Labour regulation shift and labour intensive manufacturing

Author name: 
Nurina Merdikawati
Sarah Xue Dong

This paper analyses the relationship between a significant shift to more stringent labour market regulations in Indonesia in the early 2000s and changes in employment patterns in the manufacturing sector. While this regulation shift has been associated with a notable decline in employment in labour intensive production in Indonesian manufacturing in the last two decades, there is little rigorous evidence to support the association. This study compares plants in labour intensive and non-labour intensive manufacturing industries over time, and use difference-in-difference method to analyse different employment trends between these two groups around the time of the labour regulation change. The findings indicate that that employment in plants in labour intensive manufacturing declined by 4 to 14 percent relative to plants in non-labour intensive manufacturing around the time of the labour regulation change. This pattern is robust to using different measures of labour intensity, and to controlling for other policies that can affect different industries differently during the same period including trade liberalisation, China’s ascension to WTO and changes in Multi Fibre Agreement.

Keywords: Large and medium manufacturing; labour intensive manufacturing; labour regulations; employment; difference-in-difference JEL codes: D22; J08; J21; L60; O14 *

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