Minimum Wages, Relative Wages, and Productivity: An Empirical Analysis on Indonesia Food and Beverage Industry

Abstract

Background of the research: Previous study on minimum wages policy in Indonesia mostly focused on employment and welfare effect, while its relationship with productivity is lack. Purpose: This study tends to study the wages and productivity relationship using minimum wages increase information in Indonesia. This paper aims to calculate the time varying productivity using one step production function then implements difference-in-difference technique to measure the productivity changes due to the implementation of minimum wages policy. Methodologies: We choose the case of food and beverage industry in Indonesia and find a strong support for efficiency wages theory. This research takes information from medium to large firms within food and beverages industry in several region in Indonesia as a sample. The reason why this research used this sample is the importance of food and beverages industry in Indonesian economy. Principal results: Using standard panel regression, this paper also find evidence on positive relationship between relative wages and productivity. Major conclusions: The findings showed that firms adopting minimum wages policy show higher changes in productivity compared to firm that is already above the minimum wages. Contributions to the field: the study made a good attempt to examine a critical issue of relationship between minimum wage policy and total factor productivity changes for food industry in the context of Indonesia. Important aspects of the study: The important aspects of the study lie in the analysis of food demand as the indicator of agricultural markets.