Publication: Does the Minimum Wage Affect Employment? Evidence from the Manufacturing Sector in Indonesia
Loading...
Date
2012-07
ISSN
Published
2012-07
Author(s)
Editor(s)
Abstract
Using survey data from the Indonesian manufacturing industry, this paper investigates the impact of minimum wage on employment and wages offered by Indonesian manufacturing firms from 1993 to 2006. It shows that the estimated effects of minimum wage on employment are positive within a province (i.e., with province fixed effects), but negative within a firm (i.e., with firm fixed effects), indicating the importance of using firm panel data to reduce the endogeneity bias in estimates. It finds significant heterogeneous effects of minimum-wage changes on employment. The employment effects of minimum wages are significant and negative among small firms and less educated workers, but not among large firms and workers with high school education and above. The negative employment impact is more severe for non-production workers than for production workers. The analysis also shows that the minimum wage disproportionally affects women: most of the non-production job losses are experienced by female workers. Lastly, the paper finds that the minimum wage is more correlated with the average wage of small firms than that of large firms, suggesting that minimum wages are more binding in small firms.
Link to Data Set
Citation
“Wang, Liang Choon; Del Carpio, Ximena; Nguyen, Ha. 2012. Does the Minimum Wage Affect Employment? Evidence from the Manufacturing Sector in Indonesia. Policy Research working paper;no. 6147. © World Bank. http://hdl.handle.net/10986/12000 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Publication The Future of Poverty(Washington, DC: World Bank, 2025-07-15)Climate change is increasingly acknowledged as a critical issue with far-reaching socioeconomic implications that extend well beyond environmental concerns. Among the most pressing challenges is its impact on global poverty. This paper projects the potential impacts of unmitigated climate change on global poverty rates between 2023 and 2050. Building on a study that provided a detailed analysis of how temperature changes affect economic productivity, this paper integrates those findings with binned data from 217 countries, sourced from the World Bank’s Poverty and Inequality Platform. By simulating poverty rates and the number of poor under two climate change scenarios, the paper uncovers some alarming trends. One of the primary findings is that the number of people living in extreme poverty worldwide could be nearly doubled due to climate change. In all scenarios, Sub-Saharan Africa is projected to bear the brunt, contributing the largest number of poor people, with estimates ranging between 40.5 million and 73.5 million by 2050. Another significant finding is the disproportionate impact of inequality on poverty. Even small increases in inequality can lead to substantial rises in poverty levels. For instance, if every country’s Gini coefficient increases by just 1 percent between 2022 and 2050, an additional 8.8 million people could be pushed below the international poverty line by 2050. In a more extreme scenario, where every country’s Gini coefficient increases by 10 percent between 2022 and 2050, the number of people falling into poverty could rise by an additional 148.8 million relative to the baseline scenario. These findings underscore the urgent need for comprehensive climate policies that not only mitigate environmental impacts but also address socioeconomic vulnerabilities.Publication Exports, Labor Markets, and the Environment(Washington, DC: World Bank, 2025-07-14)What is the environmental impact of exports? Focusing on 2000–20, this paper combines customs, administrative, and census microdata to estimate employment elasticities with respect to exports. The findings show that municipalities that faced increased exports experienced faster growth in formal employment. The elasticities were 0.25 on impact, peaked at 0.4, and remained positive and significant even 10 years after the shock, pointing to a long and protracted labor market adjustment. In the long run, informal employment responds negatively to export shocks. Using a granular taxonomy for economic activities based on their environmental impact, the paper documents that environmentally risky activities have a larger share of employment than environmentally sustainable ones, and that the relationship between these activities and exports is nuanced. Over the short run, environmentally risky employment responds more strongly to exports relative to environmentally sustainable employment. However, over the long run, this pattern reverses, as the impact of exports on environmentally sustainable employment is more persistent.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication The Asymmetric Bank Distress Amplifier of Recessions(Washington, DC: World Bank, 2025-07-11)One defining feature of financial crises, evident in U.S. and international data, is asymmetric bank distress—concentrated losses on a subset of banks. This paper proposes a model in which shocks to borrowers’ productivity dispersion lead to asymmetric bank losses. The framework exhibits a “bank distress amplifier,” exacerbating economic downturns by causing costly bank failures and raising uncertainty about the solvency of banks, thereby pushing banks to deleverage. Quantitative analysis shows that the bank distress amplifier doubles investment decline and increases the spread by 2.5 times during the Great Recession compared to a standard financial accelerator model. The mechanism helps explain how a seemingly small shock can sometimes trigger a large crisis.Publication Impact of Heat Waves on Learning Outcomes and the Role of Conditional Cash Transfers(Washington, DC: World Bank, 2025-07-14)This paper evaluates the impact of higher temperatures on learning outcomes in Peru. The results suggest that 1 degree above 20°C is equivalent to 7 and 6 percent of a standard deviation of what a student learns in a year for math and reading tests, respectively. These results hold true when the main specification is changed, splitting the sample, collapsing the data at school level, and using other climate specifications. The paper aims to improve understanding of how to deal with the impacts of climate change on learning outcomes in developing countries. The evidence suggests that conditional cash transfer programs can mitigate the negative effects of higher temperatures on students’ learning outcomes in math and reading.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Minimum Wages and Social Policy : Lessons from Developing Countries(Washington, DC: World Bank, 2007)This report examines how minimum wages affect the income poverty of workers, their households, and the state. It does not question whether or not the minimum wage is a good policy: instead, it focuses on the tradeoffs in setting the minimum wage level. It takes as a starting point the literature on the wage and employment effects of minimum wages in Latin America and expands the discussion in three ways. First, the household is placed at the center of the debate. Poverty and inequality are measured at the level of the household, rather than at the individual level, to allow for employment and wage trade-offs among individuals who pool their income. Second, new research is presented on how the minimum wage affects groups whose labor market participation and success is considered "vulnerable": that is, youth, women, the low-skilled, and informal sector workers. Third, the implications of the minimum wage on wage and social expenditures of the government are measured. In the end, the report argues that the minimum wage by itself is not a sufficient tool for protecting the income of the poorest households, and that other social protection tools are necessary to complement it. The report has eight sections following the introduction. Chapter 2 presents a history of the minimum wage in LAC, the theory behind the functioning of the minimum wage, and empirical evidence from the OECD to lay a foundation for the Latin American experience. Chapter 3 presents an overview of the minimum wage in the Region, including a discussion of the definition of a minimum wage, institutional design, and who earns it. Chapter 4 focuses on the worker; it summarizes the existing literature, presents new evidence on the wage and employment effects of a minimum wage, and gives special attention to "vulnerable" labor market groups. Chapter 5 turns its attention to the household and presents the new (and only) evidence on the effects of the minimum wage on household poverty and inequality in LAC. Chapter 6 considers the state and discusses the cost of minimum wages to the government. Chapter 7 opens the discussion to the rest of the world and considers the lessons learned in other countries about setting, managing, and enforcing the minimum wage. Finally, chapter 8 concludes and presents policy considerations.Publication Minimum Wage Policy : Lessons with a Focus on the ASEAN Region(World Bank, Washington, DC, 2014-01)This report consists of seven chapters and is divided into three parts. Part one focuses on the minimum wage policy, its historical evolution, and the current institutional context across ASEAN countries. Part two delves into the socio?economic impacts of the minimum wage policy on workers, households, firms, the economy, and the ASEAN region. Part III links the findings from each country to the ASEAN regional context and brings all the analysis together into a policy and operational discussion. Specifically, part one of the report includes this chapter (chapter one) and chapter two. The rest of chapter one summarizes the findings from all chapters in the report and presents an overview of lessons detailed in the final chapter. To provide some background and context for the remainder of the report, chapter two briefly describes the history of minimum wage policy around the world and the theoretical principles behind wage setting and its effects. Part two consists of four chapters. Chapter three, which describes how the minimum wage policy is structured and managed in each ASEAN country, includes details on the objectives that countries have set out for the policy and how the policy is enforced in each country. Chapter four summarizes results from primary and secondary empirical research on the impacts of minimum wage changes on employment, wages, and informal work in the four focus ASEAN countries. The discussion in this chapter takes into account the existence of complementary worker protection programs in each country. Chapter five discusses empirical results on whether changes in the minimum wage policy affect poverty and inequality. Since each country has distinct poverty programs, the discussion takes into account the presence of various social programs that potentially complement income earned from wage labor. Chapter six focuses on how wage and labor costs affect firms, especially in terms of investment decisions and productivity. Due to the limited availability of evidence on the impact of minimum wages on firm performance and private sector activity in ASEAN countries, a large part of the discussion in this chapter includes evidence from non-ASEAN countries. Lastly, this chapter reviews the status of the main labor market institutions legislated in the region and provides some evidence on how other labor institutions might interact with the minimum wage policy to shape its effect. Part three comprises chapter seven, which reflects on the material presented in previous chapters and provides policy?oriented insights. It discusses the political economy of the minimum wage policy and draws out the implications of having such diverse wage policies and institutional arrangements for wage management in an increasingly interlinked regional bloc such as ASEAN. The chapter also synthesizes the lessons learned throughout the report and frames the main labor policy issues to provide guidance for, and elicit action from, policymakers going forward.Publication The Impact of Syrians Refugees on the Turkish Labor Market(World Bank, Washington, DC, 2015-08)Civil war in Syria has resulted in more than four million refugees fleeing the country, of which 1.8 million have found refuge in Turkey, making it the largest refugee-hosting country worldwide. This paper combines newly available data on the 2014 distribution of Syrian refugees across subregions of Turkey with the Turkish Labour Force Survey, to assess the impact on Turkish labor market conditions. Using a novel instrument, the analysis finds that the refugees, who overwhelmingly do not have work permits, result in the large-scale displacement of informal, low-educated, female Turkish workers, especially in agriculture. While there is net displacement, the inflow of refugees also creates higher-wage formal jobs, allowing for occupational upgrading of Turkish workers. Average Turkish wages have increased primarily as the composition of the employed has changed because of the inflow of refugees.Publication Malaysia Economic Monitor, December 2015(World Bank, Washington, DC, 2015-12)Growth moderated throughout 2015, affected by a slowdown in private consumption and weak export growth. The authorities have generally managed the downturn in commodity prices and the financial market volatility with a reasonable mix of macro policies. Heightened external volatility calls for prudent macro policies and acceleration of structural reforms. The eleventh Malaysia plan stresses the importance of effective migration management to achieve high-income country status by 2020. Immigration continues to play a crucial role in Malaysia’s development. While job growth has recently been concentrated in high-skilled occupations, three quarters of all jobs in Malaysia are still low- and mid-skilled. Econometric modelling suggests that immigrant workers can raise gross domestic product (GDP) and create employment for Malaysians. The current process for sourcing immigrant workers is complex and costly for the migrant. The immigration system can better meet the country’s development objectives if it is aligned with Malaysia’s human resource development strategy. Global experience shows that successful immigration systems recognize the long-term role of immigrant workers in the hosting country’s economic and social objectives if they are: (a) market-driven, with immigration flows aligned with labor market demands; (b) comprehensive, acknowledging the need for immigrants of all types; and (c) balanced, minimizing the negative impacts on Malaysian workers, and protecting immigrant workers from abuse.Publication Can Minimum Wages Close the Gender Wage Gap?(World Bank, Washington, DC, 2015-07)Using manufacturing plant-level census data, this paper demonstrates that minimum wage increases in Indonesia reduced gender wage gaps among production workers, with heterogeneous impacts by level of education and position of the firm in the wage distribution. Paradoxically, educated women appear to have benefitted the most, particularly in the lower half of the firm average earnings distribution. By contrast, women who did not complete primary education did not benefit on average, and even lost ground in the upper end of the earnings distribution. Minimum wage increases were thus associated with exacerbated gender pay gaps among the least educated, and reduced gender gaps among the best educated production workers. Unconditional quantile regression analysis attests to wage compression and lighthouse effects. Changes in relative employment prospects were limited.
Users also downloaded
Showing related downloaded files
Publication Lebanon Economic Monitor, Fall 2022(Washington, DC, 2022-11)The economy continues to contract, albeit at a somewhat slower pace. Public finances improved in 2021, but only because spending collapsed faster than revenue generation. Testament to the continued atrophy of Lebanon’s economy, the Lebanese Pound continues to depreciate sharply. The sharp deterioration in the currency continues to drive surging inflation, in triple digits since July 2020, impacting the poor and vulnerable the most. An unprecedented institutional vacuum will likely further delay any agreement on crisis resolution and much needed reforms; this includes prior actions as part of the April 2022 International Monetary Fund (IMF) staff-level agreement (SLA). Divergent views among key stakeholders on how to distribute the financial losses remains the main bottleneck for reaching an agreement on a comprehensive reform agenda. Lebanon needs to urgently adopt a domestic, equitable, and comprehensive solution that is predicated on: (i) addressing upfront the balance sheet impairments, (ii) restoring liquidity, and (iii) adhering to sound global practices of bail-in solutions based on a hierarchy of creditors (starting with banks’ shareholders) that protects small depositors.Publication Argentina Country Climate and Development Report(World Bank, Washington, DC, 2022-11)The Argentina Country Climate and Development Report (CCDR) explores opportunities and identifies trade-offs for aligning Argentina’s growth and poverty reduction policies with its commitments on, and its ability to withstand, climate change. It assesses how the country can: reduce its vulnerability to climate shocks through targeted public and private investments and adequation of social protection. The report also shows how Argentina can seize the benefits of a global decarbonization path to sustain a more robust economic growth through further development of Argentina’s potential for renewable energy, energy efficiency actions, the lithium value chain, as well as climate-smart agriculture (and land use) options. Given Argentina’s context, this CCDR focuses on win-win policies and investments, which have large co-benefits or can contribute to raising the country’s growth while helping to adapt the economy, also considering how human capital actions can accompany a just transition.Publication Classroom Assessment to Support Foundational Literacy(Washington, DC: World Bank, 2025-03-21)This document focuses primarily on how classroom assessment activities can measure students’ literacy skills as they progress along a learning trajectory towards reading fluently and with comprehension by the end of primary school grades. The document addresses considerations regarding the design and implementation of early grade reading classroom assessment, provides examples of assessment activities from a variety of countries and contexts, and discusses the importance of incorporating classroom assessment practices into teacher training and professional development opportunities for teachers. The structure of the document is as follows. The first section presents definitions and addresses basic questions on classroom assessment. Section 2 covers the intersection between assessment and early grade reading by discussing how learning assessment can measure early grade reading skills following the reading learning trajectory. Section 3 compares some of the most common early grade literacy assessment tools with respect to the early grade reading skills and developmental phases. Section 4 of the document addresses teacher training considerations in developing, scoring, and using early grade reading assessment. Additional issues in assessing reading skills in the classroom and using assessment results to improve teaching and learning are reviewed in section 5. Throughout the document, country cases are presented to demonstrate how assessment activities can be implemented in the classroom in different contexts.Publication The Journey Ahead(Washington, DC: World Bank, 2024-10-31)The Journey Ahead: Supporting Successful Migration in Europe and Central Asia provides an in-depth analysis of international migration in Europe and Central Asia (ECA) and the implications for policy making. By identifying challenges and opportunities associated with migration in the region, it aims to inform a more nuanced, evidencebased debate on the costs and benefits of cross-border mobility. Using data-driven insights and new analysis, the report shows that migration has been an engine of prosperity and has helped address some of ECA’s demographic and socioeconomic disparities. Yet, migration’s full economic potential remains untapped. The report identifies multiple barriers keeping migration from achieving its full potential. Crucially, it argues that policies in both origin and destination countries can help maximize the development impacts of migration and effectively manage the economic, social, and political costs. Drawing from a wide range of literature, country experiences, and novel analysis, The Journey Ahead presents actionable policy options to enhance the benefits of migration for destination and origin countries and migrants themselves. Some measures can be taken unilaterally by countries, whereas others require close bilateral or regional coordination. The recommendations are tailored to different types of migration— forced displacement as well as high-skilled and low-skilled economic migration—and from the perspectives of both sending and receiving countries. This report serves as a comprehensive resource for governments, development partners, and other stakeholders throughout Europe and Central Asia, where the richness and diversity of migration experiences provide valuable insights for policy makers in other regions of the world.Publication World Development Report 2006(Washington, DC, 2005)This year’s Word Development Report (WDR), the twenty-eighth, looks at the role of equity in the development process. It defines equity in terms of two basic principles. The first is equal opportunities: that a person’s chances in life should be determined by his or her talents and efforts, rather than by pre-determined circumstances such as race, gender, social or family background. The second principle is the avoidance of extreme deprivation in outcomes, particularly in health, education and consumption levels. This principle thus includes the objective of poverty reduction. The report’s main message is that, in the long run, the pursuit of equity and the pursuit of economic prosperity are complementary. In addition to detailed chapters exploring these and related issues, the Report contains selected data from the World Development Indicators 2005‹an appendix of economic and social data for over 200 countries. This Report offers practical insights for policymakers, executives, scholars, and all those with an interest in economic development.