T H E J O U R N A L O F H U M A N R E S O U R C E S • 46 • 4
Child Labor and Trade Liberalization in Indonesia
Krisztina Kis-Katos Robert Sparrow
A B S T R A C T
We examine the effects of trade liberalization on child work in Indonesia, identifying geographical differences in the effects of trade policy through
district level exposure to reduction in import tariff barriers, from 1993 to 2002. The results suggest that increased exposure to trade liberalization is
associated with a decrease in child work among the 10–15 year olds. The effects of tariff reductions are strongest for children from low-skill back-
grounds, older siblings, and in rural areas. Favorable income effects for the poor, induced by trade liberalization, are likely to be the dominating
effects underlying these results.
I. Introduction
The effects of trade liberalization on child labor are widely debated, and public and political interest in the issue is high. From a theoretical perspective
these effects are a priori unclear Ranjan 2001; Jafarey and Lahiri 2002, as trade liberalization acts potentially through several channels, changing relative prices, real
income distribution, wages, and net returns to education. The arising income and substitution effects can both raise and reduce workforce participation of children.
Krisztina Kis-Katos is a research associate at the Institute for Economic Research, Department of Inter- national Economics, University of Freiburg. Robert Sparrow is a lecturer at the International Institute of
Social Studies, Erasmus University Rotterdam. They thank Arjun Bedi, Sebi Buhai, Eric Edmonds, Pedro Goulart, Michael Grimm, Umbu Reku Raya, Guenther Schulze, Bambang Sjahrir Putra, and two anony-
mous referees for useful comments and discussions, as well as seminar participants at Aarhus School of Business, Freiburg University, International Institute of Social Studies, the Second IZA Workshop on
Child Labor in Developing Countries, and the Fourth Annual Conference of the German Research Com- mittee Development Economics. Permission to use the Indonesian survey data in this article may be ob-
tained from the Indonesian Central Bureau of Statistics. The authors will provide contact details for obtaining the survey data and a detailed listing of the data used. The other data used in this article can
be obtained beginning May 2012 through April 2015 from Robert Sparrow, Kortenaerkade 12, 2518AX The Hague, The Netherlands, sparrowiss.nl.
[Submitted August 2009; accepted November 2010] ISSN 022-166X E-ISSN 1548-8004 䉷 2011 by the Board of Regents of the University of Wisconsin System
Empirical evidence on the issue is scarce. Cross-country studies generally find trade liberalization to be associated with lower incidence of child labor on average
Cigno, Rosati, and Guarcello 2002, a relationship that seems most likely to be driven by the effect of trade on income, as more open economies have less child
labor because they are richer Edmonds and Pavcnik 2006. Kis-Katos 2007 finds differential effects of trade openness, with smaller reductions in child labor for the
poorest food exporting countries. However, empirical studies based on micro data and direct evidence from trade reforms are required to understand the heterogenous
effects from trade liberalization and identify the main channels at work. For example, Edmonds and Pavcnik 2005b find that rice price increases due to a dismantling of
export quotas in Vietnam led to an overall decrease in child labor in the 1990s, especially due to the relatively evenly distributed favorable income effects. In con-
trast, Edmonds, Pavcnik, and Topalova 2010 find that in rural India, districts that have been more strongly exposed to trade liberalization have experienced smaller
increases in school enrollment on average, which they argue is primarily due to the unfavorable income effects to the poor and the relatively high costs of education in
these districts.
This study contributes to the microempirical literature by examining the trade liberalization experience of Indonesia in the 1990s, which, given the vast geographic
heterogeneity of the archipelago, offers an interesting case study on the effects of trade liberalization on child work. In preparation to and following its accession to
the WTO, Indonesia went through a major reduction in tariff barriers: average import tariff lines decreased from around 17.2 percent in 1993 to 6.6 percent in 2002.
During that same period the workforce participation of children aged 10–15 years more than halved. Due to Indonesia’s size and geographic variation in economic
structure, the various districts have been very differently affected by trade liberali- zation, which offers us a valuable identification strategy.
Our identification strategy follows that of Topalova 2005 and Edmonds et al. 2010, as we combine geographic variation in sector composition of the economy
and temporal variation in tariff lines by product category, yielding geographic vari- ation in changes in average exposure to trade liberalization over time. We extend
this approach by going beyond the fixed effects approach employed in earlier studies and investigate the dynamic effects of trade liberalization. We also test the robustness
of our results to alternative measures of geographic exposure to trade liberalization, by weighting tariffs on different products by the shares these sectors take in i
regional structure of employment defined by both including and excluding nontrad- ables, and ii the regional GDP. These measures reflect different dimensions of
households’ exposure to trade liberalization: the former two through labor market dynamics, the latter through the distributional effects of local economic growth.
The analysis draws on a variety of data sources. Indonesia’s annual national house- hold survey Susenas provides information on the main activities of children and
their basic socioeconomic characteristics. We use four rounds of this repeated cross- section data, spaced at three-year intervals between 1993 and 2002. As the Susenas
is representative at the district level, we apply our analysis both at the individual level using pooled repeated cross-section data with district fixed effects, and at the
district level with pseudo-panel data for 261 districts. The data on economic structure of the districts comes from information on regional GDP GRDP of the Central
Bureau of Statistics in Indonesia BPS, while district-level employment shares and further controls are based on Susenas. Additional district-level information is derived
from PODES, the Village Potential Census. Finally, information on tariff lines comes from the UNCTAD-TRAINS database.
We find that stronger exposure to trade liberalization has led to a decrease in child labor among the 10–15 year olds. The effects are strongest for children from low-
skill backgrounds, for older siblings, and in rural areas. Favorable income effects for the poor induced by trade liberalization are likely to be the dominating effects
underlying these results as we find larger decreases in poverty in the districts that were most affected by trade liberalization.
The next section of the paper provides a theoretical framework for our analysis. The third section elaborates on the context of the tariff reductions in Indonesia, and
the developments in child labor for our study period. Section 4 presents the data and sets out the identification strategy. The results are then discussed in Section 5
while Section 6 concludes.
II. Theoretical Background
