Increases in average real consumption and an improvement in overall equity both helped to reduce poverty. Gains to the urban sector and population shifts were quantitively less important than direct gains to the rural poor. Why was this so? Gains to the rural sector contributed greatly to the alleviation of poverty. For a caloric intake level which 37 percent of the population failed to attain in 1984, only 27 percent of the population failed to attain it in 1987. Although caloric intake data are not ideal, the authors found evidence that the extent of undernutrition also fell significantly. The paper studies a wide range of possible poverty lines and poverty measures - and the sensitivity of key results to many of the underlying assumptions about poverty. This paper discusses how the country fared in its efforts to alleviate poverty and undernutrition during that period. Indonesia adjusted rapidly to sharply falling external terms of trade during the 1980's - using a classic package of currency devaluation, budgetary and monetary restraint, and regulatory relaxation. As such, using minimum wage policy to ensure high wages to a limited number of workers will almost certainly diminish the poverty reducing potential of the labor markets. Recent empirical evidence suggests that increases in the minimum wage may have hurt employment growth, particularly among small firms.

But if they reduce labor mobility, labor market policies can be counterproductive to Indonesia's poverty reduction efforts. At the same time, labor market policy can play an important role in the Government's poverty reduction efforts by helping to facilitate labor mobility across sectors. Because poverty remains largely an agricultural and self-employed phenomenon, the most direct way to reduce poverty is to focus on improving the operation of product, land, and capital markets. Wage labor markets can be expected to play an increasingly important impact on the welfare of Indonesia's poor as the economy continues to undergo structural change, and as the workforce moves out of agriculture into manufacturing and services. Data show that the role of the labor market in reducing poverty has increased since the mid-1980s. Moreover, the largest single contribution to poverty reduction between 19 came from within-sector welfare gains to self-employed farm households. A majority of the poor in Indonesia come from agricultural and self-employed households.

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