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Eurocham | EuroCham's Quarterly Briefing on the labour market and policies

On Wednesday 18th September, EuroCham hosted its regular quarterly briefing which this time focused on the Indonesian labour market and the government's labour policies. Speakers from BAPPENAS, ILO and APINDO concentrated on labour productivity, the impact of economic liberalization on employment, updates on the 2014 minimum wage, the National Social Security System (SJSN) and outsourcing.

Indonesia's labour market is still recovering following the financial crisis of 1997. Labour productivity is growing at a rate of 4.5%. In most sectors, labour productivity has gradually improved; however, it remains low compared to neighboring countries. According to the Ministry of National Development Planning (BAPPENAS), around 40% of employment is concentrated in the agriculture sector with approximately 90% of workers in this sector categorized as low-skilled.

The majority of the labour force is working in the informal sector. According to ILO Statistics, in May 2013 around 54% of people are working in the informal economy. In the formal sector, 80% of workers do not have a contract with their employers, thus making them less likely to receive any benefits.

Recently, employment conditions have been affected by the depreciation of the Rupiah and reductions in the fuel subsidy. However, economic liberalization has had a positive impact on the labour market and, with various plans in place to further open the market, including the establishment of special economic zones, market diversification and strengthened trade cooperation, new employment opportunities are likely to be created. (ILO Report, 2013).

The minimum wage has been steadily increasing in Indonesia since 1999 at an annual rate of 13%. As outlined by the World Bank in the Indonesia Jobs Report 2012, 'minimum wages in Indonesia are used more as a primary wage setting than a safety net.' One of the biggest concerns with the minimum wage is that the increase in the provincial minimum wage since 2007 is no longer consistent with increases caused by inflation or basic living costs.

According to the Indonesian Employers' Association (APINDO), the National Wage Council will collaborate with Statistics Indonesia (BPS) in conducting the Decent Living Component (KHL) Survey in order to determine the 2014 Minimum Wage (UMP). However, labour unions are at odds with the government and the National Wage Council about which criteria should be included in this survey. There is a concern that with elections looming in 2014, the UMP will be used as a political tool and businesses should be aware of this.

To avoid another unprecedented increase in UMP, the government is currently developing a Presidential Instruction to guide local governments in determining the UMP. The draft Presidential Regulation requires local governments to consider Regional Wage Council recommendations.

APINDO's proposal to increase UMP by 10% above the inflation rate (with maximum 20%) in the capital intensive sector and 5% above the inflation rate in the labour intensive sector was recently rejected by the President. According to the latest draft, if the result of the 2013 KHL Survey is lower than or equal to UMP, then the 2014 UMP does not have to increase or can increase in proportion with inflation. Meanwhile, if labour unions demand that UMP should exceed the KHL Survey result, then UMP can be determined via bi-partite consultation (between representatives from management and labour unions).

One of the key messages from this event is that minimum wages cannot be and should not be set based on any pressure imposed by either employers or workers and that the 2014 minimum wage should be proportionally set, which is vital in the context of the current state of businesses in the country, particularly SMEs.

The labour unions are also in disagreement with the government about the proposed 5% Social Security Organization (BPJS) contribution- 4% of which will be covered by the company and 1% by the employee. Although a 3% contribution was proposed by APINDO and the labour unions, the government has rejected this proposal so companies should expect that the 5% contribution rate will be again proposed by the government.

The Outsourcing Regulation will be implemented fully on 14 November 2013. As the Labour Law review has yet to be completed by the Constitutional Court, it is advisable that businesses do not wait for the result of the Outsourcing Regulation judicial review.

The Outsourcing Regulation requires sectoral business associations to determine the business process, however many of these associations have not yet been made aware of their new responsibility. Businesses will also be required to provide a proof of report before they can participate in outsourcing; if a company fails to obtain the proof of report before outsourcing, employment relations will be transferred to them. APINDO is informing business associations of the details of the new outsourcing regulations and is offering assistance in the development of the sectoral business process.

Eurocham - 2014

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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)