The Effect of Minimum Wage on Labor Market Structure and Household Welfare in Indonesia
Open AccessThis dissertation explores the effect of minimum wage on labor market structure and household welfare. Chapter 1 provides the context and significance of the subject and outlines the thesis. Chapter 2 provides empirical analyses on the characteristics of the labor market structure in Indonesia. Our empirical analysis shows the essential features of the labor market in Indonesia that are also commonly found in other developing countries.: (i) substantial heterogeneity in profit income among informal sector workers, (ii) monopsonistic behavior of employers, (iii) the minimum wage close to the median wage, and (iv) imperfect government monitoring and non-compliance of minimum wage regulations. Especially, the estimation of Marginal Treatment Effects (MTE) suggests that a number of informal sector workers choose to stay in the informal sector. Chapter 3 develops a stationary equilibrium model that incorporates the key features of the labor market we showed in the previous chapter. The model extends Burdett and Mortensen (1998) with the presence of informal sector workers and firms' non-compliance behavior to the existing labor protection regulation. Chapter 4 discusses the econometric analyses on the effect of the minimum wage to confirm the predictions of the theoretical model. Using historical minimum wage changes in Indonesia during 2000~2014 and implementing a method that exploits differences in real minimum wage changes between geographically proximate districts, this paper empirically confirms the predictions of the equilibrium wage-posting model. An increase in the minimum wage can induce (i) an increase in formal sector employment, (ii) an increase in formal sector wages, (iii) reduced economic rents for monopsonistic employers, and (iv) an increase in the number of formal sector firms that do not comply with the minimum wage regulation. Chapter 5 shifts our attention to the household, and analyze the effect of minimum wage on the married couple's household bargaining. We have four main findings: (i) the minimum wage has a negative and statistically significant effect on overall measures of married women’s intrahousehold bargaining power; (ii) a negative effect of the minimum wage on women’s household bargaining power can be explained by a positive effect of the minimum wage on married men’s labor market opportunities relative to labor market opportunities for their wives; (iii) The negative effect of the minimum wage on women’s bargaining power is driven primarily by less educated women who rarely work in the formal sector; and (iv) the minimum wage increases household expenditure on tobacco and alcohol, reduces their contributions to a common form of microfinance, and has a negative effect on children’s health, consistent with a loss of women’s bargaining power. Chapter 6 concludes the dissertation.
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