Essays on the impact of labour market regulation in Indonesia

Abstract

This thesis contributes to the literature on the impact of labour market regulations in developing countries. It consists of three main chapters evaluating how broader changes in labour market regulations and in minimum wage policy, in particular, affect labour market outcomes and poverty in Indonesia.

Chapter 2 analyses the relationship between a significant shift to much more stringent labour market regulations in Indonesia in the early 2000s and changes in employment in the manufacturing sector. While this regulation shift has been associated with the stagnation of the manufacturing sector in Indonesia over the past two decades, there is little rigorous evidence to support the association. The analysis compares firms in labour-intensive and non-labour-intensive manufacturing industries over time, and uses the difference-in-differences method to analyse different employment trends between these two groups around the time of the labour regulation change. The results show that employment in firms in labour-intensive manufacturing declined by 4% to 14% relative to firms in non-labour-intensive manufacturing around the time of the labour regulation change. This pattern is robust to using different measures of labour intensity, and to controlling for other policies that may have affected different industries differently during the same period including trade liberalisation, China's entry into the WTO, and changes in the Multi Fibre Agreement. The findings suggest that more stringent labour regulations likely contributed to the stagnation of labour-intensive manufacturing since the early 2000s in Indonesia.

Chapter 3 evaluates the effect of minimum wage increase on labour market outcomes of workers in formal and informal manufacturing firms in Indonesia from 2000 to 2014. Using district-level panel data, I use an identification strategy that exploits minimum wage variation within nearby districts. The results show a positive wage effect on the formal manufacturing firms where the minimum wage is relatively more binding and a null wage effect for the informal firms. I find growing informalisation in the manufacturing sector, driven by declining employment among formal manufacturing firms and increasing employment among informal manufacturing firms.

Chapter 4 examines whether the minimum wage policy played any significant role in poverty reduction in Indonesia between 2002 and 2014. The results from difference-in-spatial-differences, which exploit minimum wage variation within geographically proximate districts, show that the minimum wage not only helps to increase the earnings of poor workers in the formal sector, but also those who work in the informal sector. However, the policy decreases poor workers' employment in the formal sector. As a result, the minimum wage has limited effect on household consumption per capita and has no significant impact on the poverty headcount ratio. Show more