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Does the minimum wage affect employment ? evidence from the manufacturing sector in Indonesia


  • Del Carpio, Ximena
  • Nguyen, Ha
  • Wang, Liang Choon


Using survey data from the Indonesian manufacturing industry, this paper investigates the impact of minimum wage on employment and wages offered by Indonesian manufacturing firms from 1993 to 2006. It shows that the estimated effects of minimum wage on employment are positive within a province (i.e., with province fixed effects), but negative within a firm (i.e., with firm fixed effects), indicating the importance of using firm panel data to reduce the endogeneity bias in estimates. It finds significant heterogeneous effects of minimum-wage changes on employment. The employment effects of minimum wages are significant and negative among small firms and less educated workers, but not among large firms and workers with high school education and above. The negative employment impact is more severe for non-production workers than for production workers. The analysis also shows that the minimum wage disproportionally affects women: most of the non-production job losses are experienced by female workers. Lastly, the paper finds that the minimum wage is more correlated with the average wage of small firms than that of large firms, suggesting that minimum wages are more binding in small firms.

Suggested Citation

  • Del Carpio, Ximena & Nguyen, Ha & Wang, Liang Choon, 2012. "Does the minimum wage affect employment ? evidence from the manufacturing sector in Indonesia," Policy Research Working Paper Series 6147, The World Bank.
  • Handle: RePEc:wbk:wbrwps:6147

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    References listed on IDEAS

    1. Hallward-Driemeier,Mary C. & Rijkers,Bob & Waxman,Andrew R., 2015. "Can minimum wages close the gender wage gap ? evidence from Indonesia," Policy Research Working Paper Series 7364, The World Bank.
    2. Asep Suryahadi & Wenefrida Widyanti & Daniel Perwira & Sudarno Sumarto, 2003. "Minimum Wage Policy And Its Impact On Employment In The Urban Formal Sector," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 39(1), pages 29-50.
    3. 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.
    4. Rebitzer, James B. & Taylor, Lowell J., 1995. "The consequences of minimum wage laws Some new theoretical ideas," Journal of Public Economics, Elsevier, vol. 56(2), pages 245-255, February.
    5. Kristensen, Nicolai & Cunningham, Wendy, 2006. "Do minimum wages in Latin America and the Caribbean matter ? Evidence from 19 countries," Policy Research Working Paper Series 3870, The World Bank.
    6. Veerle Miranda, 2011. "Cooking, Caring and Volunteering: Unpaid Work Around the World," OECD Social, Employment and Migration Working Papers 116, OECD Publishing.
    7. Burkhauser, Richard V & Couch, Kenneth A & Wittenburg, David C, 2000. "A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 653-680, October.
    8. Ann Harrison & Jason Scorse, 2010. "Multinationals and Anti-sweatshop Activism," American Economic Review, American Economic Association, vol. 100(1), pages 247-273, March.
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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. The impact of the minimum wage in a developing economy
      by Economic Logician in Economic Logic on 2012-08-13 20:08:00


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Anna Kochanova, 2012. "The Impact of Bribery on Firm Performance: Evidence from Central and Eastern European Countries," CERGE-EI Working Papers wp473, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. David Robalino & Michael Weber, 2013. "Designing and implementing unemployment benefit systems in middle and low income countries: beyond risk-pooling vs savings," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 2(1), pages 1-20, December.
    3. World Bank, 2013. "Minimum Wage Policy : Lessons with a Focus on the ASEAN Region," World Bank Other Operational Studies 16687, The World Bank.
    4. 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.
    5. Sudip Ranjan Basu & Yusuke Tateno, "undated". "Minimum wage policies to boost inclusive growth," MPDD Policy Briefs PB16, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
    6. Hanousek, Jan & Kochanova, Anna, 2015. "Bribery Environment and Firm Performance: Evidence from Central and Eastern European Countries," CEPR Discussion Papers 10499, C.E.P.R. Discussion Papers.
    7. Betcherman, Gordon, 2014. "Labor market regulations : what do we know about their impacts in developing countries ?," Policy Research Working Paper Series 6819, The World Bank.
    8. Del Carpio, Ximena & Messina, Julián & Sanz-de-Galdeano, Anna, 2014. "Minimum Wage: Does It Improve Welfare in Thailand?," IZA Discussion Papers 7911, Institute for the Study of Labor (IZA).
    9. Bin Ni & Kyosuke Kurita, 2018. "The Minimum Wage, Exports, and Firm Performance: Evidence from Indonesia," Discussion Paper Series 171, School of Economics, Kwansei Gakuin University, revised Jan 2018.
    10. 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.
    11. Haroon Bhorat & Tara Caetano & Benjamin Jourdan & Ravi Kanbur & Christopher Rooney & Benjamin Stanwix & Ingrid Woolard, 2016. "Investigating the Feasibility of a National Minimum Wage for South Africa," Working Papers 201601, University of Cape Town, Development Policy Research Unit.
    12. Nurrachmi, Rininta & Mad-Ahin, Ashanee & Waeowanjit, Phimpaporn & Kareemarif Arif, Naz Abdul, 2012. "Article Review on World Bank Report, Optimal Design for a Minimum Wage Policy in Malaysia," MPRA Paper 44618, University Library of Munich, Germany, revised 27 Feb 2013.

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    Labor Markets; Labor Policies; Microfinance; Corporate Social Responsibility; Tertiary Education;

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