Taking money out of workers' pockets

30 October 2015

The Indonesian government has proposed a new regulation that is likely to take money out of the pockets of workers, argues Professor Michele Ford and Professor Teri L. Caraway.

As part of its recent package of economic reforms announced earlier this month, the Jokowi government has proposed a new regulation that would eviscerate the country’s wage councils.

Minimum wages are set annually by tripartite wage councils composed of unions, employers and local governments. These wage councils have recommended — and governors have approved — large increases in recent years.

Under pressure, employers in low-wage sectors have cried foul, and the Jokowi government responded by issuing the proposed regulation.

If it is implemented, the wage councils will no longer be an arena for negotiation. Instead, they will be required to determine wage increases based on a formula set by the central government. Employers have applauded the government’s move, but unions have expressed their dismay, threatening to mount massive protests.

Employers have applauded the government’s move, but unions have expressed their dismay, threatening to mount massive protests.

The government would have us believe that the problem with minimum wage negotiations is that they result in unpredictable and overly generous wage increases that harm Indonesia’s investment climate. But if you look at actual minimum wage increases in Indonesia since 2003, a different picture emerges.

For many years, minimum wage increases closely tracked the inflation rate, with the consequence that real wages were effectively stagnant. In 2010, Indonesia’s minimum wages were considerably lower than China, Thailand, the Philippines, and even Vietnam.

Things only changed when unions in industrial areas began to flex their political muscle to convince local governments to support workers in wage negotiations. Since 2011, minimum wage increases in industrial areas have been significantly above the inflation rate, resulting in real wage gains and finally bringing wages in some localities in line with the government-defined minimum living standard (KHL). By 2013, even governments in non-industrial areas began to approve minimum wage increases that outstripped inflation.

The Jokowi government is right to be concerned about the competitiveness of low-wage industries ate. But minimum wages in core industrial areas in Indonesia are still lower than many competing nations. It’s not because they are paying higher average wages that Indonesian employers can’t compete.

The government could  put other measures in place that would have a much larger impact on the cost of doing business in Indonesia. According to the World Bank’s Doing Business report, Indonesia is one of the worst countries in the world for starting a business, enforcing contracts, and paying taxes.

Structural change aimed at improving the business climate would make a serious difference to Indonesia’s competitiveness. It would also be a logical thing for a reformist government to do. But attacking these problems would require much more profound changes to Indonesia’s political system than taking away workers’ right to a living wage.

According to the International Trade Union confederation, the proposed changes to the system contravene ILO Convention 131 on Minimum Wage Fixing, which requires consultation with unions and employers on the mechanisms used for wage determination. They also undermine Indonesia’s democracy.

The wage councils have been an important mechanism for building economic and political citizenship at the local level. Replacing them with bureaucratic procedures that prevent meaningful participation will destroy that, leaving unions with no choice but to protest policy in the streets.

Teri L. Caraway is professor of political science at the University of Minnesota (Twin Cities) in the US. Michele Ford is professor of Southeast Asian studies and director of the Sydney Southeast Asia Centre at the University of Sydney, Australia. First published in the Jakarta Post, 29 October 2015.

Sitou Sally

Higher degree research student
  • The University of Sydney

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