Demand for Higher Minimum Wages Hurts Indonesia's Investment Climate
On Monday (28/10), another large-scale demonstration took place in the center of Jakarta, Indonesia's capital city. The workers that participated in the strike demanded a new minimum wage for Jakarta's provincial government due to the country's recent high inflation rate after prices of subsidized fuels were raised in June 2013, thus curbing people's purchasing power. The workers demand for the new minimum wage of IDR 3.7 million (USD $327) per month. However, these developments can hurt the investment climate in Indonesia.
For investors (particularly foreign investors), such a minimum wage increase can become reason not to invest in Indonesia as they prefer low production costs through cheap labour, while it can make established investors decide to move to other emerging countries where labour is cheaper. Another possible consequence of the workers' demands, if approved, is that entrepreneurs might need to fire employees in order to safeguard their financial balance sheets. As such, if workers demand too steep wage increases, it can backfire.
On 31 October and 1 November 2013, a national strike will be held, organized by the Indonesian Workers Confederation (Konfederasi Serikat Pekerja Indonesia or KSPI). This is expected to cause a slowdown in industrial activities for two days. Moreover, between 28 and 30 October, various regional demonstrations or strikes are held aimed at increasing the regional minimum wages as well as demanding for universal health coverage for all Indonesians (from 1 January 2014) and the elimination of outsourcing. In 2013, Indonesia has already seen an average minimum wage increase of 18.32 percent, significantly higher than the 10.27 percent average minimum wage increase in 2012.
As regards Jakarta, the local minimum wage currently stands at IDR 2.2 million (USD $195) per month. The workers' demand for IDR 3.7 million would imply an increase of 67 percent. In other parts of Indonesia, demands are less high. For example in the footwear industry (mostly centered in East Java), workers demand for a 50 percent increase in the minimum wage. It has been reported in Indonesian media that 46 foreign footwear manufacturers will leave Indonesia if the government approves this demand. For them, Vietnam or Myanmar is a more attractive production hub with lower labour costs.
Sofjan Wanandi, Chairman of the Indonesian Employers Association (Apindo) claims that as a result of the minimum wage increases last year, various foreign investors chose to leave Indonesia in the first semester of 2013, resulting in about 200,000 of discharged workers.
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