Regional Skill Differentials: A Study of the Indonesian Labor Market

This study investigates the patterns and trends in the returns to skill in the Indonesian labor market over the period 2007 to 2013, a period of rising earnings and income inequality. The study takes into account the labor demand and supply across regional development regions and over time. It presents evidence on the returns to skill related to structural changes in the economy through the growth of modern services and the resource boom. It confirms that skill premiums varied across regional development areas. The composition of industries across regions, female labor participation, the proportion of casual workers, the supply of tertiary-educated workers and factors unique to each region are all determinants of the regional skill premiums. The results support the policy focus on developing human capital in Indonesia to meet the rising demand for skilled workers and show the role of the manufacturing sector and minimum wages policy in reducing the skill premium.