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Minimum Wages and Changing Wage Inequality in Indonesia

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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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    References listed on IDEAS

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    1. de Mel, Suresh & McKenzie, David J. & Woodruff, Christopher, 2009. "Measuring microenterprise profits: Must we ask how the sausage is made?," Journal of Development Economics, Elsevier, pages 19-31.
    2. Liedholm, Carl & Mead, Donald C., 1987. "Small Scale Industries in Developing Countries: Empirical Evidence and Policy Implications," Food Security International Development Papers 54062, Michigan State University, Department of Agricultural, Food, and Resource Economics.
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    Cited by:

    1. Patrick Belser & Uma Rani, 2015. "Minimum wages and inequality," Chapters,in: 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 Other Operational Studies 16687, The World Bank.
    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), pages 1-25.
    4. Amiti, Mary & Cameron, Lisa, 2012. "Trade Liberalization and the Wage Skill Premium: Evidence from Indonesia," Journal of International Economics, Elsevier, pages 277-287.
    5. Amiti, Mary & Cameron, Lisa, 2012. "Trade Liberalization and the Wage Skill Premium: Evidence from Indonesia," Journal of International Economics, Elsevier, pages 277-287.
    6. 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.
    7. Sell, Friedrich L. & Ă–llinger, Michael, 2017. "On the distributional effects of minimum wages: A note," Working Papers in Economics 2017,3, Bundeswehr University Munich, Economic Research Group.

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