The Indonesian labour market is characterised by widespread informality. To some extent, these outcomes
can be attributed to a sharp increase in the real value of the minimum wage since 2001, when
minimum-wage setting was decentralised to the provincial governments. To test this hypothesis, this paper
uses survey data on the labour market (Sakernas), household income and expenditure (Susenas) and the
industrial sector (Survei Industri) to construct a district-level dataset spanning the period 1996 to 2004. The
effects of changes in the minimum wage on unemployment, formal-sector employment and the incidence
of informality in urban areas are estimated separately by fixed effects and jointly by a seemingly unrelated
regression (SUR) estimator. Our findings show that an increase in the minimum-to-mean wage ratio is
associated with a net increase in employment: a rise in informal-sector employment more than
compensates for job losses in the formal sector. This Working Paper relates to the 2008 OECD Economic
Assessment of Indonesia (www.oecd.org/eco/surveys/indonesia)....

How Does Decentralised Minimum-Wage Setting Affect Unemployment and Informality?: The Case of Indonesia

10.1787/222850046464