Productivity, wages and employment: evidence from the Indonesia's manufacturing sector

This paper examines the links between productivity, wages and employment in Indonesia's manufacturing sector utilizing the rich datasets of National Labour Force Survey (Sakernas), National Income Account and Manufacturing Statistics. A decoupling trend between real wages and productivity in the overall manufacturing sector is evident, but the dynamics within the sector is far from homogenous. Wages and productivity are further disaggregated into large–medium (LM) and cottage–small (CS) manufacturing firms and significant gaps between LM and CS firms are found. This paper challenges the conventional wisdom of negative wage elasticity with respect to employment. In contrast to the overall diverging trend between real wage and productivity in the overall manufacturing sector, a positive link between wages and productivity in the LM manufacturing industry has led to a positive correlation between wages and employment. This is analogous to the ideal situation where both productivity and wage increase, while the overall economy (employment and output) expands.