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The dynamics of labor share decline in manufacturing: Evidence from Indonesia

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  • Riandy Laksono
  • Arianto A. Patunru

Abstract

Labour share of income in developing economies has generally declined with increased engagement in international trade, raising concern about adverse distributional consequences of trade for workers. Using a panel dataset of Indonesian manufacturing firms from 1990 to 2015, we evaluate how trade affects the dynamics of labor share from a micro-level perspective. We find that trade liberalization contributes to declining labor share, mainly by shifting market share towards better-performing firms with already-low labor share. While this is in line with the superstar firm framework, such model fails to characterize the labor share dynamics in a developing economy like Indonesiawhere aggregate markups and concentration do not rise. Instead, this study supports a trade-based explanation for labor share decline.

Suggested Citation

  • Riandy Laksono & Arianto A. Patunru, 2024. "The dynamics of labor share decline in manufacturing: Evidence from Indonesia," Departmental Working Papers 2024-3, The Australian National University, Arndt-Corden Department of Economics.
    • Handle: RePEc:pas:papers:2024-3
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    File URL: https://acde.crawford.anu.edu.au/sites/default/files/publication/acde_crawford_anu_edu_au/2024-06/acde_td_laksono_and_patunru_2024_03_1.pdf
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    JEL classification:

    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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