Are Schooling and Roads Complementary? Evidence from Income Dynamics in Rural Indonesia

We examine the impact of spatial connectivity on household income growth and non-agriculture labor supply in Indonesia by combining household panel data and village census data during the period of 1995-2007. Our empirical results show that the impacts of improved local road quality on income growth and the transition to non-agricultural labor markets depend on household education and distance to economic centers. In particular, post-primary education significantly increases the benefit from the improvement of local spatial connectivity in remote areas, promoting labor transition to non-agricultural sectors. Education and local road quality are complementary, mutually increasing non-agricultural labor supply and income in remote areas. In contrast, the initial landholding size does not affect the benefit from improved road quality. (C) 2011 Elsevier Ltd. All rights reserved.