How important are labor markets to the welfare of the poor in Indonesia?

A majority of the poor in Indonesia come from agricultural and self-employed households. Moreover, the largest single contribution to poverty reduction between 1990 and 1993 came from within-sector welfare gains to self-employed farm households. Data show that the role of the labor market in reducing poverty has increased since the mid-1980s. Wage labor markets can be expected to play an increasingly important impact on the welfare of Indonesia's poor as the economy continues to undergo structural change, and as the workforce moves out of agriculture into manufacturing and services. Because poverty remains largely an agricultural and self-employed phenomenon, the most direct way to reduce poverty is to focus on improving the operation of product, land, and capital markets. At the same time, labor market policy can play an important role in the Government's poverty reduction efforts by helping to facilitate labor mobility across sectors. But if they reduce labor mobility, labor market policies can be counterproductive to Indonesia's poverty reduction efforts. Recent empirical evidence suggests that increases in the minimum wage may have hurt employment growth, particularly among small firms. As such, using minimum wage policy to ensure high wages to a limited number of workers will almost certainly diminish the poverty reducing potential of the labor markets.