Could a Resource Export Boom Reduce Workers’ Earnings? The Labor Market Channel in Indonesia

For a decade from 2000 Indonesia underwent a natural resource export boom. Aggregate income rose, but real labor earnings stagnated. Employment rose mainly in low-skill sectors with predominantly informal employment arrangements. In this paper we reveal causal connections from the aggregate phenomenon of Dutch Disease to these labor market outcomes. We first explain broad sectoral trends, then, integrating data from several national surveys, investigate sources of variation in boom-era labor earnings. We use instrumental variables to address issues of endogeneity and selection in earnings equations. After controlling for individual and district features we find that intensity of oil palm production, a key booming resource export, robustly predicts diminished formal employment, and that lower formality, in turn, robustly predicts lower earnings. Our findings establish causal linkages absent from prior studies, and so provide a structural dimension to ongoing debates over persistent poverty, rising inequality, and lack of educational progress in Indonesia.