Urbanization and labor productivity in Indonesia

This chapter aims at examining the key variables of labor productivity, wages, and employment in the context of Indonesia's rapid urbanization. It tries to discern whether workers in Indonesian cities are more productive than workers in rural areas, and if so, how much is due to the agglomeration of externalities and how much to location and economic activity (World Bank 2009).1 This area of inquiry has not been widely researched in Indonesia, in contrast to some recent work in the People's Republic of China (PRC) and India (Chauvin et al. 2016). The chapter first considers average wage levels and worker productivity in Indonesia and whether there are significant differences if workers are located in large cities, small cities, or rural districts. There seem to be some differences in productivity based on location that cannot be directly explained by the standard factors such as wages and education levels. Subsequently, the chapter also considers whether these differences in worker productivity may be due to the predominant types of economic activity of a district (agriculture, mining, industry, or services). The chapter finds that the types of activities that require a high share of skilled workers (who have correspondingly higher wages) are more likely to be located in urban districts. This is particularly true of services. At the same time, urban districts also tend to attract a very high share of low-productivity services.