An Annually Recurring Phenomenon and Polemic; Indonesian Provinces Set the New Minimum Wages

As usual, it is a matter that tends to disappoint all related sides: workers and worker unions are typically disappointed by too slowly growing minimum wages while their employers are disappointed by seeing the cost of production rise. And, it is always important for the government to stay somewhere in the middle as too strongly rising minimum wages could damage the country’s investment and business environment (and therefore undermine investment realization, which consequently undermines job creation and tax revenue collection). However, on the other hand, it is also in the interest of the government to have millions of satisfied workers (as they are voters in upcoming elections) enjoying improving purchasing power.

And, what makes matters often more complicated is that there exist opposing views (or better: interests) within the government itself (both at the central government and regional governments). So, while some politicians or regional leaders advocate for steep minimum wage growth to seek popularity ahead of elections, others – who focus on the longer term and/or whose political campaigns are financially supported by certain business owners – are likely to advocate for very limited minimum wage growth. This therefore adds a layer of complexity to the matter.

What we have seen in recent years is that Indonesian President Joko Widodo seems to tilt toward safeguarding a conducive business and investment environment by not allowing too steep minimum wage growth (thereby pleasing business-owners).

We also need to add that too steep minimum wage growth could actually backfire on workers as their wages form a significant part of the business owners’ operating expenses. So, excessive wage growth may force a business-owner to cut the number of workers working at his company or factory, while finding strategies to make more efficient use of the fewer workers that become available to him/her. Or the business-owner keeps all workers and instead decides to raise selling prices of the products or services that are sold to customers. This isn’t without risks, too, as it could result in a decline in demand for the company’s products/services thereby actually putting additional pressures on the company’s financial situation (which could necessitate layoffs later on).

However, it could also backfire on business-owners in case wages – throughout the country – grow too slowly as this could lead to stagnation in consumers’ purchasing power. In fact, when inflation grows faster than wage growth, people may very well consume less, and therefore the business-owner could face a decline in sales; again triggering financial pressures.

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