A Non-Healing Wound: Lasting Consequences Of Unemployment And Informal Self-Employment: An Empirical Evidence From Indonesia

Economic inactivity has long been seen to lead to the deterioration of future labor market prospects. This negative effect on future labor outcomes potentially lasts for the individual’s entire remaining working lifetime. Although there seems to be a consensus on the negative relationship between present spells of unemployment and future labor market outcomes, the literature discussing why and how this is the case, especially in developing countries, is limited. The challenges of labor market transitions are, without a doubt, complex, and the cases for developing countries could be different from those for developed countries. Therefore, to further extend the discussion in the literature, this paper attempts to investigate how self-employment in the informal sector, rather than unemployment per se, influences the scarring effects, especially in the context of Indonesia, where informality is prevalent. This paper finds that scarring effects due to previous unemployment and selfemployment are more observable among senior workers. Besides, there is also evidence of scarring effect due to self-employment among young workers age 25-34 years, which is more substantial than that due to unemployment. The estimation results show that the duration of unemployment negatively affects subsequent earnings, particularly for senior workers and workers in the lowincome group. In the meantime, years spent in self-employment has no significant effect on subsequent earnings, either when the sample is disaggregated by age, income distribution, gender, or location of residence. This evidence could indicate that the opportunity for human capital accumulation in self-employment is limited and/or employers may use this information as an indicator of low productivity.