Investigating the Effects of Minimum Wages on Employment, Unemployment, and Labour Participation in Java Indonesia: A Dynamic Spatial Panel Approach

Abstract

Using district-level data for urban areas in Java, we assess the impact of minimum wages on formal- and informal-sector employment, unemployment and labour participation. We employ the spatial Durbin model for our estimation and allow labour markets to be spatially correlated across districts. Our findings suggest that a minimum-wage rise affects mainly the local labour market where the minimum-wage increase occurs. The spillover effects of a minimum-wage increase on neighbouring districts are negligible, except for the impact on labour participation. The results of this study highlight the need to account for spatial dependence when modelling formal-sector employment, unemployment and labour participation, as we found those variables to be geographically correlated, at least across districts in Java.

Tifani Husna Siregar

Former Assistant Professor, School of Political Science and Economics, Waseda University and Research Assistant, Asian Development Bank Institute

My research interests include topics in labor economics, particularly minimum wages and its impact on labor market outcomes.