How the minimum wage has affected intergenerational health in Indonesia

A smiling boy learns to ride a bicycle with his family while walking together in the park

Minimum wages have been implemented almost universally. Initially instituted in high-income countries, more than 80% of low-and-middle-income countries (LMICs) now have minimum wage legislation in place.

This expansion of the policy has come with substantial interest from researchers on the impact of minimum wages on labor market outcomes in the context of high-income countries. However, little is known about their implications in LMICs and even less is known about their impact on health. In Barcelona School of Economics Working Paper 1416, “Minimum Wages and Intergenerational Health,” Farhan Majid, Jere R. Behrman, and Hanna Wang fill this gap by studying the effect of minimum wages on the health of parents and children in Indonesia, the third most populous LMIC.

The impact of minimum wages on intergenerational health is theoretically ambiguous.

On one hand, if an increase of the minimum wage leads to higher income, investment into personal and family health may also increase, thus leading to better health outcomes. However, higher income may also drive parents to work more hours, which could have a negative effect on their health due to physical and mental strain. At the same time, children’s well-being might be negatively affected by a reduction of childcare time.

On the other hand, some firms may reduce demand for labor in the face of higher minimum wages, thus driving some people into unemployment and reducing their income, leading to lower monetary investment in family health but more time for childcare.

The authors hypothesize that in LMICs, increases in minimum wages are more likely to affect men’s earnings and employment than women’s in the presence of children, as many mothers refrain from working to focus on child rearing due to cultural reasons.

Labor markets and minimum wages in Indonesia

Indonesia implemented minimum wages in the early 1970s. All full-time workers are subject to minimum wages that are revised annually to adjust for changes in living costs, inflation, and labor market conditions.

In contrast to countries like the United States, Indonesia’s minimum wages are set at the provincial level rather than the national level. This translates to minimum wage variations across both provinces and time.

Data from the Indonesian Family Life Survey (IFLS)

The authors use data from the Indonesian Family Life Survey (IFLS) covering the years 1993, 1997, 2000, 2007 and 2014. The survey collects data on all individuals in every sampled household. Households are followed across survey waves. The IFLS covers 83% of the Indonesian population living in 13 out of 26 provinces.

Household members are asked about a wide spectrum of life aspects, including employment, work hours, earnings, expenditures, and health. Importantly, the data includes high-quality bio-marker measures that provide objective health measures, in contrast to most health surveys that rely on subjective health classifications.

To explore the role of minimum wages on health, the authors also construct a history of real minimum wages in Indonesian provinces. As shown in Figure 1, there is significant variation in the path that real minimum wages have taken across provinces, which allows the authors to isolate the effect of changes in the minimum wage on health.

Charts show that there is significant variation in the path that real minimum wages have taken across provinces
Figure 1: Real Minimum Wages in Selected Indonesian Provinces 1993-2014 in 1000s Rupees

What does the data tell us?

Using their data on Indonesian household members and on regional real minimum wages, the authors then conduct econometric analysis to study the link of several outcomes of interest, such as income, hours worked, expenditure on protein, hemoglobin readings, height-adjusted child height, etc.

The authors control for unobserved individual characteristics that are time-invariant, such as ethnicity or genetic differences, for differences across regions that are fixed across time, such as demographic shares, and for country-wide shocks that affect all regions in a given year.

Here are some of the outcomes that the authors found:

  • A 10% increase in the minimum wage is associated with an increase of 1.2% of men’s earnings and no significant increase in women’s earnings. Employment and hours worked are not significantly affected by the increase either.
  • The 1.2% increase in men’s earnings is associated with a 1.85% increase in household spending on animal protein, which can help lower the risk of anemia, and a 0.3% increase in mothers’ hemoglobin levels, which is consistent with lower rates of anemia.
  • Effects are particularly pronounced in the years around childbirth: a 10% increase in the minimum wage is associated with a 3.1% increase in children’s age-adjusted height for up to seven years after birth and a 19.3% reduction in pregnancy complications.

Implications for policy in low-and-middle-income countries

Despite much interest from researchers regarding the effects of minimum wages on labor market outcomes in high-income countries, little was previously known about their impact on health outcomes and in low-and-middle-income countries.

The authors of this BSE Working Paper document that increases in the minimum wage in a LMIC context are associated with increased earnings for men, which translate into higher expenditure in animal protein and, in turn, lower levels of anemia, lower pregnancy complications, and higher child age-adjusted height.

These findings should inform policy in LMICs, where unconditional cash transfers have been found to have ambiguous effects on child nutrition and health.