Examining the drivers of changes in mean earnings and earnings inequality in Indonesia

Abstract This article examines the main drivers behind changes in mean earnings and earnings inequality in Indonesia between 2001/2002 (data for 2001 and 2002 are combined) and 2018. During this period, there was an increase in workers' education level, average age, job quality and mean earnings. More women participated in the labor market, but women earn lower wages than men, therefore mean earnings fell. For the overall period, a decline in educational returns at all levels of education contributed negatively to earnings. Narrowing wage premia across provinces contributed to the increase in mean earnings. Indonesia's Gini index rose during this period, driven by the education distribution effect and the spatial location (place of residence) premium effect. Although improvement in education levels increased mean earnings, this was inequality‐increasing due to the “paradox of progress” (exponential wage returns to education). There is a need for complementary policies to attenuate the inequality‐increasing education and spatial location effects as well as gender wage gap.