Scandinavian Working Papers in Economics

EIJS Working Paper Series,
Stockholm School of Economics, The European Institute of Japanese Studies

No 169: DO EDUCATION EARNINGS DIFFERENTIALS REFLECT PRODUCTIVITY?: EVIDENCE FROM INDONESIAN MANUFACTURING 1996

Sadayuki Takii ()
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Sadayuki Takii: The International Centre for the Study of East Asian Development, Postal: The International Centre for the Study of East Asian Development, Kitakyushu, 11-4 Otemachi, Kokurakita, Kitakyushu, 803-0814 JAPAN,

Abstract: The purpose of this paper is to examine the efficiency of labor markets for workers with different levels of educational achievement in Indonesian manufacturing plants in 1996. Specifically, the paper asks (1) are earnings for more educated workers higher than for less educated workers, and (2) do earnings differentials between more educated workers and less educated workers reflect corresponding productivity differentials? The empirical findings suggest that more educated production workers earned more than less educated workers. However, the results suggest that the earnings differentials between more and less educated workers were smaller than corresponding differentials in marginal products for production workers. This finding implies that some of the labor markets examined were not perfectly competitive. Although the precise nature of the imperfect competition cannot be identified with this methodology, the results also imply that the allocative inefficient performance of some plants partially contributed to the inefficiency of the labor markets.

Keywords: Labor productivity; Wage differentials; Indonesia

JEL-codes: J24; J31; O12

24 pages, January 30, 2003

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