A Higher Minimum Wage Is Crucial for Indonesia

A Higher Minimum Wage Is Crucial for Indonesia

By Kristia Davina Sianipar on 05:50 pm May 07, 2014

On May 1, Indonesia for the first time commemorated Labor Day as a national holiday. Tens of thousands of workers thronged the streets of Jakarta, to celebrate and to voice their demands. President Susilo Bambang Yudhoyono declared May 1 a national holiday in July 2013, much to the delight of workers all over Indonesia. The move signifies monumental progress for the labor movement in Indonesia, but it is not enough. A one-day holiday cannot and should appease those who have been struggling for fairer pay. A higher minimum wage is not only imperative for the welfare of the workers, but also necessary for economic progress.

The wage issue has always been at the heart of labor demands. On May 4, 1886, workers in Chicago clashed with police forces after they rallied for an eight-hour workday with no cut in pay, thus effectively demanding a higher wage. The clash, known as the Haymarket affair, was a momentous event for the modern labor movement, and is now celebrated worldwide as Labor Day, or May Day.

Labor in Indonesia

In Indonesia, the labor movement has its roots in the 18th century, and, like its US counterparts, better remuneration has always been at the core of its demands. In 1920, Soerjopranoto, now one of Indonesia’s national heroes, led a strike by the Personeel Fabrieks Bond labor union to demand higher wages for sugar mill workers in Java from their Dutch owners. The governor-general of the Dutch East Indies quickly condemned the strike as communist political action against the government.

This accusation by the colonial rulers often echoed during Suharto’s New Order. After Indonesia’s independence in 1945, the labor movement was strong and the Labor Party of Indonesia (PBI) was founded. But this changed under Suharto’s rule, when the labor movement was considered to be communist-leaning. In an era where communism was being purged nationwide, the labor movement was very much restricted. The Labor Ministry was even renamed as the Ministry of Manpower.

The fall of Suharto in 1998 ushered in the era of Reformation, and with it the liberalization of a tightly controlled nation.

In 2013, workers in Jakarta rallied for an increase in the provincial minimum wage. Governor Joko Widodo, or Jokowi, caught between the workers and business owners, sought a compromise solution and set the 2014 minimum wage for Jakarta at Rp 2.4 million ($209), a 10 percent increase from the 2013 minimum wage. But neither side was quite satisfied. Business owners threatened to move their factories to Vietnam, citing the 2015 Asean Free Trade Area, which will make it easier for businesses to relocate within the Association of Southeast Asian Nations.

The case for a minimum wage

One of the most vocalized arguments against the minimum wage, let alone a higher minimum wage, is an increased cost to businesses that can reduce their competitiveness, or reduce Indonesia’s competitiveness internationally as a producer of cheap goods. Critics argue that a minimum wage creates a market distortion as businesses are forced to pay workers higher wages than would be justified by productivity. This, they argue, can lead to unintended consequences of higher unemployment, especially among low-skilled and young workers, as businesses choose to lay off workers or move elsewhere. But has unemployment really risen due to a higher minimum wage? Have businesses relocated?

A 2013 study by John Schmitt, a senior economist with the Center for Economic and Policy Research in Washington DC, concludes that moderate increases in minimum wage have little or no impact on employment. Research shows that adjustments take place that prevent job losses, such as reduction in labor turnover, improvement in organizational efficiency, reduction in wages of high earners, and price increases. This is supported by a 1992 US study by David Card and Alan Krueger, which noted that a minimum wage increase in fast-food restaurants in New Jersey and Pennsylvania did not lead to higher unemployment, but the higher costs to businesses were being passed down to consumers in the form of higher prices.

In Indonesia, a study by Vivi Alatas Lisa Cameron on the clothing, textile, footwear, and leather industries from 1990 to 1996 shows that increases in wages did not drive foreign businesses out of Indonesia. In fact, foreign investment rose during the period. Their study also shows that higher wages did not lead to higher unemployment in large establishments, although smaller establishments were affected more. A World Bank study on manufacturing firms in Indonesia from 1993 to 2006 reached a similar conclusion.

There seems to be plenty of evidence that higher wages do not lead to significantly higher unemployment numbers, and that they do not force businesses to relocate. If we look at neighboring countries, we can see this, too.

Looking to the future

According to the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP), more than 20 countries in the Asia-Pacific region have introduced or increased the minimum wage since 2012. Malaysia first introduced a minimum wage on Jan. 1, 2013, ranging from 800 ringgit to 900 ringgit per month. On that same day, Thailand introduced a nationwide minimum wage of 300 baht per day. Vietnam has increased its minimum wage by an average of 26.8 percent from 2006 to 2010.

UN ESCAP argues that Asia should no longer rely on cheap labor to boost exports. Rather, it has to boost local demand, especially as worldwide trade is falling due to weakening global demand after the crisis in recent years. A higher minimum wage can help by pushing businesses to invest in technology and boosting high-skilled sectors. Of course a higher minimum wage will also push local demand upwards.

The 2015 Asean Economic Community and the AFTA will surely pose both challenges and opportunities for Indonesia. But Indonesia and Asean should not strive to compete based on prices and low costs, but on productivity and worker skills. If Indonesia wants to be in the top 10 of advanced economies by 2025 and in the top six by 2050 — as the Master Plan for Acceleration and Expansion of Indonesian Economic Development (MP3EI) aims to achieve — then Indonesia should go high-tech and highly skilled.

Much is therefore at stake in the July 9 presidential election. Many of the current hopefuls are former businessmen. Some are associated with corporate and human rights scandals, while others have been criticized for making decisions that are seen as going against the interests of laborers. Some claim to be pro-poor and social welfare, while others are supported by labor groups and have the support of the market — having already caused a jump in the country’s stock market.

Which leader can best balance the interest of labor groups and business-owners? Who can strive for social welfare within the country while promoting Indonesia’s competitiveness at the international stage?

Whoever gets elected, he or she will carry the weight of Indonesia’s leadership both in Asean and the wider world.

One thing is sure, as much as this historic, inaugural national Labor Day is a cause for celebration in itself, much still needs to be fought for in advancing both workers’ welfare and Indonesia’s economy. And much hope is put on the shoulders of Indonesia’s next president.

Kristia Davina Sianipar is a student of the School of Government and Public Policy — Indonesia.