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Essay title: The Impact of a Rise in Minimum Wages on the Food-Service Industry
in Jakarta
Research question: What is the impact of a rise in minimum wages on the food
Subject: Economics
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
Contents Page
1. Introduction 4
2. Hypothesis 5
3. Methodology 5
5. Literature Review 11
11
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
6.3. Card and Krueger study of Minimum Wages and the Impact on the
7. Research Findings 16
8. Limitations of Research 18
8.1. Survey 18
8.2. Interviews 18
Economy 19
9.2. Welfare 20
9.3. Stakeholders 21
10. Conclusion 22
11. Bibliography 26
12. Appendices 30
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What is the impact of a rise in minimum wages on the food service industry\ in
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Introduction
the best decision possible to address the core economic problem of scarcity
(Tragakes, 2011). In cases where opportunity cost is a viable option, that is usually a
objectives, which, for purpose of this research, are economic (employment and
to try to establish a ‘living wage’ for lower income families who fall under the
‘unskilled’ or ‘low skilled’ labour and who normally are paid the least (London School
of Economics, 2016).
The general macro-economic reasons for a minimum wage policy (and for raising
● Reduce inequality.
● Reduce poverty.
living.
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
What is the impact of a rise in minimum wage on the food service industry in Jakarta;
and
This paper is divided into sections and will address the research question above
aimed to evaluate the current employment and wage situation, the importance of the
food service industry in Jakarta and the impact on profitability as a result of rising
Hypothesis
Continuous Increase in the national minimum wage will lead to fall in profits and /or
As all policies do, the minimum wage policy has its own challenges and its
Thus, develops the hypothesis, above, and direction this research will take.
Methodology
Research Philosophy
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
The research philosophy of this paper adopts a mixed methods approach, with
quantitative and qualitative, and literature review data, collected and collated.
In the primary research, I will conduct electronic surveys with a sample size of 45
stalls, cafes and fine dining restaurants. Each survey will incorporate 16
questions. (See Appendix-1). I will also conduct detailed three interviews. Two
with senior leaders of Burger King and Dominos in Indonesia (fast food chains)
and one with the CEO of a fine dining restaurant. These interviews will include
wage, business opinion regarding impact of this rise and solutions they may have
Literature Review
The literature review will include information from electronic and hard copy sources
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What is the impact of a rise in minimum wages on the food service industry\ in
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required to pay wage earners for the work performed during a given period,
The objective is to ensure that the unskilled labour gets a reasonable income to live
on, and manage, and help mitigate income inequality within the labour market
(Dixon, 2017).
The market clearing wage We is where demand of labour is equal to the supply of
labour. The minimum wage, Wm, lies above the equilibrium wage, We. Therefore, at
Wm, the quantity of labour supplied, Qs, is larger than the quantity of labour supplied
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
when the labour market is in equilibrium (Qe). The quantity of labour demanded, Qd,
is less than the quantity demanded at equilibrium, Qe. This results a surplus of
labour in the market (Qs – Qd). The labour market does not clear when there is a
minimum wage which could result in unemployment and therefore this is one of the
In economic theory, when the wage increase is lower than the marginal productivity
is measured as extra unit of output (in this case extra unit of revenue) for every extra
worker who is employed (Social Protection and Labor Global Practice of the World
Bank Melbourne Australia, 2015). When minimum wage is set close to the market
will lead to job losses in the formal sector, because poor workers with low skills and
low productivity get pushed out first when overall wages increase.
similar wage increase (Babones, 2014). A change in the minimum wage would lead
wage legislation is set above the equilibrium wage on a demand and supply curve
and is increased, the supply of labour exceeds the demand, which decreases
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
employment. This is why firms use both labour and capital to maximize output. If
marginal benefit keeps rising whilst marginal cost remains the same, the firms are
able to continue producing without losing any of their employees. They can use
● Distribution of income gap between high and low income are narrow
Online, 2018)
● Demand for labour contracts as labour prices rise and supply expands
a nominal GDP per capita of US$3,570 and a GNI per capita of US$3430. It is
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
also a young country of 260 million people and the current labour force is
government’s aims are to reduce unemployment, and at the same time ensure
that workers have a basic minimum standard of living, keeping in line with the
have been increasing between 8-10% p.a . The figure below shows the wage
increase in Jakarta which in 2018 is approximately IDR 3.6 million (US$ 265) 8
percent higher than the minimum wage in 2017. This new wage is 54.2% higher
than the minimum wage in 2014, which was IDR 2.4 million.
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
Literature Review
employment is negatively impacted in small firms with Low skilled workers. Since
there are many more small firms in the sector, the overall impact of job losses is
significant in the formal employment sector. This is because job losses are more
severe in firms which are labour intensive like wholesale, retail, tourism, as they
employ a large number of unskilled labour. This study showed is that wage increases
greater than productivity increases leads to unemployment as firms will try and
Small firms tend to have lower average wages so when minimum wages are greater
than average wages, firms retrench low skilled workers, because the marginal
productivity of labour per unit of revenue is low in small firms. In comparison larger
firms have economies of scale even when marginal productivity of labour is closer to
minimum wages.
Harrison and Scorce (2010) highlights a 10% increase in real wages resulted in a
1.2% decrease in employment. However, this research did not cover informal
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
agriculture and other informal enterprises (Asian Development Bank BPS Statistics
Indonesia, 2015)
Though the monthly minimum wages in Indonesia relative to the country’s GDP per
capita is higher in Indonesia than in Thailand and China (Trading Economics, 2018).
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What is the impact of a rise in minimum wages on the food service industry\ in
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The various segments in the food service sector fall in varying degrees of
power. As a result, in the short run firms can make abnormal profit, but in the long
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
The graph above shows the long-run equilibrium of the monopolistically competitive
firm. At the level of output where MR = MC, P = ATC; therefore, economic profit is
The explicit costs of the firm are labour, rental and cost of materials. In the short run,
in the food service industry, firms will need to control variable or explicit costs.
Normally when output increases, the firm adds more variable cost in the form of
additional labour to produce this extra output. If the cost of wages increases, unless
the output increase is greater than the cost of wage increase, firms will need to
There are over 200,000 individual restaurants in Indonesia (Chen, 2016) and close
than national economic growth at 5.5%. This industry also contributed to 34.95%
of the national economic growth in 2017 (Temp Co, 2018). This sector is
most of whom are minimum wage earners. Each individual restaurant is like a
small firm and its aim is to make at least economic profit (Global Business Guide
cafes/bars, fast food, kiosks /street stalls. Of this 45.5% are small kiosks or stalls
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What is the impact of a rise in minimum wages on the food service industry\ in
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and the remaining are more formal in the form of cafes, fast food and dine-in
The food service sector has 3 large buckets of variable costs- labour, cost of raw
material (food and beverage) and rental. Labour alone is between 14-22% of the
Card and Krueger Study of Minimum Wage and the Impact on the Food Service
Industry
Card and Krueger’s (1994) study on the impact of minimum wages and
employment in the fast food industry examined the effect of minimum wage
imposition on the fast food industry in New Jersey (USA) and compared this
showed that wage increases in New Jersey did not (necessarily) reduce
refuted this and through their research contested that minimum wage
increase did impact employment of low wage workers. Card and Krueger’s
study was contested until Dube and Reich’s (2012) study on restaurant
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What is the impact of a rise in minimum wages on the food service industry\ in
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This is different from the results in section 5.1, where the analysis of
Research Findings
Quantitative survey and further in depth case interviews were done to understand
what the impact truly is of the increase in minimum wages in the food service
industry . Is there no impact, which is what Card and Krueger’s study showed or
does it impact unskilled labour as shown in the earlier study done on the
The survey showed that kiosks employ an average of 3 or less workers per shift. All
are on contract and primarily unskilled. Local and international chains employ more
than 10 workers per shift, and 75% are unskilled. Dine in restaurants have 50% or
The local kiosks or ‘warungs’ seem unaffected with the increase in minimum wages.
This is because they don’t seem to adhere to minimum wage regulations and have
primarily unskilled workers. When pushed they claim they are willing to work with
lower profits.
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What is the impact of a rise in minimum wages on the food service industry\ in
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All firms in other segments are unwilling to compromise on revenue and profitability
due to minimum wages in the short run. They said they would do the following:
● Reduce labour
workers with higher minimum wage, their main solution was to offload some
labour
The survey showed that kiosks employ an average of 3 or less workers per shift. All
are on contract and primarily unskilled. Local and international chains employ more
than 10 workers per shift, and 75% are unskilled. Dine in restaurants have 50% or
The local kiosks or ‘warungs’ seem unaffected with the increase in minimum wages.
This is because they don’t seem to adhere to minimum wage regulations and have
primarily unskilled workers. When pushed they claim they are willing to work with
lower profits.
All firms in other segments are unwilling to compromise on revenue and profitability
due to minimum wages in the short run. They said they would do the following:
● Reduce labour
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What is the impact of a rise in minimum wages on the food service industry\ in
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workers with higher minimum wage, their main solution was to offload some
labour
Limitations of Research
Survey
The survey only covered employers, and could not reach other stakeholders:
employees and consumers. Additionally, kiosks did not follow minimum wages and
therefore did not have many solutions as they do not see a problem. The execution
of this type of primary research took a lot longer than predicted and surveys were
reposted in order to gather more accurate information and complete the ones that
Interviews
The interviews were only three and excluded cafes and kiosks. These interviews
rise in minimum wage, were senior management and did not always have the time to
Secondary Research
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What is the impact of a rise in minimum wages on the food service industry\ in
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Some journals and articles were old and therefore some theory and data were
irrelevant to this study. A majority of journals and articles written more recently
studied minimum wages in other countries and some of their analysis was not
relevant. Most journals and reports have contradictory points of view on the impacts
of wages.
The benefits of increasing minimum wages for the economy as a whole in the form of
Economy
The overarching question is - Who benefits and who loses out when minimum
wages rises?
From the literature review, the purpose of minimum wage is to address market
narrowing the gap, as best as the economy can, between low, middle and
manage potential market failure, address welfare issues that may arise and
Market Failure
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What is the impact of a rise in minimum wages on the food service industry\ in
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Whilst market failure is a topical issue, the overall adverse effects of rising minimum
wages, from the data, seem to have little effect on unemployment numbers.
productivity and demand for labour, thus lowering labour turnover in most
● Higher minimum wages seem to attract higher skilled, efficient, and more
productive labour who in the long run could take over jobs from low skilled
● Some firms tend to pass along cost of higher minimum wage to consumers
Welfare
aimed to improve public welfare and income distribution. The minimum wage
government and welfare support then the rise of minimum wage will:
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● curb low income earners from falling below the poverty line through
redirect government revenue into other areas of the economy such as;
● enable low skill workers to improve or upgrade their skills. enabling them
On the flip side, the adverse effects see, no reduction in welfare payments and an
increase in welfare programs to assist with the downfall of even more. So, in this
case, impact may be severe (Employment Policies Institute, 2015). Thus, the
Stakeholders
From the data and the literature review, the stakeholders that were affected by
rising wages were employees, employers, consumers and everyone who has an
interest, personal or business, in the fast food industry. The impact on stakeholders
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What is the impact of a rise in minimum wages on the food service industry\ in
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Organisation, 2015)
Overall, in the short run, rising costs due to the rise in minimum wage, could have
The benefits, on the other hand would see improved living standards, increase
Conclusion
Minimum wages are an important macroeconomic policy tool by the government to reduce
inequality, poverty and maintain a material and non -material standard of living. The
Indonesian government has increased minimum wages by more than 8-9% per
The food service industry is very labour intensive and an average 70% of the labour
employed is unskilled (as per survey). A lot of research has gone into understanding
the impact of minimum wages in this sector with contradictory conclusions on the
impact of minimum wages on the labour intensive small firms. My conclusions from
the survey and interviews mostly echo that of the research by John Schmitt (Feb
2013) .
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In general, firms are not willing to work with less profit. However, as labour costs
form between 15-22%, they use this as a lever to manage profit. (appendix-3) There
are real costs involved in hiring new workers or firing existing workers. Workers may
not find new jobs easily. Because firms will are not willing to pay more for workers,
they work with some vacancies, make the existing workers more efficient and pay
The important cost metric for firms is pay per hour, and to reduce this firms.
( see Appendix 4)
I believe there are positive outcomes with wage increases for all stakeholders-
Labour :
pay
Firms
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● With reduced turnover of labour , they save on re-training costs and re-hire costs.
● Try and close the gap of wages between permanent and contract workers. In
the last 4 years the gap has reduced from 60% to 25% and the government is
now mandating that contract workers also get all benefits. Through this,
government hopes to close this gap. This will ensure that all workers get the
4a)
● Allow for minimum wages to be fair and competitive and not fixed. (Endriga,
2008)
by 2030, demand for semi- skilled and skilled workforce will be 113 million
● Ensure that growth in minimum wages is not more than growth in average
themselves.
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the country, so there is more jobs, more consumption and higher GDP
growth.
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Jakarta?
Bibliography
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
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What is the impact of a rise in minimum wages on the food service industry\ in
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a
[Accessed August 2018].
Guntur Sugiyarto and Benjamin A. Endriga, Do minimum wages affect employment and
training , ERD working paper 113. Asian development bank, may 2008
Available at https://www.adb.org/sites/default/files/publication/28371/wp113.pdf
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Appendix 1
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Appendix 2
growing at 9% p.a and are segmented into full service restaurants, cafes/bars, fast
food, kiosks /street stalls. Of this, restaurant's form 80% of revenue, cafes are 10%,
As per the Euromonitor 2016, the following is the estimate of numbers and value for
Restaurants
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Appendix 3
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Appendix 4a
Dominos , Indonesia
The Indonesian government has been increasing the minimum wages every year by
10-12%. Ashwini spoke about the impact of the wage increase from 2014 to 2018.
The monthly wages in Jakarta have gone up as below between 2014-2018 and on
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Domino's has not been able to increase prices at the same level as the increase in
minimum wages as this will mean declining revenues in a highly competitive market
for Pizzas.
In 2014, each restaurant of Dominos employed 14-15 people of whom 10-11 were
full time employees (who get min wages or other benefits such as insurance ), and 4
were part time employees (these people get minimum wages , but do not get other
benefits).
In 2018, each restaurant now employs 10 people of whom 5 are Full time and 5 are
part time.
This is a cut of 33% of the total labour per restaurant or a cut of 8% per year on an
average.
So Domino's has done two things to manage the wage inflation and to increase
profitability
1. Cut the total number of employees and are squeezing employees to give
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Part time employees are atleast 25% cheaper than full time employees because they
are easy to roster which means they need to only be on duty for the hours when the
restaurant needs them, as they are paid by the hour and they can also be told to
leave jobs on a days notice. Full time employees have to be present and are paid
monthly, have to be given a notice of at least 1 month and it is difficult to let them go.
As a result , according to Ashwini, while the living standards of employees may have
increased, the impact of minimum wage increase by the government means that
there is more unemployment in the quick service restaurant sector unless the
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Jakarta?
This shows that overall unemployment however has been the same over the last 4
years. This is an average for all Indonesia and may not reflect the specific
Domino's has however been able to increase its profitability on a store wise level by
IDR Million
drinks sold as %
to revenue
a % of revenue
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Employees per 15 12 10
store
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What is the impact of a rise in minimum wages on the food service industry\ in
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Appendix 4b
Summary of the Interview with Vaibhav Punj, CEO Burger King Indonesia
Fast food chains, especially burger chains work on a store profitability of 12-13% per
store.
On an average the labour cost per store is between 11-12% of the total revenue.
With a profit margin which is low, any cost increase puts pressure on the profit of the
firm.
The Indonesian government has been increasing the minimum wages every year
and they took a big hike in 2014 of close to 14%. The wage increase of 7-8% p.a in
the last 2-3 years has been close to the inflationary increase of 6.7-7% in CPI over
Burger King has not been able to take the entire wage inflation through price
Burger King has therefore managed to maintain the store profitability by cutting food
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What is the impact of a rise in minimum wages on the food service industry\ in
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In addition to this, the company has also become more labour efficient. On an
average it has cut 5-6 people per restaurant from the rate of 20-25 people per
The company has had to do this, because while the wage inflation has been 7-8%,
the government has included bonus on top (which is the 13th month salary) + total
health insurance from last year. This has added more pressure to the real cost of
labour.
In order to manage the future cost of wage inflation, Burger King is already testing
new technologies such as self service kiosks which will further reduce 3 people per
In summary, Burger King will want to maintain profitability at 12-13% per store and
2. cut food costs and make it more efficient because food costs are around 39%
profitability
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What is the impact of a rise in minimum wages on the food service industry\ in
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Appendix 4c
Interview with Ronald Akili of the PTT family, CEO of Potato Head, Jakarta
Summary
There are 3 potato heads in Jakarta . The restaurants are all fine dining with a
revenue of greater than IDR 5 million per day per restaurant. Food cost is 33%,
which gives the restaurant more margin to work with. Labour cost is high at 22%,
but this is because 70% of labour he employs is skilled. He is clear that he will
continue to automate to remove the unskilled labour and will increase productivity of
skilled labour. He is more concerned with the average wages he pays per worker
and as long as minimum wages are below the average wage, he will continue to
When his average wage per worker is higher than the minimum wage, this is a good
indicator according to him that he is employing more skilled and capable workers.
He also said that for him the productivity per worker is critical and his revenue per
worker should be 50% higher than the wages he pays. He has also reduced the
increases in pay he gives to his high cost skilled staff and therefore there is some
wage compression.
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What is the impact of a rise in minimum wages on the food service industry\ in
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For the fine dining restaurant sector as a whole, he believes that the following is
roles like cleaning, increase in training and skilling make the critical roles like service,
workers as a percentage as the wage cost per hour comes down overall.
He also mentioned that he believes over the last 5 years, restaurants in Jakarta have
reduced workers by 20% and many of these workers have now either gone back to
The restaurants form 47% of the total sector, and on an average employ 20 people
between two shifts. Earlier they used to employ 26 people, so there is a reduction of
6 people per restaurant over 5 years, but the overall sector is growing at 8-9% p.a.
and therefore the new restaurants and cafes absorb them. Overall till now, he
believes that the overall unemployment has not increased . However in the last 2
years, the growth in this sector has been slowing down and this could impact
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What is the impact of a rise in minimum wages on the food service industry\ in
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Appendix 5a
Restaurant type:
Cafe 7 36.84%
kiosk/stall 7 36.84%
total 19
Respondent:
owner/founder/ceo 11 57.89%
cfo 5 26.32%
gm operations/director 3 15.79%
19
Revenue:
from 500,000 to
5,000,000 6 31.58%
19
people employed:
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What is the impact of a rise in minimum wages on the food service industry\ in
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On an average 6.7
4 - 10 8 42.11% 7 employees
19 6.710526316
level of unskilled
labour:
Mostly unskilled
26 - 75 10 52.63% workers
19
permanent vs
contract:
significant contract
50 or more 11 57.89% workers
19
estimated increase in
revenue:
3-5 13 68.42% 4
Estimated increase in
6 - 10 1 5.26% 8 revenue low at 6.5%
19 6.447368421
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
19 3.763157895
expected increase in
costs:
Cost increase
expected low. and
5 - 10 5 26.32% 7.5 lower than revenue
expected impact of
min wage increase:
19
no 8 42.11%
maybe 2 10.53%
19
solutions:
Significant number of
restaurants will cut
lower profit 6 21.43% people
others 6 21.43%
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What is the impact of a rise in minimum wages on the food service industry\ in
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Appendix 5b
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What is the impact of a rise in minimum wages on the food service industry\ in
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What is the impact of a rise in minimum wages on the food service industry\ in
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single
stall
pintar@gmail.com Pak Warung kiosk or Owner less than
sayed pintar one 500,000
ciliwung single
stall
alaytebet@gmail.co Pak alay Warung kiosk or Owner less than
m alay tebet one 500,000
single
stall
miedaging@gmail.c Pak yudi Mie kiosk or Owner 500,000-1,
om daging one 000,000
menteng single
stall
yfirdensliu@gmail.c Yeni Calais cafe and Owner 2,000,000-
om local 5,000,000
chain
ayuzuliashafira@g Ayu What's Up cafe and owner above
mail.com Zulia Cafe local 5,000,000
Shafira chain
daisy@yummycorp. Daisy Yummy cafe and Director above
com Harjanto Corporati local 5,000,000
on chain
jessph86@gmail.co Jess ayam sit in owner above
m Prabawa kriwil dining 5,000,000
Hudaya
jessph86@gmail.co Jess ayam sit in owner above
m Prabawa kriwil dining 5,000,000
Hudaya
2. how 3. what is 4. how 5. what is the split 6. what are all the
many the split in many between variable costs in each
people (%) between restaur permanent and restaurant in % of total
do you skilled and ants do contract workers costs? (please write as a
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
employ unskilled you per store on the % for each: food cost,
per workers? have in year 2014 and labor cost, rental cost,
restaura unskilled is Jakarta 2018? (If you are other expense)
nt in basic labour ? establish after
each 2014, state the
shift number in the
year when you
were first
established)
6-10 10 - 90 4 2014 - permanent food cost 30, labor 20,
0 contract 10. rental 20, other 10
2018 - permanent
10 contract 70.
3-6 50 20 90/10 Na
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
7 how 8. how 9. how 10.what 11. are 12. what steps do you
much do many much do you you plan to take to reduce
you restaura do you see as concerne the impact of increase
estimate nts do expect the d with the
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
your you plan your impact of increase in wages - you can tick
revenue to open costs to minimum in more than 1
to per year increas wage minimum
increase e per increase wages in
per year per the
restaurant store? future?
per year
5-10% 2-5 5-10% reduction Yes use automation
in profit
3-5% more 5-10% reduction Yes reduce people;use
than 5 in profit automation;reduce
other costs
5-10% less less no Maybe reduce other costs
than 2 than 5% change
3-5% more 5-10% reduction No more contract
than 5 in profit workers;reduce other
costs
5-10% 2-5 less no Yes reduce people;reduce
than 5% change other costs
3-5% 2-5 less no Yes reduce people;reduce
than 5% change other costs
5-10% more less no Yes reduce people;reduce
than 5 than 5% change other costs
above more less no Yes reduce people;reduce
10% than 5 than 5% change other costs
3-5% 2-5 less no Yes reduce people;reduce
than 5% change other costs
3-5% 2-5 less no No Employ qualify people
than 5% change and automate unskilled
workers
3-5% more 5-10% reduction Yes reduce people;more
than 5 in profit contract workers;price
increases
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Conclusion
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References
Start the reference list on a new page, center the title “References”.
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Jakarta?
Begin each appendix on a new page with the word appendix in the top center. Use
an identifying capital letter (e.g., Appendix A, Appendix B etc.) if you have more than
one appendix. If you are referring to more than one appendix in your text, use the
plural appendices.
The first paragraph of the appendix should flush with the left margin. Additional
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What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
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