Are Rice Prices an Effective Anti-Poverty Tool in Indonesia: A Rural-Urban Labour Market Integration Approach

• Agricultural Economics Workshop
• Departmental Seminar

Date and Location

Thursday, October 31, 2013, 4:10 PM - 5:30 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

Global poverty is especially a rural issue and labor markets play a crucial role. With an eye to poverty policy, we study rural wages in Indonesia. Given limited time series data we keep our model of the agricultural labor market relatively simple to determine agricultural and urban drivers that are most important in determining the agricultural wage rate. We test a controversial hypothesis: to what extent does farm labor face a horizontal demand function? If agriculture is a price-taker in its labor market, then farm commodity price subsidies, such as raising the rice price, would increase the quantity of labor demanded but not agricultural wage rates. If urban and rural labor markets were well integrated, non-agricultural variables would be the prime determinants of farm wages. Then effective poverty reduction strategies would ignore farm prices of rice, and other agricultural variables. Policy makers should instead focus on job creation in the non-farm sector and facilitate rural-urban migration . An increase in farm rice prices would primarily raise rice land prices. This issue has deep roots. As far back as Ricardo, but in the modern literature starting with Arthur Lewis (a Nobel Laureate in 1979) in the early 1950s, many development economists argued in support of labor market dualism. According to Lewis and his followers, the agricultural labour market was distinct from industrial labour markets. This view remains controversial. Finding that agriculture is a price taker for labor would contradict the labor market dualism hypothesis of Lewis, at least for Indonesia. This paper estimates the long-run relationships among real agricultural wage rates, urban wage rates, agricultural prices, and urban GDP, using the Johansen co-integration framework. The estimates of the long run elasticities are obtained based on 1983-2009 quarterly data compiled from Indonesian government statistics. Results for three most populated Indonesian provinces (West, Central and East Java) show that urban variables (real urban wage rates and urban GDP) are much more important than rural variables (the rice price) in determining the long-run rural wage rates. The long-run elasticity is 0.3 for urban wage rates, 0.2 for urban GDP and only 0.1 for the agriculture (rice) price. The policy implications of these findings are significant. The 25% rice import tariff of 2000 would have raised rural wage rates in Java by about 2.6%, a negligible one-time increase. By contrast, more rapid urban GDP growth and steady increases in urban wage rates would have increased wage rates over the decade since 2000 by ten times as much. Dismantling the rice tariff and related non-tariff barriers would have virtually no effect on the wage rate of rural landless, and would benefit them by lowering their costs of rice (as they are mostly net rice consumers). Expanding growth in the non-farm sector would have a much stronger positive effect on raising incomes of the poorest individuals in rural areas.