EVALUATING THE EFFECT OF MINIMUM WAGE ADJUSTMENTS ON EMPLOYMENT IN THE INFORMAL SECTOR: INSIGHTS FROM INDONESIA AND LATIN AMERICA

Abstract

Minimum wage adjustments are often policies implemented to improve workers' welfare, especially in the informal sector which absorbs most of the workforce in developing countries such as Indonesia and countries in Latin America. However, the impact of these policies on the unemployment rate in the informal sector is still not fully understood, with research results varying depending on economic conditions and policy contexts in each country. This study aims to analyze the impact of minimum wage adjustment on unemployment in the informal sector in Indonesia and several Latin American countries. The method used is panel data analysis with a fixed effects model, using secondary data from the World Bank, ILO, and local economic reports during the 2015–2023 period. The results show that the increase in the minimum wage has a significant negative relationship with unemployment in the informal sector, especially when accompanied by incentive policies for small businesses and skills training for workers. In addition, it was found that macroeconomic stability and government support play an important role in determining the effectiveness of minimum wage policies in the informal sector. These findings have important implications for policymakers in formulating minimum wage policies that balance improving worker welfare and labor market stability in the informal sector