Disability, employment and wages: evidence from Indonesia

Abstract

PurposeThe purpose of this paper is to quantify the labor market outcomes of people with disabilities (PwD) in Indonesia and compares them to people without disabilities. It first studies the labor force participation of PwD before examining the large and persistent wage gaps they face. It explores whether these wage gaps are explained by differences in productivity, a distinction which has important implications for policies addressing these gaps.Design/methodology/approachThe analysis is based on the Indonesian Family Life Survey Wave 5, which includes unique questions allowing for several definitions of disability. Multinomial logistic regression is used to study differences in type of employment for PwD. Wage gaps are estimated and corrected for selection using propensity score matching, supported by a Heckman selection model and Oaxaca–Blinder decomposition. Comparisons with other physically disadvantaged subgroups and the analysis of heterogeneity by job requirements and sector of work explore whether productivity gaps help explain wage gaps.FindingsPwD generally have lower unconditional labor force participation, but disparities largely disappear when controlling for characteristics. Moreover, patterns vary depending on whether the measure of disability used depends on prior medical diagnosis. PwD that do not require prior diagnosis tend to work in more vulnerable employment. When they are employed for wages, people with these types of disabilities face lower wages, up to 22% lower. Meanwhile, (surprisingly) those with medically diagnosed conditions face no difference or a wage premium. This paper finds compelling evidence that, where a wage penalty exists, a substantial part is unexplained by observable characteristics.Originality/valuePrevious literature on disability has been mostly based on studies of high-income economies. This paper extends the literature to Indonesia, which differs from high-income contexts due to lack of mental healthcare resources and assistive technologies, as well as weaker rule of law. It provides unique insights based on types of disability and the salient dimensions of disability in the workplace. It also provides evidence that productivity differences do not explain the wage gap.