Labour regulation shift and differential trends between labour-intensive and non-labour-intensive manufacturing in Indonesia

This paper analyses the relationship between a significant shift to much more stringent labour market regulations in Indonesia in the early 2000s and changes in the manufacturing sector. While this regulation shift has been associated with the stagnation of the manufacturing sector in Indonesia in the last two decades, there is little rigorous evidence to support the association. We compare plants in labour-intensive and non-labour-intensive manufacturing industries over time, and use the difference-in-difference method to analyse different employment trends between these two groups around the time of the labour regulation change. We find that employment in plants in labour-intensive manufacturing declined by 4 to 14% 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 the Multi Fibre Agreement. Our findings suggest that more stringent labour regulations likely contributed to the stagnation of labour-intensive manufacturing since the early 2000s in Indonesia.