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The Impact of Minimum Wages on Investment and Employment in Indonesia

Author

Listed:
  • Andi Sukmana

    (Graduate School for International Development and Cooperation, Hiroshima University)

  • Ichihashi Masaru

    (Graduate School for International Development and Cooperation, Hiroshima University)

Abstract

The labor market in Indonesia cannot absorb all of the labor force available, which allows employers to have greater bargaining power over employees. To protect and to increase labor welfare, the government issued minimum wages regulation. Although the purposes of the minimum wage policy were widely accepted, there is great disagreement about whether the minimum wage is effective in achieving its objectives. We found that the minimum wage policy in Indonesia has a positive impact on the average wage. 1 percent of the increase of the minimum wage will increase the average wage by 0.71-0.98 percent. The minimum wage has a negative impact on employment to the working age population ratio. 1 percent of the increase of the minimum wage will decrease the employment to population ratio by 0.62?0.76 percent. The minimum wage only affects total investment. Total investment will decrease 0.09% if the minimum wage increases by 1%.

Suggested Citation

  • Andi Sukmana & Ichihashi Masaru, 2014. "The Impact of Minimum Wages on Investment and Employment in Indonesia," IDEC DP2 Series 4-6, Hiroshima University, Graduate School for International Development and Cooperation (IDEC).
    • Handle: RePEc:hir:idecdp:4-6
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    References listed on IDEAS

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    Keywords

    Average Wage; Employment; Investment; Labor; Minimum Wage;
    All these keywords.

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