The Heterogeneous Impacts of Digital Transformation and Investment on Indonesia's Labour Market

In this paper, we provide a nuanced and detailed analysis of the effects on the labour market of digital transformation and investment in Indonesia. This paper is divided into three strands of work, which can be read independently or together. In the first strand, we discuss the impact of digital transformation on rising wage inequality using the approach of skill-biased technological change. Building on the work by Jacoby et al. (2021), we explore channels that may attenuate the skill-biased technological change. The second strand looks at rising wage inequality arising from routine-biased technological change, which theorises that it is those performing routine tasks in their jobs who are left behind as automation emerges, not necessarily the less-educated workers. The third strand looks at the impacts of investment in the digital sectors on the wages and employment of various types of workers. The overall narrative is clear: workers who are more advantaged to begin with, such as high-skilled and bettereducated workers, benefit more from digital transformation and digital investment than low- and midskilled and lower-educated workers, who are more likely to lose out. There are, however, cases where high-skilled workers may also be adversely affected. This is the case in Indonesia for the period until 2019 (2016 for the study on the effects of digital investment). To address the digital divide potentially arising from skill-biased technological change, routine-biased technological change, and digital investment, we recommend that policies to accelerate Indonesia’s digital transformation and liberalise its digital investment are accompanied by policies on education, the labour market, investment, trade (including service trade), and competition. Our policy recommendations shed light on the findings in this report while considering that digital technologies will continuously evolve that may have different impacts on the labour market.