The Effect of Provincial Minimum Wage on Wage Inequality in Java

Abstract

The minimum wage setting policy as an effort to improve wage distribution and expected to reduce income inequality is still being a debate in the literatures. However, similar studies, especially those that examine the impact of establishing minimum wages on the conditions of wages for workers in different percentile groups, have not been widely practiced in Indonesia. This study aims to analyze the increase in effective minimum wages against the wage gap of workers in the period 2008-2017 in Java using the National Labor Force Survey (Sakernas) data. Through the OLS method, we find that the impact of minimum wages is not the same among percentile groups. The effective minimum wage has a negative impact on the wage 30th percentile group where an increase in effective wage will reduces the gap between the 30th percentile and the 50th percentile. We find different result on 60th percentile. On this percentile, the effective minimum wage will increases the gap between the 60th percentile and the 50th percentile, this result implies a spillover.