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Can minimum wages cause a big push? Evidence from Indonesia

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  • Magruder, Jeremy R.

Abstract

Big Push models suggest that local product demand can create multiple labor market equilibria: one featuring high wages, formalization, and high demand and one with low wages, informality, and low demand. I demonstrate that minimum wages may coordinate development at the high wage equilibrium. Using data from 1990s Indonesia, where minimum wages increased in a varied way, I develop a difference in spatial differences estimator which weakens the common trend assumption of difference in differences. Estimation reveals strong trends in support of a big push: formal employment increases and informal employment decreases in response to the minimum wage. Local product demand also increases, and this formalization occurs only in the non-tradable, industrializable industries suggested by the model (while employment in tradable and non-industrializable industries also conforms to model predictions).

Suggested Citation

  • Magruder, Jeremy R., 2013. "Can minimum wages cause a big push? Evidence from Indonesia," Journal of Development Economics, Elsevier, vol. 100(1), pages 48-62.
  • Handle: RePEc:eee:deveco:v:100:y:2013:i:1:p:48-62
    DOI: 10.1016/j.jdeveco.2012.07.003
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    More about this item

    Keywords

    Minimum wage; Big push; Spatial regression discontinuity;

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • J8 - Labor and Demographic Economics - - Labor Standards

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