Who Benefits from Minimum Wage Reform? Gendered Impacts of Indonesia’s Rule Based Wage Policy

In 2016, Indonesia implemented a major institutional reform of minimum wage regulation through Government Regulation No. 78/2015. This reform replaced highly discretionary and politically contested negotiations with a transparent formula that ties annual wage adjustments to inflation and provincial GDP growth. Designed to enhance predictability and compliance, the rule-based system represented a structural shift from fragmented bargaining toward a standardized policy framework. This paper examines whether such a gender-neutral reform produced distributional consequences, particularly for women, by assessing its impact on wages given their persistent disadvantages in pay and job quality. The analysis focuses on the formal sector, where enforcement and compliance are stronger.
The study draws on Indonesia’s National Labor Force Survey (SAKERNAS), spanning 2008–2019 and comprising roughly 1.4 million observations of salaried workers. A Difference-in-Differences-in-Differences (DDD) framework is employed to compare wage trajectories across gender, sector, and time, thereby isolating the reform’s effect on women in the formal sector relative to men in both sectors and women in the informal sector. To address potential endogeneity—such as unobserved gender-specific shocks in the formal sector—we complement the DDD design with a two-stage least squares (2SLS) strategy. We use minimum wage bindingness as the instrument for treatment intensity, defined at the provincial level as the share of workers earning at or below 110 percent of the statutory minimum wage in 2015, a year prior to the reform.
The Instrumental Variable-DDD estimates show that the rule-based policy significantly increased wages for women in the formal sector, with the largest gains concentrated among low-paid workers. The results are robust to placebo tests in the pre-reform period and to alternative specifications, supporting the validity of the identification strategy. By contrast, no comparable effects are observed for men or for informal workers, consistent with weaker enforcement outside formal employment.
These findings suggest that rule-based minimum wage policies, though gender-neutral in design, can promote gender equity by enhancing compliance and improving outcomes for disadvantaged groups. Unlike much of the existing literature that focuses on minimum wage increases, this paper evaluates an institutional shift in wage-setting—from discretionary, politicized negotiations to a formula-based system. To our knowledge, it provides the first empirical evaluation of such a reform in Indonesia and among the few globally. While the study cannot separate voluntary compliance from enforcement, the findings highlight how institutional design helps close gaps and improve outcomes for low-paid women in the formal sector.