How does the minimum wage affect employment statuses of youths?: evidence of Indonesia

Abstract

Purpose

The purpose of this paper is to examine the effects of minimum wage on youth employment across employment statuses in Indonesia. This study uses the National Labour Force Survey (Sakernas) from 2010 to 2012.

Design/methodology/approach

This study uses a multinomial logit model to see the youth distribution across different employment status changes as a result of an increase in the minimum wage. Five categories of youth employment statuses are examined including self-employed; unpaid family workers; paid employees in the covered sector; paid employees in the uncovered sectors; and unemployed. The model is examined separately for urban and rural areas, as well as for the male and female youth labour market.

Findings

The results generally suggest that an increase in minimum wage decrease the probability of youth being employed in the covered sector, i.e. paid employment in the covered sector and increase the probability of youth being employed in the uncovered sectors, including self-employed, unpaid family workers, and paid employment in the uncovered sectors. This study indicates a displacement effect for youths from the covered sector into the uncovered sector as suggested by the two-sector model. The specific results are different across urban and rural labour markets, as well as across males and females.

Originality/value

Compared to the developed country studies, the studies on the effects of minimum wage on youth employment in developing countries is relatively limited. The sample from Indonesian labour market with a large informal sector has never been used for these purposes. This study also contributes to the literature by using the particular definition of the covered-uncovered sector to the Indonesian labour market based on the employment status and individual wage data.

Citation

Pratomo, D.S. (2016), "How does the minimum wage affect employment statuses of youths?: evidence of Indonesia", Journal of Economic Studies, Vol. 43 No. 2, pp. 259-274. https://doi.org/10.1108/JES-07-2014-0131