Wages, productivity and the evolution of inequality in Indonesia: A case study on manufacturing sector

This paper looks at the dynamics of wage inequality and productivity in the manufacturing sector. Although the manufacturing sector maintains its role as the largest contributor to the overall GDP and is the main engine of growth, the Indonesian economy seems to have experienced negative deindustrialization. Despite this trend, manufacturing sector is still viewed as the main source of quality employment and many has advocated for revitalization of this sector. The de-linking trend between wage and productivity in the overall manufacturing sector is evident, but the dynamics within the sector is not homogenous. Significant wage and productivity gaps between large-medium (LM) and cottage-small (CS) manufacturing firms are found. In contrast to the overall de-linking trends in the sector, the positive link between wage and productivity in the large-medium (LM) manufacturing industry has led to a positive correlation between real wage and employment. This is analogous to the ideal situation where wage increases when the overall economy (employment and GDP) expands.