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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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Bibliographic Info

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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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. Agrawal, Nisha, 1996. "The benefits of growth for Indonesian Workers," Policy Research Working Paper Series 1637, 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. Bell, Linda A., 1995. "The impact of minimum wages in Mexico and Colombia," Policy Research Working Paper Series 1514, The World Bank.
  5. Brown, Charles, 1988. "Minimum Wage Laws: Are They Overrated?," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 133-45, Summer.
  6. 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.
  7. 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.
  8. David Neumark & William L. Wascher, 2008. "Minimum Wages," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262141027, January.
  9. 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.
  10. 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.
  11. 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.
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