Research Report
October 2001

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Wage and Employment Effects of Minimum Wage Policy in
the Indonesian Urban Labor Market

Research Team:

Research Coordinator: Asep Suryahadi
Research Advisor: Sudarno Sumarto, John Maxwell
Quantitative Study: Asep Suryahadi, Wenefrida Widyanti, Daniel Perwira
Qualitative Study: Sri Kusumastuti Rahayu, Bambang Sulaksono, Musriyadi Nabiu,
Sri Budiyati, Hastuti, Akhmadi, Wawan Munawar, Osmaliana Waworuntu, Dewi Meiyani,
Chairil Anwar, Sinung Hendratno
Editing: Rachael Diprose, Kristen Stokes

Abstract

Since the late 1980s, minimum wages have become an important plank of the Indonesian government's labor market policy. During much of the 1990s, minimum wages have increased faster than both average wages and gross domestic product. Furthermore, during the last two years, in 2000 and 2001, the government has vigorously pursued the minimum wage policy, evident from the large increases in the levels of real minimum wages. As a result, minimum wages have become binding for the majority of workers and affect the entire wage distribution. The effects, however, differ across different types of workers. This study finds that minimum wages have had a positive but statistically insignificant effect on average wages. On the other hand, minimum wages have had a negative and statistically significant effect on employment. In particular, the disemployment effects are greatest for women, youth, and less educated workers. On the other hand, the employment prospects of white-collar workers are enhanced by increases in minimum wages.

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