Paper short abstract:

There are circumstances where declining/levelling earnings gaps is more indicative of a bane than a boon for long term economic growth. Using the case of Indonesia, we study the implications of structural characteristics and direct labour market interventions on the dynamics of earnings inequality.

Paper long abstract:

Increasing job polarization and accompanying rise in earnings inequality on account of technological change and globalization over the past few decades have increased concern about the attainability of governments' perennial objective of inclusive growth. Yet, there are circumstances where either declining or levelling earnings gaps may be more indicative of a bane than a boon for a country's long term economic health. Using the particularly interesting case of Indonesia, which reduced and subsequently levelled off its earnings inequality in the midst of impressive growth, we study the implications of structural characteristics and direct labour market interventions on the dynamics of earnings inequality. We find evidence of a stronger role of structural characteristics in a direction that appears to be more indicative of a bane than a boon for long term efficiency and prosperity. We discuss generalisations and policy implications beyond the Indonesian context.