Labour Market Returns to Ability in Developing and Developed Countries: Comparison between Indonesia and the United States

This paper compares the labour market returns to ability in Indonesia and the United States. In Indonesia, I find that the mathematics ability has no significant effect on income, while general cognitive ability positively affects income, with higher ability rewarded at an increasing rate. However, only the highly educated can reap the benefit of higher ability, implying the existence of credentialism. In the US, meanwhile, I find that only mathematics ability is significant, and there is neither non-linear effect of ability on income nor evidence of credentialism. Comparing the results, I find that there are indeed different valuations of skills between developed and developing countries. Higher mathematics ability is more rewarded in the US, while higher cognitive skills is more rewarded in Indonesia.

March 1, 2008
DANIEL SURYADARMA, esearch School of Social Sciences, The Australian National University; SMERU Research Institute

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