This paper uses household survey (Sakernas) data from the 1996 and 2004 to estimate the determinants of
earnings in Indonesia. The Indonesian labour market is segmented, with a majority of workers engaged in
informal-sector occupations, and earnings data are available only for formal-sector workers (salaried
employees). This posed problems for the estimation of earnings equations, because selection into different
labour market statuses is likely to be non-random. In order to describe selection into different labour
market statuses we use the most general version of the method proposed by Dubin and McFadden (1984),
which Bourguignon, Fournier and Gurgand (2007) proved to be preferable to other available multinomial
selection methods. We also deal with reverse causality between education attainment and earnings by
estimating the selection equations using an instrumental variable technique. Our findings cast doubt on the
use of a binomial selection rule and suggest that workers with higher levels of educational attainment are
most likely to find a job in the formal sector, and that the informal sector is perceived by those workers
who cannot obtain a job in the formal sector as an alternative to inactivity. This Working Paper relates to
the 2008 OECD Economic Assessment of Indonesia (www.oecd.org/eco/surveys/indonesia)....

The Determinants of Employment and Earnings in Indonesia: A Multinomial Selection Approach

10.1787/224864812153