The effects of changes in minimum wage on employment in Indonesia: Regional panel data analysis

Using the aggregate provincial panel data set from 1989 to 2003 for 26 provinces, this study examines the effects of changes in minimum wage on employment in Indonesia. This study compares five different minimum wage measurements commonly used in the literature (a) the log of real minimum wage; (b) toughness; (c) the fraction below the minimum wage; (d) the fraction at the minimum wage; (e) the fraction affected minimum wage. This study also employs several different panel data methods, including the simple fixed effects model, instrumental variable method, and a Dynamic Arellano-Bond panel data model in order to obtain the most robust estimates of the effects of minimum wage on employment in Indonesia. Although the findings vary across different minimum wage measures and methods, the result suggests that an increase in minimum wage reduces paid employment in the covered sector, as predicted by the standard competitive model. The result generally shows that there is no significant impact on total paid employment because of the non-compliance problem in Indonesia.