job seniority playing a smaller role. By contrast, in Indonesia, the 10-year return to seniority is 24 to 28 %, which is higher than the return to experience. Furthermore, we estimate a 35 % return to 10 years of tenure in the formal sector, with no significant return to tenure in the informal sector. The difference in the sources of wage growth in Indonesia versus the USA may be a reflection of Indonesia’s lower level of development. JEL codes: J3, O1
Highlights
Wage growth is tied to general and specific human capital accumulation (Becker, 1964)
In Indonesia, the returns to employer tenure are essentially unaffected if we allow for returns to industry and occupation tenure, which is again different from the results found on US data (Kambourov and Manovskii, 2009; Sullivan, 2010)
We present the ordinary least squares (OLS) results and instrumental variables (IV) estimates obtained from two stage least squares in Table 2.8 The first column presents OLS estimates of the linear model, and the second column presents IV estimates of the linear model
Summary
Wage growth is tied to general and specific human capital accumulation (Becker, 1964). The substantial size of the informal sector and the distinctive characteristics of formal and informal jobs imply that, in addition to employer, occupation, and industry, sector-specific human capital is likely to matter in determining wage growth in developing countries. The first alternative definition combines self-employed workers and salaried workers Under this definition, formal workers are those with medical benefits, or, if no information on medical benefits is available, those whose firm size is greater than 20, government workers, and those in the military. The second alternative definition of informality does not include information on medical benefits, so we use only firm size and separate workers into three categories: salaried formal, salaried informal, and self-employed workers. The analyzed sample has 820 individuals with non-missing employer, occupation, industry, and sector tenure (formal salaried or informal salaried), with a total of 1611 individual-year observations.
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