Global Business Guide Indonesia

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Business Updates | Indonesia Moves to Address Minimum Wage Woes

Having made some progress through its previous economic policy packages in allaying concerns within the business community related to rising costs, the Indonesian government on 15th October 2015 made public its fourth package which goes a step further in addressing a core issue that was previously left untouched; namely, the country’s labour laws (See Labour Pains in Indonesia). As a hotly debated topic made even more contentious by the nature of Indonesia’s previous method for determining hikes, minimum wage levels in the archipelago nation are from 2016 onwards going to be subject to a simplified calculation system.

Fixing the formulation of wage hikes

Replacing the much maligned tripartite negotiation system (in which representatives from the country’s labour unions, business community and government met on an annual basis to decide upon a new minimum wage level) is a considerably more straightforward wage adjustment method in which the government will take into account the current fiscal year’s inflation rate in addition to the gross domestic product (GDP) growth rate as the basis for determining the rate of wage increases. As explained by Coordinating Minister for Economic Affairs Mr Darmin Nasution during an interview with The Jakarta Post, a five percent increase in inflation coupled with a five percent rise in GDP growth would result in a ten percent hike in the following year’s minimum wage level.

This policy is set to go into effect in all regions of Indonesia, with the exception of a handful of provinces that have yet to adhere to the nation’s existing requirement for minimum wage to meet the realistic cost of living as determined by the cost of living index (KHL). For provinces such as Maluku, Central Kalimantan, West Sulawesi, East Nusa Tenggara, West Nusa Tenggara, and West Papua, minimum wage increases are to be calculated by a slightly altered formula which takes into account an annual roadmap plan created by the regional government. In aiming to move minimum wage levels toward the national average and increase regional competitiveness, the roadmaps shall serve as the reference point for these provinces in deciding to raise minimum wages at a rate beyond that which is mandated by rises in inflation and GDP growth. These areas of Indonesia are therefore likely to experience among the largest increases in minimum wage levels up until the conclusion of a four-year grace period detailed in the fourth economic policy package.

Impact in question

Market reaction to the government’s first foray to fix flawed labour policies has been relatively mixed, with criticism coming from worker representatives as well as industry analysts. Among the harshest words levelled against this plan of action are remarks from the Indonesian Workers’ Union Confederation – considered to be one of the largest and most influential (and militant) organizations of its type in the country – which posit that the new minimum wage calculation system disproportionately benefits employers due to the already low base salary compared to other regional markets and the perceived limitations being placed on the annual rate of wage increases. The International Trade Union Confederation has voiced similar misgivings in asserting that the new system disregards the workers’ right to dialogue in setting the minimum wage. Such complaints have been countered by President Joko Widodo’s government, which points to the inclusion of GDP growth rates in the calculation process as a step not usually taken by other countries.

From the perspective of businesses in Indonesia, there are both positives and negatives to be taken from the new minimum wage calculation system. According to Chairman of Indonesia’s Investment Coordinating Board, Mr Franky Sibarani, the policy revision should boost the labour-intensive sector in providing companies with greater certainty when it comes to anticipating minimum wage hikes. Through the introduction of a transparent, publicly known formula that draws upon rates that can be readily estimated, businesses will be able to more accurately project future costs and as such budget for prospective investments and expenses accordingly.

Moreover, the revised wage calculation system has been praised for its likely impact of curbing labour protests that typically occur during the aforementioned annual tripartite negotiation sessions. As explained by the Indonesian Employers’ Association (Apindo) Chairman Mr Hariyadi Sukamdani, the new scheme can be viewed as a solid effort to reduce long-standing tension between workers and businesses in addition to providing companies with an improved platform for remuneration packages.

These sentiments, however, should not be taken to represent an overwhelmingly positive response from the business community. Questions remain as to whether the new minimum wage calculation method continues to put undue pressure on companies to account for rising labour costs. While greater certainty will prove useful, businesses will still see their costs associated with wages swell on a yearly basis without necessarily seeing an increase in worker productivity. Certainly, it should not be assumed that a rise in GDP growth merits a rise in minimum wage for companies in sectors struggling in spite of a stronger overall economy. Further steps will therefore need to be taken by the government to determine minimum wage increases on an industry by industry basis.

Despite the potential pitfalls brought about by the latest revision to labour policies, the fourth economic policy package can nevertheless be viewed as a notable initiative by the Indonesian government to begin tackling a deep-rooted and contentious issue. What remains to be seen is if the current administration will grasp the nettle and use this momentum of reform and the leverage of a more challenging economic environment to dismantle employment laws that presently make Indonesia’s labour market unattractive such as high severance pay requirements.

Global Business Guide Indonesia - 22nd october 2015

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)