The Decline and Levelling Off of Earnings Inequality: Boon or Bane for a Growing Economy?

Virgi Agita Sari () and Ralitza Dimova
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Virgi Agita Sari: London School of Economics and Political Science
Ralitza Dimova: The University of Manchester, Arthur Lewis Building

The European Journal of Development Research, 2024, vol. 36, issue 6, No 4, 1448-1470

Abstract: Abstract This paper investigates evidence on deficits in economic inclusion, focussing on the labour market in Indonesia. Increasing job polarization and an accompanying rise in earnings inequality on account of technological development and globalisation over the past few decades have augmented concerns about the attainability of governments’ perennial objective of inclusive growth. However, there are circumstances in which declining or levelling earnings gaps may be more of a bane than a boon for a country’s long-term economic health. Using the particularly interesting case of Indonesia, which has reduced and subsequently levelled off its earnings inequality in the midst of impressive growth, this paper studies how structural factors and labour market policies influence dynamics of inequality. The study finds evidence of a strong role of structural characteristics, which appears to indicate that reductions in earnings inequality may be more of a bane than a boon for Indonesia’s long-term prosperity. The paper concludes with broader insights and a discussion on policy implications that extend beyond the Indonesian context.

Keywords: Earnings inequality; Minimum wage; Quantile decomposition; Indonesia (search for similar items in EconPapers)
JEL-codes: C21 J08 J31 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41287-024-00646-9

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