ABSTRACT
In a capital-scarce and labour-abundant economy, real wages in the modern sector are not supposed to rise significantly. Wages may be somewhat higher in the modern urban areas than in the rural hinterland, enough to attract surplus labour out of agriculture, but at a relatively stable wage rate, or wages that rise only a little over time. This allows entrepreneurs to earn profit, which they can reinvest to generate more economic growth and employment (Lewis 1954; Fields 2004). In this traditional view of a very elastic labour supply curve, significant real wage improvements can only be caused by non-market forces until all surplus labour has been exhausted and a turning point reached. Indonesia has conducted labour force surveys over 30 years in most years between 1976 and 2007, and thus provides an ideal opportunity to test the above hypothesis in this fourth most populous country in the world.
