Effect of Trade Liberalisation on Wage Inequality in Indonesia

Abstract

This study attempts to find out the influence of trade liberalisation on wage inequality in Indonesia. A two-stage estimation approach is used. Using the national labour force survey dataset, the study estimates industry wage premium and industry-specific skill premium in the first stage conditional on individual worker characteristics. In the second stage, the study regresses industry wage premium and industry-specific skill premium on tariff as a measure of trade liberalisation, respectively. It is concluded that trade liberalisation significantly contributes to increasing wage inequality. This contribution occurred through changes in industry wage premium but not industry-specific skill premium.