Poverty, labor markets and trade liberalization in Indonesia

Abstract

We measure the effects of trade liberalization over the period of 1993–2002 on regional poverty levels in 259 Indonesian districts, and investigate the labor market mechanisms behind these effects. The identification strategy relies on combining information on initial regional labor and product market structure with the exogenous tariff reduction schedule over four three-year periods. We add to the literature on local labor market effects of trade policies by distinguishing between tariffs for output markets and for intermediate inputs, and finding that poverty reduced especially in districts with a greater sector exposure to input tariff liberalization. Among the potential channels behind this effect, we show that low-skilled work participation and middle-skilled wages were more responsive to reductions in import tariffs on intermediate goods than to reductions in import tariffs on final outputs. These results point towards increasing firm competitiveness as a driving factor behind the beneficial poverty effects.