The impact of the minimum wage in a developing economy

Whether raising the minimum wage decreases employment has always been controversial, foremost because some studies could not find such an effect, second because there are some theoretical grounds that can support the opposite effect. Some of this has been discussed on this blog: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11. Only one of those works pertained to a developing country, where it is found, using household level data, that an increase in the minimum wage leads to a shift from the formal to the informal sector and leads to a decrease in poverty.

Ximena Del Carpio, Ha Nguyen and Liang Choon Wang provide new evidence, this time from Indonesia and using data from manufacturing firms. The impact of an increase of the minimum wage depends highly on what you are looking at: it increases employment at the provincial level, but decreases it at the firm level. The negative effect is particularly strong for non-production workers, workers with few skills, female workers, and small firms. It should not be a surprise that people with lower skills are more affected, and small firms, too, as they tend to have lower wages. But this just confirms that empirical works on the minimum wage are hard and confusing.