Minimum Wages and Changing Wage Inequality in Indonesia

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.