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Can minimum wages cause a big push? Evidence from Indonesia

Jeremy Magruder ()

Journal of Development Economics, 2013, vol. 100, issue 1, 48-62

Abstract: Big Push models suggest that local product demand can create multiple labor market equilibria: one featuring high wages, formalization, and high demand and one with low wages, informality, and low demand. I demonstrate that minimum wages may coordinate development at the high wage equilibrium. Using data from 1990s Indonesia, where minimum wages increased in a varied way, I develop a difference in spatial differences estimator which weakens the common trend assumption of difference in differences. Estimation reveals strong trends in support of a big push: formal employment increases and informal employment decreases in response to the minimum wage. Local product demand also increases, and this formalization occurs only in the non-tradable, industrializable industries suggested by the model (while employment in tradable and non-industrializable industries also conforms to model predictions).

Keywords: Minimum wage; Big push; Spatial regression discontinuity (search for similar items in EconPapers)
JEL-codes: J8 O1 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:100:y:2013:i:1:p:48-62

DOI: 10.1016/j.jdeveco.2012.07.003

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