Abstract
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.
Highlights
Most countries around the world have some forms of minimum wages
One caveat worth highlighting is that by looking at manufacturing firms, this paper focuses on formal manufacturing employment, and not on employment in the informal sector, which accounts for approximately 63% of the employed workforce in Indonesia (Indonesia Job Reports, 2010)
6.1 Employment of production workers and non-production workers Table 2 reports estimates for all firms based on regression specifications (1) and (2) with the log of paid production worker employment as the dependent variable
Summary
Most countries around the world have some forms of minimum wages. Policymakers have often argued that rises in minimum wages lift the earnings of low-income workers, and can be used as a tool to reduce poverty and inequality. This paper uses firm-level data from the Indonesia industry survey (SI) to investigate the impact of minimum wages on employment and firm average wages in the manufacturing sector, differentiating between the effects on workers by production1 and nonproduction type, education level, and gender. Columns (3) and (4) in Table 2 examine the effects of minimum wage changes on employment of paid production workers among small firms (i.e., firms with 150 or fewer workers during the sample period).
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