Should Nike and Reebok Pay Higher Wages? The Impact of Minimum Wages on Employment in a Low Income Country

Abstract

The low level of minimum wages in developing countries has been the source of much international controversy. Raising these wages will only benefit the workers in these countries if there are not large subsequent job losses. Unlike the well-developed literature on the employment impact of the minimum wage in industrial nations, very little is known about minimum wage effects in low-income countries. Minimum wages increased sharply in Indonesia between 1990 and 1996 and by more in some provinces than in others. We exploit the large difference in the rate of increase on either side of the Jakarta-West Java border. Household level labor market data are used to establish compliance with the legislation. Matched difference-in-difference estimates of the employment impact in the clothing, textiles, footwear and leather industries are then calculated from a census of all large and medium-sized firms. We find no evidence of a negative employment impact for large firms, both foreign and domestic, but some evidence that workers in small, domestic firms may lose their jobs.

Keywords: minimum wages, natural experiment, developing country, Indonesia

JEL Classification: J38, O15