Paper short abstract:

The study shows that structural transformation among rural people, mostly poor farmers, significantly improve their welfare. Considering their skill-gap, the village government could establish village-owned enterprises under Village Law to facilitate and empower the farmers to acquire the new skills

Paper long abstract:

Previous study showed that to let the poor equally benefit from economic growth, the right sources of growth must be identified first. In rural areas, service growth is identified to have significant impact to reduce poverty compared to agriculture or manufacture. Given that the majority of people in rural areas are working in agriculture, it remains unclear whether shifting to non-agricultural sector, particularly services, would improve their welfare considerably. This paper evaluates the impact on individual welfare in rural areas based on their decision to shift working from agricultural to non-agricultural sector in the mid-term (7 years) and the long-term (14 years). Utilizing longitudinal data, Indonesia Family Life Survey (IFLS) 1993, 1997, 2000, 2007, and 2014, we performed Propensity Score Matching (PSM), Double Difference-in-Difference (DDID), as well as generating bounds on treatment effect to address the selection bias. The findings show that in micro level the employment structural transformation in rural areas is able to significantly improve both the income and the consumption level. Therefore rural farmers, lying in bottom 15% of rural income, might catch up with the average income growth level which eventually flatten out rural inequality. This may lead to overall inequality since the majority of poor people are concentrated in rural areas. In light of this, we should also consider the skill-gap in shifting to non-agricultural job, in which the village government could utilize Village Law No. 6/2014 to establish the village-owned enterprises which could facilitate and empower the farmers to acquire the new skills.