The Effects of Changes in Minimum Wage on Wages, Employment and Hours Worked in Indonesia.

Pratomo, Devanto Shasta (2009) The Effects of Changes in Minimum Wage on Wages, Employment and Hours Worked in Indonesia. PhD thesis, UNSPECIFIED.

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Abstract

This thesis examines the effects of changes in minimum wage on wages, employment and hours worked in Indonesia. This study is important for Indonesia as a part of the policy evaluation relating to the minimum wage policy changes since the end of 1980s. Based on the standard competitive model, an increase in minimum wage is predicted to decrease the level of employment. More specifically, under the two-sector model, an increase in minimum is predicted to decrease employment in the covered sector and to increase employment in the uncovered sector, given a high proportion of uncovered sector employment in developing countries. Three main empirical analyses are conducted in this thesis. Firstly, using a regional panel data method, this study examines the effects of changes in minimum wage on wages and employment in Indonesia. Although the findings vary across different minimum wage measures and panel data methods, the result suggests that an increase in minimum wage increases wages and reduces paid employment in the covered sector, as predicted by the standard competitive model. The result shows that there is no significant impact on total paid employment because of the non-compliance problem in Indonesia. Secondly, extending the analysis, this thesis examines the effects of changes in minimum wage on employment in the covered and uncovered sectors using an individual micro-level data. The results suggest that an increase in minimum wage is more likely to decrease the covered sector employment and to inrease the uncovered sector employment. These results also indicate a displacement effect from the covered sector to the uncovered sector, as suggested by the two-sector model. Thirdly, providing a complete analysis of any adjustments in labour demand, this thesis examines the effects of changes in minimum wage on hours worked as an alternative measure of employment. Using a selection biased correction method based on multinomial logit, the empirical results suggest that an increase in minimum wage increases paid employment hours worked. However, compared to the minimum wage effects on employment, this hours effect is relatively small. The main reason is because the Indonesian minimum wage is set based on monthly term, suggesting a greater change in per-worker cost than in per-hour cost.