How Does Decentralized Minimum Wage Setting Affect Employment and Informality? The Case of Indonesia

21 Pages Posted: 10 May 2011

See all articles by Margherita Comola

Margherita Comola

Paris School of Economics (PSE); Université Paris I Panthéon-Sorbonne

Luiz R. de Mello

OECD

Date Written: May 1, 2011

Abstract

The Indonesian labor market is characterized by widespread and growing informality (defined as non-salaried work). To what extent can the growth in informality be attributed to a sharp increase in the real value of the minimum wage since 2001, when minimum-wage setting was decentralized to the provincial governments? To answer this and related questions we use survey data on the labor market, on household income and expenditure, and on the industrial sector to construct a district-level dataset spanning the period 1996 to 2004. The effects of changes in the minimum wage on unemployment, formal-sector employment, and the incidence of informality in urban areas are estimated by fixed effects with a seemingly unrelated regression estimator. We find that an increase in the ratio of the minimum to the mean wage is associated with a net increase in employment: a rise in informal-sector employment more than compensates for job losses in the formal sector.

Keywords: Indonesia, minimum wage, informality, employment, unemployment

JEL Classification: J23, J31, J64

Suggested Citation

Comola, Margherita and de Mello, Luiz R., How Does Decentralized Minimum Wage Setting Affect Employment and Informality? The Case of Indonesia (May 1, 2011). Review of Income and Wealth, Vol. 57, pp. S79-S99, 2011, Available at SSRN: https://ssrn.com/abstract=1837192 or http://dx.doi.org/10.1111/j.1475-4991.2011.00451.x

Margherita Comola (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

Luiz R. De Mello

OECD ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France
+33-1-45.24.87.52 (Phone)

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