“Economic development and the spatial allocation of labour: Evidence from Indonesia” (Gharad Bryan)

Gharad Bryan (LSE) presented his research on the spatial allocation of labour and economic development, showcasing evidence from Indonesia. He began by observing the wide differences in nominal wages across space, and posed two questions. Firstly, would moving people across space imply increases in productivity? Here, the two main issues to consider are selection and the quantitative effect on productivity of such a move. Secondly, if the answer to the first question is positive, the question becomes about why people do not make such moves. Bryan referred to two possible explanations, namely amenity differences and the associated costs of movement.

Bryan highlights that the facts show that both selection and movement costs are present. He presented a model, consistent with these facts, to answer the questions, using US and Indonesian census data. The structural estimates show that movement costs have decreased over time (1995-2012) in Indonesia and that such costs are much higher than in the US. Bryan also finds that amenity is negatively correlated with productivity. Quantitatively, the results show that reduced movement costs and changes in amenity both separately account for approximately 25% of growth. Bryan explained that higher movement costs explain approximately 5% of the US-Indonesia gap.

Bryan concluded by explaining that if the heterogeneity observed in wages across space is due to costly migration or amenity differences, this may represent an opportunity and a role for policy. If, however, selection accounts for most of this difference there is less room for policy to have an effect.

Daniel Sturm (LSE), the discussant of the session, began by emphasising the importance of the issues discussed in this paper, stating that the implications of distortions in the spatial distribution of economic activity are under-researched but that this is a first-order question. Sturm relayed concerns regarding the way in which the model presented amenities, arguing that the model is unable to capture the empirical regularity that larger locations pay higher wages. According to Sturm, the key policy question is how government policy can reduce the estimated migration costs to achieve better job matches. He stresses the importance of understanding what underlies the effect of distance on migration costs prior to developing and implementing costly policy initiatives, such as building highways to reduce migration costs.

By Michelle Jacob, igc Hub Economist