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Minimum Wages and Firm-Level Employment in a Developing Country

Sjöholm, Fredrik LU (2020) In Working papers
Abstract
The effect of minimum wages on employment is a matter of debate, and the existing empirical literature contains mixed results. One reason for this is the methodological difficulties involved where changes in minimum wages are endogenous to other important economic changes. To overcome this problem, we examine exogenous changes to local minimum wages in Indonesia between 1989 and 1994. Our natural experiment results from a national policy change: from minimum wages being determined by local guidelines and criteria to minimum wages being harmonized and set according to nationwide criteria. We examine how these changes in minimum wages affect employment, considering the effect both on employment within plants and on exit of plants. Our... (More)
The effect of minimum wages on employment is a matter of debate, and the existing empirical literature contains mixed results. One reason for this is the methodological difficulties involved where changes in minimum wages are endogenous to other important economic changes. To overcome this problem, we examine exogenous changes to local minimum wages in Indonesia between 1989 and 1994. Our natural experiment results from a national policy change: from minimum wages being determined by local guidelines and criteria to minimum wages being harmonized and set according to nationwide criteria. We examine how these changes in minimum wages affect employment, considering the effect both on employment within plants and on exit of plants. Our results show no evidence of an effect of minimum wages on employment in Indonesian plants. One explanation found in the data is that higher minimum wages force plants to increase productivity, which in turn enables them to retain their labor force, despite higher wage costs. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Working paper
publication status
published
subject
keywords
Minimum wages, Employment, Plants, Indonesia, J21, J23, J38
in
Working papers
issue
2020:4
pages
32 pages
language
English
LU publication?
yes
id
1f73cb71-2c7d-4185-bd2d-377284134562
alternative location
https://swopec.hhs.se/lunewp/abs/lunewp2020_004.htm
date added to LUP
2020-04-27 09:50:31
date last changed
2020-04-27 09:50:31
@misc{1f73cb71-2c7d-4185-bd2d-377284134562,
  abstract     = {The effect of minimum wages on employment is a matter of debate, and the existing empirical literature contains mixed results. One reason for this is the methodological difficulties involved where changes in minimum wages are endogenous to other important economic changes. To overcome this problem, we examine exogenous changes to local minimum wages in Indonesia between 1989 and 1994. Our natural experiment results from a national policy change: from minimum wages being determined by local guidelines and criteria to minimum wages being harmonized and set according to nationwide criteria. We examine how these changes in minimum wages affect employment, considering the effect both on employment within plants and on exit of plants. Our results show no evidence of an effect of minimum wages on employment in Indonesian plants. One explanation found in the data is that higher minimum wages force plants to increase productivity, which in turn enables them to retain their labor force, despite higher wage costs.},
  author       = {Sjöholm, Fredrik},
  language     = {eng},
  month        = {04},
  note         = {Working Paper},
  number       = {2020:4},
  series       = {Working papers},
  title        = {Minimum Wages and Firm-Level Employment in a Developing Country},
  url          = {https://swopec.hhs.se/lunewp/abs/lunewp2020_004.htm},
  year         = {2020},
}