Inter-Industry Wage Differentials and Worker Heterogeneity: Evidence from Indonesia and the Asian Financial Crisis

Type Working Paper
Title Inter-Industry Wage Differentials and Worker Heterogeneity: Evidence from Indonesia and the Asian Financial Crisis
Author(s)
Publication (Day/Month/Year) 2011
URL http://www.researchgate.net/publication/228272936_Inter-Industry_Wage_Differentials_and_Worker_Heter​ogeneity_Evidence_from_Indonesia_and_the_Asian_Financial_Crisis/file/e0b495203c0d31a9a8.pdf
Abstract
We utilize panel data on Indonesian workers to examine the role of econometrically unobserved worker characteristics in explaining inter-industry wage differentials. While these differentials dipped in magnitude following the Asian Financial Crisis, consistent with the view that they are paid out of profits, they are highly correlated over time. Usefully, this structural stability is observed despite large, crisis-induced reallocations of workers across industries. We exploit these frequent industry switches to identify the effects of industry affiliation on worker wages, controlling for worker identity. To the extent that the switches were involuntary, our estimates will be free of biases associated with endogenous industry switches. The magnitude of industry wage differentials decreases by 32% with the introduction of worker fixed effects. Pre- and post-crisis inter-industry wage differentials are closely correlated, suggesting that our results are relevant for understanding wage determination under non-crisis conditions.

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