An impact of minimum wage rising on firm-specific factors: The case of the emerging economy

Abstract

This study examines how the minimum wage raises in Indonesia affect firm-specific factors such as sales growth, return on assets, return on equity, net profit margin, and gross profit margin. The samples used in this study were 135 companies for 12 years’ financial statements ranging from 2008 to 2019, with 1620 observations. An ordinary least square and multivariate analysis of variance are employed. The MANOVA result shows differences in firms specific factors among industries’ types. Meanwhile, sales growth and wage growth showed no difference in the value of sales growth and wage growth between industry types. The regression results show that 1) minimum wage has a positive effect on wage growth, but the non-significant effect on sales growth; 2) economic growth has a negative but non-significant effect on sales growth and wage growth, and 3) only total assets and wage growth variables have a positive and significant effect on gross profit margin. Bodnár et al. (2018) asserted that the negative effect of an increase in minimum wage could be lowered by cutting in non-labor costs, rising in product prices, and improving productivity; however, this study found that the increase in the minimum wage does not spur employees to be more productive because the number of companies that get positive sales growth decreases in the declining economic conditions (Acar, Bossavie, & Makovec, 2019; Luca & Luca, 2019; Che Ahmat, Kim, & Arendt, 2021; Alexandre, Bação, Cerejeira, Costa, & Portela, 2022) in which it might increase the firms’ exit rate