Investigating the Effects of Minimum Wages on Employment, Unemployment and Labour Participation in Java: A Dynamic Spatial Panel Approach

Abstract

Using district-level data for urban areas in Java, we assess the impact of minimum wages on formal- and informal-sector employment, unemployment and labour participation. We employ the spatial Durbin model for our estimation and allow labour markets to be spatially correlated across districts. Our findings suggest that a minimum-wage rise affects mainly the local labour market where the minimum-wage increase occurs. The spillover effects of a minimum-wage increase on neighbouring districts are negligible, except for the impact on labour participation. The results of this study highlight the need to account for spatial dependence when modelling formal-sector employment, unemployment and labour participation, as we found those variables to be geographically correlated, at least across districts in Java.