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Table 8 compares key features of the minimum wage legislation with the other five countries. It is clear that minimum wages provisions in Indonesia are at least as generous as in any of the other countries. Malaysia stands out as the only one of the six countries with no minimum wage. The other four countries either have more exclusions in coverage for example for apprentices or workers on probation (U.S., Korea) and/or permit certain non-wage benefits to be counted as wages (U.S. and in Korean law), and, at least at first glance have minimum wages set at lower levels relative to average manufacturing wages. The minimum wage as a ratio of an average manufacturing wage was 0.51 in Indonesia in 1991 and is likely to be slightly higher in 199432/. The real value of minimum wages fell through the eighties in the U.S., Mexico and Chile33/. In the first quarter of 1993, approximate calculations based on available data reveal that approx one-third of all manufacturing industry workers had monthly income below 1.2 times the minimum wage while about 15% had monthly incomes below 0.8 times the minimum wage34/. While not cast in stone, these estimates suggest that the minimum wage may be more binding in Indonesia than in the other countries being studied35/36/ Minimum wage provisions are usually designed to guarantee each worker a reasonable wage for his or her work effort and thus to reduce the incidence of poverty. Proponents also argue that they increase productivity. Neoclassical economic theory, on the other hand, suggests that such legislation could have unintended adverse consequences. Even in the case of full coverage, repeated minimum wage imposition as in the case of the U.S.37/ could be associated with a cycle of short run employment losses, inflation reducing the real value of the minimum wage and restoring employment, and then an increase in the minimum wage starts the process all over. In a growing economy with complete coverage, the net effect of a one-time increase in the minimum wage is to reduce the rate of growth of 32/Minimum wages in Jakarta, for example, in 1994 are about 1.5 times their 1991 value. Wage trends in 1993 Sakemas data show that nominal manufacturing wages increased at about 11 % between 1991 and 1992. Assuming the same rate of growth for the next 2 years and assuming manufacturing growth rates in Jakarta are the same as the Indonesia wide rates, this would make the ratio slightly above the 1991 ratio. At any rate, with annual indexation to the CPI, this ratio is unlikely to decrease without real wage increases.

_3/Although in Chile real minimum wages have grown at 7% per annum since 1989 while average wages have grown at 4% per annum in real terms.

34/These are approximate calculations based on available published tabulations from the Sakemas household surveys. In Chile, about 5-6% of workers are reportedly at the minimum wage and almost no workers are below the minimum wage. In Bell (1994) 1988 household survey data showed that 2.16% of formal sector workers were below the minimum wage, 24.18 were below 1.5 times the minimum wage and 48.02% were below twice the minimum wage. For full time male workers in the informal sector, the corresponding numbers were 16.48, 44.74 and 62.94 respectively.

35/See Bell, 1994 for minimum wages relative to income distributions in Mexico and Columbia. The numbers for Indonesia appear to be more like the Columbia numbers where distortionary impacts of minimum wages were found. Note that the Columbia numbers were from manufacturing firm data and may underestimate the number of workers at the lower end of the income distribution.

36/lnterviews with employers inn Indonesia suggested that smaller labor intensive firms such as small garment firms appeared to find the minimum wage somewhat problematic whereas the minimum wage was not an issue for the larger less labor intensive firms.

37/In the U.S. the minimum wage was typically fixed in nominal terms at about 55% of current average wage. Rising wages in the rest of the economy gradually erode the minimum wage and eventually the process is repeated.