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Trade-employment linkages in Indonesian agriculture

David Vanzetti Australian National University. Trade-employment linkages in Indonesian agriculture. Jakarta, Indonesia, July 13th, 2010. Recent interest in trade and employment. With increased trade, countries exposed to external shocks Positive and negative GFC Food self-sufficiency

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Trade-employment linkages in Indonesian agriculture

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  1. David Vanzetti Australian National University Trade-employment linkages in Indonesian agriculture Jakarta, Indonesia, July 13th, 2010

  2. Recent interest in trade and employment • With increased trade, countries exposed to external shocks • Positive and negative • GFC • Food self-sufficiency • Does trade liberalisation costs jobs?

  3. Illustrative scenario • ASEAN – China FTA • Impacts on labour market in agriculture • Use global general equilibrium model, GTAP

  4. Trade and employment linkages • Trade and growth • +ve, causaulity? • Demand for labour intensive goods? • Capital-labour substitution • Econometric studies may be useful

  5. Structural adjustment • Unemployment in specific sectors • Durations of unemployment • Trade policy vs labour policies? • Low labour productivity in agriculture. Better use? • Case studies may be useful

  6. GTAP • For policy scenarios • General equilibrium trade model • Multi-region, multi-sector • Capital, labour, land, intermediate inputs • Two labour factors • Skilled • Unskilled

  7. Assumptions • Perfect competition (e.g. agriculture) • No excess profits • Constant returns to scale • Foreign products imperfect substitutes

  8. Demand for labour in GTAP Dlabour = f(wages, price of output, technology) Dlabour = σ (w-p) σ = elasticity of substitution Labour use decreases with wages and increases with output price. Labour use also increases with price of capital, land and other inputs

  9. Demand for labour • Closely related to output • K/L substitution

  10. Agricultural sectors in GTAP

  11. Data for Indonesia • K/L ratios • Labour/output ratios

  12. Capital labour ratios Low in agriculture, but dubious data

  13. Labour output ratios xx

  14. Illustrative scenario • ASEAN China FTA • Assume no exemptions • Long run closure

  15. Labour market closures • Fixed employment • Fixed real wages • Some combination

  16. Results • Labour use • Real wages • Real incomes

  17. Employment and wages Change in unskilled employment and real wages under alternative labour market assumption

  18. EmploymentPrimary agriculture Change in unskilled labour use by sector Small changes

  19. EmploymentPrimary agriculture Absolute change in unskilled labour use by sector, Flex scenario Rice, palm oil

  20. EmploymentProcessed agriculture Change in unskilled labour use by sector Mostly +ve with Flex

  21. EmploymentProcessed agriculture Absolute change in unskilled labour use by sector, Flex scenario Fish, ‘other food’

  22. Change in welfare with alternative labour market closures Greater welfare gains withflexible labour force

  23. Implications • AFTA-CHN FTA will generate demand for labour intensive agricultural goods in IDN • Results in increased wages and/or increased employment • Fixed wages closure allows increase in labour use with large welfare implications • Some combination more realistic • Negative impact in some sectors

  24. Limitations • Data on labour use • K/L ratios split from primary agriculture • Only two labour sectors • Not linked to household data (poverty) • Labour response data (supply elasticity)

  25. ExtensionWith RinaOktaviani (IPB) • Combine trade impacts with single country CGE • 74 sectors (inc 30 ag) • Ten household types • Two regions (Java, non-Java) • 2005 Social Accounting Matrix

  26. Ten households • landless rural, • rural with less 0.5 ha • with 0.5 – 1 ha, • with more than 1 ha • low income rural non-agricultural, • medium income rural non-agricultural • high income rural non-agricultural • low income urban • medium income urban • high income urban

  27. The End

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