The Impact of Minimum Wages on Employment in a Low Income Country: An Evaluation Using the Difference-in-Differences Approach

Abstract

Unlike the well-developed literature on the employment impact of the minimum wage in industrial nations, very little is known about minimum wage effects in low income countries. Minimum wages increased sharply in Indonesia between 1990 and 1996 and by more in some provinces than in others. Following Card and Krueger (1994) the authors exploit the large geographic variation in the rate of increase and compare changes in employment in the clothing, textile, footwear, and leather industries on either side of the Jakarta-West Java border. They use household level labor market data to establish compliance with the legislation. They obtain matched difference-in-difference estimates of the employment impact using a census of all large and medium-size firms in the clothing, textile, leather, and footwear industries. The authors find some evidence of a negative employment impact for small, domestic firms but no employment impact for large firms, foreign or domestic.