Can Minimum Wages Cause a Big Push? Evidence from Indonesia

• Departmental Seminar
• Development Workshop

Date and Location

Monday, April 16, 2012, 4:10 PM - 5:30 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

Big Push models suggest that local product demand can create multiple labor market equilibria: one featuring high wages, formalization, and high demand and one with low wages, informality, and low demand. I demonstrate that minimum wages may coordinate development at the high wage equilibrium. Using data from 1990s Indonesia, where minimum wages increased in a varied way, I develop a difference in spatial differences estimator which weakens the common trend assumption of difference in differences. Estimation reveals strong trends in support of a big push: formal employment increases and informal employment decreases in response to the minimum wage. Local product demand also increases, and this formalization occurs only in the non-tradable, industrializable industries suggested by the model (while employment in tradable and non-industrializable industries also conforms to model predictions).