The impact of minimum wage on the labour market of an economy with a large informal sector : the case of Indonesia

Abstract

This thesis evaluates the impact on minimum wage on labour market participation in an economy with a large informal sector. In Indonesia, minimum wages are set up at the provincial level, following national directives. In 2001, West Sumatra significantly increased its minimum wage, while most of the other provinces did not, thus offering a perfect quasi-natural experimental setting. The objective of this research is to discuss how this increase in minimum wage influenced the participation of non-governmental workers.1 I used synthetic control method to analysis the effect directly on the aggregate values for the employment level and the proportion of informal workers among employed individuals. I found that the minimum wage resulted in a shift from the informal to the formal sector: without changing the number of non-governmental employed workers, the increase in minimum wage reduced the share of informal workers by 6% within the six years following the intervention. I also found that the increase in minimum wage did not not have any significant impact on workers aged 30 or less.