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Can minimum wages cause a big push? Evidence from Indonesia

  • Magruder, Jeremy R.

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).

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 100 (2013)
Issue (Month): 1 ()
Pages: 48-62

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Handle: RePEc:eee:deveco:v:100:y:2013:i:1:p:48-62
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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