The Effect of Political Connections on Labour Market Outcomes: Evidence from Indonesia
In segmented labor markets, personal connections can be very important for obtaining well-paying jobs. There is abundant empirical evidence showing the positive impact of social networks on labor market outcomes. Anecdotal evidence from developing countries suggest that a political connections confers an advantage in the labor market, but empirical estimates of the impact are scarce. This paper fills this gap by estimating the impact of political connection on wages and employment in Indonesia. A sudden political change from an autocratic regime to democracy in 1999 exogenously diluted political connections formed during the former autocratic regime for some fraction of previously connected individuals. This natural experiment allows me to address endogeneity issues inherent in estimating the impact of having political connections. The results show positive impact of political connection on earnings, but smaller than an ordinary least squares estimates. Part of the earnings differential between connected and unconnected individuals is driven by unobserved human capital differences. Nonetheless, the importance of political connections may prevent complete diffusion of economic growth to unconnected individuals.