Margherita Comola

How Does Decentralized Minimum Wage Setting Affect Employment and Informality? The Case of Indonesia

The Indonesian labor market is characterized by widespread and growing informality (defined as non-salaried work). To what extent can the growth in informality be attributed to a sharp increase in the real value of the minimum wage since 2001, when minimum-wage setting was decentralized to the provincial governments? To answer this and related questions we use survey data on the labor market, on household income and expenditure, and on the industrial sector to construct a district-level dataset spanning the period 1996 to 2004. The effects of changes in the minimum wage on unemployment, formal-sector employment, and the incidence of informality in urban areas are estimated by fixed effects with a seemingly unrelated regression estimator. We find that an increase in the ratio of the minimum to the mean wage is associated with a net increase in employment: a rise in informal-sector employment more than compensates for job losses in the formal sector.

Testing Unilateral and Bilateral Link Formation

Empirical analysis of social networks is often based on self-reported links from survey data. How we interpret such data is crucial for drawing correct inference on network effects. We propose a method for testing whether survey responses can safely be interpreted as a link and, if so, whether links are generated by a unilateral or bilateral link formation process. We present two empirical illustrations of the test on risk-sharing links in Tanzania and on communication among Indian farmers, respectively, demonstrating the ability of the methodology to discriminate between competing data-generating processes.

Formation of Migrant Networks

In this paper, we provide the first direct evidence on the internal structure of the migrant social network. By using a purposely designed survey on Sri Lankan immigrants living in Milan, we show that the pattern of within-group link formation is heterogeneous across immigrants, and differentiated according to the network function (i.e., accommodation, credit, job-finding). We find that migrants tend to interact with co-nationals who come from nearby localities at origin, while the time of arrival has a U-shaped effect. Once the link is formed, material support is provided mainly to relatives, while early migrant fellows are helpful for job-finding.

Democracies, Politics and Arms Supply

Throughout the 20th century arms have not only been tradable goods, but also policy instruments. This paper focuses on countries supplying major conventional weapons (MCW), and investigates whether changes in political conditions impact the quantity of MCW supplied to third countries. In particular, it concentrates on democratic exporters and estimates a gravity-type panel tobit for the years 1975-2004. Results suggest that the exporters chief executive, being right-wing, has a positive and significant impact on MCW exports. This may reflect a general right-wing tendency to support national industry and deregulate heavy industry exports. It is also found that higher concentration of power is associated with lower MCW exports, and that executives which serve the last year of their term and can run for re-election tend to decrease MCW exports.

Salaried employment and earnings in Indonesia: New evidence on the selection bias

This article uses household survey data to estimate the determinants of earnings in Indonesia, a country where nonsalaried work is widespread and earnings data are available for salaried employees only. We deal with the selection bias by estimating a Full-Information Maximum Likelihood (FIML) system of equations, where selection into the labour market is modelled in a multinomial setting. We find that some estimated parameters of the earnings equation differ from a binomial selection procedure by Heckman (1979), in particular for those variables with the strongest impact on the selection into the different labour-market statuses. However, the estimated returns to education are unaffected, even when we deal with the endogeneity of educational attainment following Duflo (2001). Overall, our findings show that the choice of the selection rule affects the estimates of the earnings determinants in the Indonesian labour market.

Educational Programs in Rural Nepal: Peer Communication and Information Spillovers

This paper studies how individuals exchange information with peers and how this information circulates and spreads through informal channels, focusing on the role of the community as a bridge for information flows. I concentrate on three rural villages in Nepal where an educational radio program about family planning and modern contraception methods is broadcasted. Women can access the information in different ways: they can personally listen to the radio program, they can speak with friends who listen to the radio program, or they can receive indirect information reported from third sources such as friends of their friends. I explicitly take into account the structure of the community network to show that also the information reported from third sources is a determinant of the womens adoption of modern contraception methods. I then address the issue of link formation and rule out the potential endogeneity of network, reconfirming that indirect exposure matters and personal links are an effective bridge for information flows.

Estimating Local Network Externalities

This paper takes a network perspective t oinvestigate how rural households in developing countries form the links through which they provide and get economic support. I test the hypothesis that indirect contacts (e.g. friends of friends) matter for link formation. An estimation procedure of a network formation model a la Jackson and Wolinsky (1996) is proposed and applied to data on a single village in Tanzania. Results show that when agents evaluate the net advantage of forming a link they also consider the wealth and the position of indirect contacts. The network externalities from indirect contacts are negative, which suggests a mechanism of competition over scarce resources. This paper proposes the first structural estimation of an endogenous network formation model, and also contributes to the development literature by overcoming the dyadic regression approach and providing evidence that village-level network structure has an explanatory value disregarded by all previous studies.This paper illustrates a procedure to estimate externalities from indirect connections (so-called network externalities) using network data. This structural approach is suitable for static games of endogenous network formation with partial information, and relies on the equilibrium conditions of pairwise stability (Jackson and Wolinsky, 1996). Operationally, it consists in a two-step estimator which addresses omitted variable endogeneity. When the estimation protocol is applied to risk-sharing data within a Tanzanian village, results indicate that indirect connections matter. Network externalities are found to be negative, which can be interpreted as competition over scarce resources.

Treatment Effect Accounting for Network Changes: Evidence from a Randomized Intervention

We study how social networks change as a result of an exogenous expansion in formal financial access and show how to estimate the effects of these changes on household outcomes. We use a unique household panel dataset that contains detailed information on the network of informal financial transactions before and after a field experiment that randomized access to savings accounts in Nepal. First, we provide evidence that the exogenous intervention affected the network of informal financial transactions. Second, we propose a dynamic model of peer effects in household expenditure that accounts for changes in the network due to the intervention. We show that disregarding such changes would lead to downward-biased peer-effect estimates. JEL codes: C31; D85; G2; O16Networks may rewire in response to interventions. We propose a measure of the total treatment effect for those situations where an intervention may affect the network structure. To build this measure, we develop a treatment response model allowing for dynamic peer effects. We illustrate our results using unique panel data on the network of informal financial transactions before and after a field experiment that randomized access to savings accounts in Nepal. Using data on expenditures in medicines and traditional remedies, we show that standard treatment effect measures neglecting network changes could be underestimated by over one third in this context.

The Formation of Migrant Networks

This paper provides the first direct evidence on the determinants of link formation among immigrants in the host society. We use a purposely-designed survey on a representative sample of Sri Lankan immigrants living in Milan to study how migrants form social links among them and the extent to which this network provides them with material support along three different dimensions: accommodation, credit, job-finding. Our results show that both weak and strong ties are more likely to exist between immigrants who are born in close-by localities at origin. The time of arrival has a U-shaped effect: links are more frequent between immigrants arrived at the same time, and between long-established immigrants and newcomers. Once the link is formed, material support is provided mainly to relatives while early migrant fellows are helpful for job finding.

How Does Decentralised Minimum-Wage Setting Affect Unemployment and Informality?

The Indonesian labour market is characterised by widespread informality. To some extent, these outcomes can be attributed to a sharp increase in the real value of the minimum wage since 2001, when minimum-wage setting was decentralised to the provincial governments. To test this hypothesis, this paper uses survey data on the labour market (Sakernas), household income and expenditure (Susenas) and the industrial sector (Survei Industri) to construct a district-level dataset spanning the period 1996 to 2004. The effects of changes in the minimum wage on unemployment, formal-sector employment and the incidence of informality in urban areas are estimated separately by fixed effects and jointly by a seemingly unrelated regression (SUR) estimator. Our findings show that an increase in the minimum-to-mean wage ratio is associated with a net increase in employment: a rise in informal-sector employment more than compensates for job losses in the formal sector. This Working Paper relates to the 2008 OECD Economic Assessment of Indonesia (www.oecd.org/eco/surveys/indonesia).