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The consequences of doubling the minimum wage : the case of Indonesia

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  • Rama, Martin

Abstract

Minimum wages in Indonesia were tripled in nominal terms, and doubled in real terms, in the first half of the 1990s. The author evaluates the effects of this hike on wage earnings, wage employment, and investment. After describing Indonesia's minimum wage policy and surveying the literature on the effects of minimum wages, the author applies relatively simple statistical tools to individual and aggregate data. He visually inspects the wage distribution for full-time laborers and employees to assess the extent of compliance with minimum wages. He uses regression analysis involving minimalist specifications and data aggregated by province to estimate the elasticity of wage earnings, wage employment, and investment with respect to the minimum wage. A wide dispersion in the ratio of minimum wages to labor productivity across the 27 Indonesian provinces can be used to identify the effects of the minimum wage. The results suggest that minimum wages have a moderate effect on outcomes in Indonesia's labor market. Taken at face value, these results imply that doubling the minimum wage led to a 10 percent increase in average wages, a 2 percent decrease in wage employment, and a 5 percent decrease in investment. The disemployment effect appears to be considerable in small firms, but employment may actually increase in large firms.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1643.

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Date of creation: 30 Sep 1996
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Handle: RePEc:wbk:wbrwps:1643

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Related research

Keywords: Banks&Banking Reform; Labor Policies; Environmental Economics&Policies; Wages; Compensation&Benefits; Labor Markets; Labor Markets; Municipal Financial Management; Environmental Economics&Policies; Wages; Compensation&Benefits; Banks&Banking Reform;

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  1. Brown, Charles & Gilroy, Curtis & Kohen, Andrew, 1982. "The Effect of the Minimum Wage on Employment and Unemployment," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 487-528, June.
  2. Mason, Andrew D. & Baptist, Jacqueline, 1996. "How important are labor markets to the welfare of the poor in Indonesia?," Policy Research Working Paper Series 1665, The World Bank.
  3. Richard Dickens & Stephen Machin & Alan Manning, 1994. "The Effects of Minimum Wages on Employment: Theory and Evidence from the US," NBER Working Papers 4742, National Bureau of Economic Research, Inc.
  4. David Neumark & William Wascher, 1992. "Employment effects of minimum and subminimum wages: Panel data on state minimum wage laws," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 55-81, October.
  5. Agrawal, Nisha, 1996. "The benefits of growth for Indonesian Workers," Policy Research Working Paper Series 1637, The World Bank.
  6. David Card & Alan B. Krueger, 1993. "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania," NBER Working Papers 4509, National Bureau of Economic Research, Inc.
  7. Alida Castillo-Freeman & Richard B. Freeman, 1992. "When the Minimum Wage Really Bites: The Effect of the U.S.-Level Minimum on Puerto Rico," NBER Chapters, in: Immigration and the Workforce: Economic Consequences for the United States and Source Areas, pages 177-212 National Bureau of Economic Research, Inc.
  8. David Neumark & William L. Wascher, 2008. "Minimum Wages," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262141027.
  9. Bell, Linda A., 1995. "The impact of minimum wages in Mexico and Colombia," Policy Research Working Paper Series 1514, The World Bank.
  10. Brown, Charles, 1988. "Minimum Wage Laws: Are They Overrated?," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 133-45, Summer.
  11. David Neumark & William Wascher, 1995. "The Effect of New Jersey's Minimum Wage Increase on Fast-Food Employment: A Re-Evaluation Using Payroll Records," NBER Working Papers 5224, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. David Neumark & William Wascher, 2006. "Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research," Working Papers 060708, University of California-Irvine, Department of Economics, revised Jan 2007.
  2. Alatas, Vivi & Cameron, Lisa, 2003. "The impact of minimum wages on employment in a low income country : an evaluation using the difference-differences approach," Policy Research Working Paper Series 2985, The World Bank.
  3. Rama, Martin, 2003. "Globalization and workers in developing countries," Policy Research Working Paper Series 2958, The World Bank.
  4. Seguino, Stephanie, 2003. "Taking gender differences in bargaining power seriously: Equity, labor standards, and living wages
    [Gender Equality through Labor Standards and Living Wages: An Exploration of the Issues for Asian     ," MPRA Paper 6508, University Library of Munich, Germany, revised Oct 2003.
  5. Asep Suryahadi, & Wenefrida Widyanti & Daniel Perwira & Sudarno Sumarto, 2001. "The Impact of Minimum Wage Policy on Wages and Employment in Developing Countries: The Case of Indonesia," Economics Study Area Working Papers 38, East-West Center, Economics Study Area.
  6. Mason, Andrew D. & Baptist, Jacqueline, 1996. "How important are labor markets to the welfare of the poor in Indonesia?," Policy Research Working Paper Series 1665, The World Bank.
  7. Stephanie Seguino & Caren Grown, 2006. "Gender equity and globalization: macroeconomic policy for developing countries," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(8), pages 1081-1104.
  8. Frances Stewart, . "Income Distribution and Development," QEH Working Papers qehwps37, Queen Elizabeth House, University of Oxford.
  9. O'Higgins, Niall, 2001. "Youth unemployment and employment policy: a global perspective," MPRA Paper 23698, University Library of Munich, Germany.
  10. Yana van der Meulen Rodgers & Gunseli Berik, 2006. "Asia's Race to Capture Post-MFA Markets: A Snapshot of Labor Standards, Compliance, and Impacts on Competitiveness," Working Paper Series, Department of Economics, University of Utah 2006_02, University of Utah, Department of Economics.
  11. Stephanie Seguino & Caren A. Grown, 2006. "Feminist-Kaleckian Macroeconomic Policy for Developing Countries," Economics Working Paper Archive wp_446, Levy Economics Institute, The.
  12. Ann Harrison & Jason Scorse, 2004. "Moving Up or Moving Out? Anti-Sweatshop Activists and Labor Market Outcomes," NBER Working Papers 10492, National Bureau of Economic Research, Inc.
  13. Nguyen Viet, Cuong, 2010. "The Impact of a Minimum Wage Increase on Employment, Wages and Expenditures of Low-Wage Workers in Vietnam," MPRA Paper 36751, University Library of Munich, Germany, revised 15 Aug 2011.
  14. Martin Rama, 2002. "Mondialisation, inégalités et politiques de l'emploi," Revue d’économie du développement, De Boeck Université, vol. 16(1), pages 43-83.
  15. Asep Suryahadi, 2001. "International Economic Integration and Labor Markets: The Case of Indonesia," Economics Study Area Working Papers 22, East-West Center, Economics Study Area.
  16. Andalon, Mabel & Pagés, Carmen, 2008. "Minimum Wages in Kenya," IZA Discussion Papers 3390, Institute for the Study of Labor (IZA).
  17. Agrawal, Nisha, 1996. "The benefits of growth for Indonesian Workers," Policy Research Working Paper Series 1637, The World Bank.
  18. Harrison, Ann & Scorse, Jason, 2003. "Globalization's impact on compliance with labor standards," MPRA Paper 36450, University Library of Munich, Germany.
  19. Uma Radhakrishnan, 2010. "A Dynamic Structural Model of Contraceptive Use and Employment Sector Choice for Women in Indonesia," Working Papers 10-28, Center for Economic Studies, U.S. Census Bureau.
  20. Robert Pollin & James Heintz, 2007. "Expanding Decent Employment in Kenya: The Role of Monetary Policy, Inflation Control, and the Exchange Rate," Country Study 6, International Policy Centre for Inclusive Growth.

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