Paid to Play Truant: The Impact of Minimum Wages on Secondary Enrolment Rates in Indonesia

Despite the extensive literature investigating the impact of minimum wage legislation on employment, only a few studies have been carried out in developing countries. Furthermore, there exists only a few studies on the impact of the minimum wage on the human capital investment decisions of teenagers, and as far as I am aware there is no evidence from a developing country context. Given the importance of human capital accumulation for long run economic development, an analysis of the poverty reduction potential of introducing a minimum wage must take into account its impact on investment in human capital. Therefore, I address the question of how minimum wage legislation can impact the human capital investment decision of households in a developing country. Using data from 1990-2000 I use a multinomial logit model to estimate the impact of the minimum wage on the occupational choice of teenagers in Indonesia at the province level. It is found that between 1990 and 2000 the sharp increase in the real minimum wage reduced the proportion of teenagers enrolled in Senior Secondary education, whereas in the following decade the minimum wage had a positive impact on the enrolment rate. The effect of the minimum wage on the occupational choice of teenagers does not differ according to gender.