The dynamics of labor share decline in manufacturing: Evidence from Indonesia

Abstract

Labour share of income in developing economies has generally declined with increased engagement in international trade, raising concern about adverse distributional consequences of trade for workers. Using a panel dataset of Indonesian manufacturing firms from 1990 to 2015, we evaluate how trade affects the dynamics of labor share from a micro-level perspective. We find that trade liberalization contributes to declining labor share, mainly by shifting market share towards better-performing firms with already-low labor share. While this is in line with the superstar firm framework, such model fails to characterize the labor share dynamics in a developing economy like Indonesia where aggregate markups and concentration do not rise. Instead, this study supports a trade-based explanation for labor share decline.