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Minimum Wages and Changing Wage Inequality in Indonesia

Author

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  • Chun , Natalie

    (Asian Development Bank)

  • Khor, Niny

    (Asian Development Bank)

Abstract

Wage inequality in Indonesia has decreased over the last two decades. This is in contrast to many developed and developing countries, which have largely seen an increase in wage inequality over this time period. This paper investigates the extent to which minimum wage laws may have contributed to the decrease in inequality over the distribution of wages by looking at changes in individual wages, hours of work, and employment between 1993 and 2007. Besides examining wage inequality in formal sector work we also examine changes in income inequality for the self-employed sector, which comprises a substantial portion of the working population in Indonesia. We find that minimum wages are a significant determinant of increases in monthly wages for the population below the minimum wage line in the formal sector, but not the informal sector. Adverse effects are observed in terms of increases in hours of work for individuals with wages near the minimum wage line. While there are no significant effects on overall employment, we find negative effects on formal sector employment for individuals throughout the wage distribution. The results suggest that minimum wage legislation has played a role in reducing wage inequality in Indonesia.

Suggested Citation

  • Chun , Natalie & Khor, Niny, 2010. "Minimum Wages and Changing Wage Inequality in Indonesia," ADB Economics Working Paper Series 196, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0196
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    Cited by:

    1. Patrick Belser & Uma Rani, 2015. "Minimum wages and inequality," Chapters, in: Janine Berg (ed.), Labour Markets, Institutions and Inequality, chapter 5, pages 123-146, Edward Elgar Publishing.
    2. World Bank, 2013. "Minimum Wage Policy : Lessons with a Focus on the ASEAN Region," World Bank Publications - Reports 16687, The World Bank Group.
    3. Maike Hohberg & Jann Lay, 2015. "The impact of minimum wages on informal and formal labor market outcomes: evidence from Indonesia," IZA Journal of Labor & Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-25, December.
    4. Öllinger, Michael & Ostermair, Christoph & Sell, Friedrich L., 2019. "Distributional effects of minimum wages: Can unions expect a double dividend? A theoretical exercise from a supply-side view," Working Papers in Economics 2019,2, Bundeswehr University Munich, Economic Research Group.
    5. Uma Rani, 2017. "Minimum Wage Policies and Their Effects in Developing Countries: A Comparative Perspective," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 60(1), pages 33-55, March.
    6. Amiti, Mary & Cameron, Lisa, 2012. "Trade Liberalization and the Wage Skill Premium: Evidence from Indonesia," Journal of International Economics, Elsevier, vol. 87(2), pages 277-287.
    7. Mehta, Aashish & Sun, Wei, 2013. "Does Industry Affiliation Influence Wages? Evidence from Indonesia and the Asian Financial Crisis," World Development, Elsevier, vol. 51(C), pages 47-61.
    8. Bruno Martorano & Marco Sanfilippo, 2015. "Structural Change and Wage Inequality in the Manufacturing Sector: Long Run Evidence from East Asia," Oxford Development Studies, Taylor & Francis Journals, vol. 43(2), pages 212-231, June.
    9. Neumark, David & Munguía Corella, Luis Felipe, 2021. "Do minimum wages reduce employment in developing countries? A survey and exploration of conflicting evidence," World Development, Elsevier, vol. 137(C).
    10. Sell, Friedrich L. & Öllinger, Michael, 2017. "On the distributional effects of minimum wages: A note," Working Papers in Economics 2017,3, Bundeswehr University Munich, Economic Research Group.
    11. Axelsson, Tobias & Martins, Igor, 2022. "Resilience to shrinking as a catch-up strategy: a comparison of Brazil and Indonesia, 1964–2010," Lund Papers in Economic History 233, Lund University, Department of Economic History.
    12. Friedrich Leopold Sell & Michael Öllinger, 2017. "Hitting two birds with one stone: A tale on the (not so) secret miracle of minimum wages," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 5(3), pages 26-30, June.
    13. Mohammad Zulfan Tadjoeddin, 2016. "Earnings, productivity and inequality in Indonesia," The Economic and Labour Relations Review, , vol. 27(2), pages 248-271, June.

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