The Informality Trap: The Mediating Role of Minimum Wages in the Effects of Informal Employment and Underemployment on Income Inequality in Indonesia

Putu Riyan Astrawan (Department Economics, Faculty of Economics and Business, Halu Oleo University, Indonesia)
Tajuddin Tajuddin (Department Economics, Faculty of Economics and Business, Halu Oleo University, Indonesia)
La Ode Almana (Department of Management, Sekolah Tinggi Ilmu Ekonomi Enam Enam Kendari, Indonesia)

Jurnal Ekonomi Pembangunan
Vol. 24 No. 01 (2026): Jurnal Ekonomi Pembangunan

This research examines how informal employment and underemployment influence income inequality in Indonesia, with the minimum wage serving as a mediating factor. Panel data covering all 34 Indonesian provinces from 2020 to 2025 were sourced from the Central Statistics Agency (BPS). A Random Effects Model was applied for the panel regression analysis, complemented by the Sobel Test to assess mediation effects. Findings reveal that both informal employment and underemployment significantly and negatively influence minimum wage levels. In turn, minimum wage is negatively and significantly associated with income inequality. Interestingly, informal employment and underemployment show no significant direct relationship with income inequality when examined in isolation. The Sobel Test confirms that minimum wage functions as a meaningful mediator linking informal employment and underemployment to income inequality outcomes. Overall, these results suggest that minimum wage acts as a key transmission channel through which labor market dynamics shape income distribution patterns across Indonesia.