Annual provincial minimum wage growth in Indonesia is determined by a formula that was set in Government Regulation No. 78/2015 on Wages. The Indonesian government decided to issue this regulation because minimum wage growth (which in Indonesia differs from province to province) had been growing by double digits in the 2012-2014 period, thus causing concern among investors.

For existing investors it meant that operating expenses rose steeply (disturbing their corporate earnings), while potential future investors hesitated to invest in Indonesia as steep minimum wage growth resulted in uncertain cost estimates.

Therefore, part of potential investors selected another country to establish their businesses, while a number of existing businesses in Indonesia decided to move their factories to other nations in Southeast Asia where minimum wages are more attractive and minimum wage growth is less steep as well as more predictable.

Investors were therefore content to see Indonesian President Joko Widodo put brakes on minimum wage growth, while allowing a still satisfying growth pace for workers, through Government Regulation No. 78/2015 on Wages. In this regulation the minimum wage growth rate is determined by the following formula:

Minimum Wage New Year = (Minimum Wage Old Year x {Annual National Inflation Rate + Annual National GDP Growth Rate})

To make it more clear, we use the minimum wage for Jakarta in 2019 as an example. In 2018 the monthly minimum wage in Jakarta was set at IDR 3,648,036 (approx. USD $243), while the headline inflation rate was 2.88 percent (year-on-year) in September 2018 and the national GDP rate 5.15 percent in the first half of 2018. Thus, to calculate Jakarta's minimum wage growth rate for 2019 it is: 3,648,036 x (2.88% + 5.15%) or simplified: 3,648,036 x 8.03% = IDR 3,940,973 per month (approx. USD $263).

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Read the full article in the October 2018 edition of our monthly research report. You can purchase this report by sending an email to info@indonesia-investments.com or a WhatsApp (WA) message to the following number: +6287884106944


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