The decline and levelling off of earnings inequality: boon or bane for a growing economy?

Virgi Sari and Ralitza Dimova

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 (search for similar items in EconPapers)
JEL-codes: J08 J31 O15 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2024-12-31
New Economics Papers: this item is included in nep-sea
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Published in European Journal of Development Research, 31, December, 2024, 36(6), pp. 1448 - 1470. ISSN: 0957-8811

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