Effect of Minimum Wages on Inflation and Unemployment in East Java - Indonesia

Abstract

Unemployment and inflation are two macroeconomic problems that have a trade-off, this means that the relationship between inflation and unemployment is negative and the relationship is also called the Phillips curve. The increase in the minimum wage is one of the causes of inflation and unemployment. This study aims to determine the relationship between minimum wage and inflation, the relationship between minimum wage and unemployment, the relationship between inflation and unemployment. This study uses panel data from 38 regions with the period 2010-2019 in East Java-Indonesia. Data is collected from the Central Bureau of Statistics of East Java. Data were analyzed with the Amos. The results showed that the real minimum wage had a negative and significant effect on inflation. Real minimum wages have a positive and significant effect on unemployment. Inflation has a positive and significant effect on unemployment. There is no trade-off between inflation and unemployment, this study does not support the Phillips curve. The real minimum wage has a direct negative effect on inflation, inflation has a positive effect on unemployment, thus causing the real minimum wage to have a negative effect indirectly on unemployment. The relationship between inflation and unemployment shows that higher inflation tends to lead to higher unemployment. The determination coefficient for inflation was 5.5 percent and the determination coefficient for unemployment was 2.3 percent.

Impact of Minimum Wage and Sectoral Growth on Inflation

“…The results of this study support the results of previous research conducted by Brouillette et al (2017), which suggested that an increase in the minimum wage can contribute to higher inflation rates. However, it is essential to note that the results of this study contradict the research conducted by Suparta et al (2021). In Suparta et al (2021) research, the independent variable is only the minimum wage.…”

“…However, it is essential to note that the results of this study contradict the research conducted by Suparta et al (2021). In Suparta et al (2021) research, the independent variable is only the minimum wage. In this study, three independent variables were added so that the number became four variables independent, but the effect of the minimum wage on inflation is positive and insignificant.…”

“…Their study suggests a spiral relationship between the minimum wage and inflation, indicating that they mutually influence each other without a definitive limit. Surprisingly, Suparta et al (2021) found that the minimum wage has a negative and significant impact on inflation, which means that an increase in the minimum wage causes a decrease in inflation.…”

“…Ma (2018) stated that the minimum wage and inflation are positively related and very strong. The relationship between the minimum wage and inflation in Indonesia, where the minimum wage increases annually, has been examined by Suparta et al (2021). Their study suggests a spiral relationship between the minimum wage and inflation, indicating that they mutually influence each other without a definitive limit.…”