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Working Papers

Title: The Role of Self-Selection in Agricultural Productivity Gap (APG): Evidence from Indonesia
Status: Job Market Paper (draft)
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Abstract: This paper examines the contribution of worker self-selection to Indonesia’s agricultural productivity gap (APG), using the first three waves of the Indonesia Family Life Survey (1993-2000). It adopts a correlated random coefficient (CRC) framework that recovers unobserved comparative advantage from individuals’ sector-choice trajectories without imposing a parametric distribution on latent abilities and distinguishes selection-relevant comparative advantage from other time-invariant worker heterogeneity. The estimated selection effect is -0.05, with a standard error of 0.38, suggesting, albeit imprecisely, that unobserved comparative advantage generates little differential payoff across sectors. The average earnings gap between non-agricultural and agricultural workers is approximately 0.95 log points. Under the normalization adopted in the analysis, sector-wide efficiency differences account for about 37% of the gap, observed worker characteristics for about 39%, and unobserved worker heterogeneity for the remaining 24%. Within this unobserved component, selection on unobserved comparative advantage accounts for only about -0.5% of the APG, weakly narrowing rather than widening it. Thus, although workers differ substantially across sectors, sorting on unobserved comparative advantage plays only a minor role in explaining the APG. The observed gap therefore cannot be interpreted directly as the aggregate productivity gain available from reallocating existing workers out of agriculture.