# **1. Introduction**

Technology adoption and trade are reshaping traditional employment and the nature of work. The new wave of digitalization and automation has led to a pattern of labor polarization in the developed world (Autor and Dorn, 2013; Goos and Manning, 2007; Goos et al., 2014). The available evidence indicates that computers are substitutes for middle-skilled workers performing routine tasks but are complements to high-skilled workers performing activities difficult to automate such as creative thinking and problem resolution. Reduced trade costs, on the other hand, are promoting the offshoring of some low- and middle-skilled routine work to countries where labor and transportation costs are relatively low and regional value chains are reasonably well established.

Several questions have been raised regarding the quantity of work available and the quality of new jobs being created by the current wave of technological change and trends in trade. Most of the available evidence has been focused on developed countries, but there are reasons to believe that technology and globalization are affecting developing countries differently from advanced economies. The two groups of countries differ in the skill base of their populations and in labor standards, which may affect the incentives to adopt technology and create new jobs (AfDB et al., 2018). The initial occupational structure of employment differs as well, with a smaller share of middle-income workers performing routine tasks in developing countries (Maloney and Molina, 2016). And the patterns of trade may have a role in shaping labor markets, as developed economies are offshoring low- or medium-skill work and competing with imports from less-developed countries such as China (Autor et al., 2015), while developing countries continue to provide the main contribution to growth in export volumes (Constantinescu et al., 2017).

The objective of this paper is to analyze the simultaneous impact of technological change and globalization on the demand for different types of skills and aggregate employment indicators in a developing country context. We focus our analysis on Indonesia over the period 2005-2015, when ICT use increased markedly and there was a large shift in exports, from the commodity boom between 2005 and 2010 to a period of declining exports between 2011 and 2015.<sup>2</sup> The commodity boom started in the early 2000s and led to an increase in the export shares of mining and mineral products at the expense of manufactured products (World Bank, 2016). The end of the commodity boom around 2011 increased the participation of manufactures in total exports. Although our interest is on goods trade and technology and their impact on labor markets, we recognize that trade in services, such as tourism and e-commerce, can affect the demand for skills depending on the skill intensity of these sub-sectors.

In our empirical analysis, we compare annual changes in the demand for different types of skills across provinces and industries, and in aggregate labor market indicators at the province level, with changes in the industry value of goods exports and changes in a province measure of technology use. We perform our analysis for different demographic groups –high- and loweducated workers, men and women. We apply an instrumental variable strategy to account for the

> 2 ICT adoption is still low in Indonesia, but measures such as cellphone use, internet, and computer access exhibited a threefold increase over the analyzed period. See Section 4 for more details.

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