Employment function for Indonesia : an econometric analysis at the sectoral level

The Indonesian government has pinned its hope for reducing unemployment on higher economic growth and increased labor market flexibility, such as lowering minimum wages. The estimated sectoral employment functions reveal that output growth rather than real wages is the major determinant of employment. Additionally, the real wage elasticity of employment in the manufacturing sector is very low. That is, a large cut in real wage will have marginal gains in employment, causing a decline in labor income. Therefore, the strategy of lowering real wage is likely to increase the incidence of the working poor as well as the incidence of vulnerability.