On Thursday (15/10), Indonesian Chief Economics Minister Darmin Nasution unveiled the fourth economic stimulus package with a main focus on boosting labor and employment in Indonesia. A key policy in the new package is the fixed formula that will be applied by the government to determine increases in labor wages across the 34 provinces of the Archipelago. The government said it will allow a wage increase, every year, based on the provincial inflation rate and economic growth pace.
The new formula is also designed to provide more certainty to business owners regarding minimum wage growth. Currently, minimum wage growth is not fixed but depends on negotiations between local governments and labor unions and is also based on the basic costs of living index in each of the country’s 34 provinces (this explains why there exist big differences in the minimum wage level between provinces). Every year the basic costs of living index (which involves 60 essential monthly expenditures) is surveyed. The result of this index is highly influential in determining the new minimum wage because the result of the index forms a recommendation to the local Governor. However, there have been voices claiming that this index systematically misrepresents living costs for low-paid workers.
As a result, there sometimes occur sudden big jumps in minimum wages on a year-on-year basis (for example the minimum wage in Jakarta jumped more than 40 percent in 2013). This is not good news for the country's business climate as it increases uncertainty for business owners and investors. Sudden big jumps in minimum wages also make Indonesia less competitive on the global market as the country is currently attractive to (labor-intensive) foreign direct investment due to low labor costs.
Minimum wages for Indonesian workers are always a sensitive issue and lead to heated discussion between labor unions and local governments and trigger regular mass demonstrations. While the workers say that their minimum wage is barely enough to maintain a modest lifestyle (particularly as Indonesia's inflation rate is high), employers usually complain about the workers' low productivity and unrealistically enormous wage growth demands from the unions and workers.
Other issues involve politics. Promises of wage growth (the amount of which is sometimes unsustainable) are often used for political gain in times of regional elections. On the other hand, in those provinces where labor unions are weak, the local minimum wage is set below the basic costs of living index.
When unveiling the fourth stimulus package Minister Nasution gave an example to illustrate the new wage formula. He said that when local inflation and economic growth is both five percent, then the provincial minimum wage will be increased by 10 percent. However, it can be questioned whether many of the country's businesses can cope with such a minimum wage increase.
Based on the latest data from Statistics Indonesia (BPS), Indonesia's unemployment rate stood at 5.81 percent (February 2015) with a workforce that numbers 128.3 million people. However, the Institute for Development of Economics and Finance (Indef) expects the country's unemployment rate to have climbed to 7.5 percent by the end of this year due to the ongoing economic slowdown.
Indonesian Labor Force:
¹ in February 2015
Source: Statistics Indonesia
The government also announced it will provide soft micro loans to at least 30 small and medium, export-oriented and labor-intensive businesses through state-owned financial institution Indonesia Eximbank (LPEI) with competitive interest rates.
In September and October, the Indonesian government unveiled three other stimulus packages. These aimed at easing domestic and foreign investment, boost trade, and reduce production and logistics costs.
Due to the country's economic slowdown, concern about unemployment has risen. The Confederation of Indonesian Workers Unions (KSPSI) recently said that over 62,000 Indonesian workers lost their jobs during the first nine months of 2015. Furthermore, the Indonesia Textile Association (API) recently stated that over 100 textile companies are currently on the verge of collapse due to weak demand for textile products. Bankruptcies could lead to an additional 36,000 layoffs.
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When will Indonesia's economic growth rebound?
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