Stuck for life? The Long-Term Consequences of Initial Employment in the Informal Sector, with Evidence from Indonesia

This paper provides insight into the costs of coping with employment shocks through informal sector employment by examining the long-term impact of completing high school during a recession on both earnings and the ability to find formal sector work. The context is Indonesia, which in 1998 suffered one of the world’s most severe downturns in the last thirty years. We ask: what are the long-term consequences for life outcomes (employment, earnings, consumption) of early work experience in the informal and self-employed sectors? Were crisis-affected youth more or less likely to suffer adverse consequences from beginning their careers in the informal sector than youth taking a first job in the informal sector during other periods? We use individual, family, and community data from all rounds of the Indonesia Family Life Survey (IFLS), take advantage of the education, employment, and migration histories available in the data, and combine them with characteristics of local labor markets and the macro economy, constructed from the annual national labor force survey (the SAKERNAS), to answer these questions. We use local labor market and macroeconomic shocks at the district at the time important schooling and initial employment decisions were being made to identify the effects of these decisions on long-term individual outcomes.