The value of political connections for labour market outcomes: evidence from Indonesia
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ACDE Seminar
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In segmented labour markets, personal connections can be very important for obtaining well-paying jobs. There is abundant empirical evidence showing the positive impact of social networks on labour market outcomes. Anecdotal evidence from developing countries suggest that a political connection confers an advantage in the labour market, but empirical estimates of the impact are scarce. This paper fills this gap by estimating the impact of political connections on earnings in Indonesia. A sudden political change from an autocratic regime to democracy in 1999 exogenously diluted political connections formed during the former autocratic regime for some fraction of previously connected individuals. This natural experiment allows me to address endogeneity issues inherent in estimating the impact of having political connections. The results show that political connections increased monthly earnings by 44 per cent. Further, part of the earnings differential between connected and unconnected individuals is driven by human capital differences.
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