The Impact of Minimum Wages on Investment and Employment in Indonesia

The labor market in Indonesia cannot absorb all of the labor force available, which allows employers to have greater bargaining power over employees. To protect and to increase labor welfare, the government issued minimum wages regulation. Although the purposes of the minimum wage policy were widely accepted, there is great disagreement about whether the minimum wage is effective in achieving its objectives. We found that the minimum wage policy in Indonesia has a positive impact on the average wage. 1 percent of the increase of the minimum wage will increase the average wage by 0.71-0.98 percent. The minimum wage has a negative impact on employment to the working age population ratio. 1 percent of the increase of the minimum wage will decrease the employment to population ratio by 0.62?0.76 percent. The minimum wage only affects total investment. Total investment will decrease 0.09% if the minimum wage increases by 1%