High minimum wage policy creates more unemployment

High minimum wage policy creates more unemployment

Fitri Wulandari, The Jakarta Post, Malang, East Java

While labor activists lauded the government's decision to
increase workers' minimum wages, a study shows that it has cut
jobs in the formal sector and has tended to lower wages in the
informal sector, which, in turn, has put further strain on the
country's unemployment problem.

Asep Suharyadi of independent research institute Smeru said
only skilled workers benefited from the higher minimum wage
policy.

"The increase in minimum wages forces employers to reduce (the
number of) their workers in certain types of job and replace them
with more skilled personnel," Asep told participants of the XVth
Congress of the Association of Indonesian Economists (ISEI) on
Monday.

The Smeru study shows that every 10 percent increase in real
minimum wages decreases the ability of the job market to absorb
workers by more than 1 percent.

"It also shows that companies shift to (more) capital-
intensive technology in response to the (wage) increase," he
added.

Workers who lost their job or who could not enter the formal
sector suffered as a result of the policy. Many would be forced
to take jobs in the informal sector, which were probably of
lesser quality, with lower wages, Asep remarked.

To top things off, the groups most badly affected by the
policy were women, youth workers and unskilled labor.

Smeru noted that minimum wage levels had been rising faster
than economic growth generally.

Director of manpower and economic analysis at the National
Development Planning Agency (Bappenas) Bambang Widianto indicated
that there had been a tendency toward a decline in the number of
workers in the formal sector in 2001 and 2002.

In 2001, there was a cut of 3.3 million workers in the
informal sector in rural areas, followed by a further cut of 1.5
million in 2002, of which some 500,000 worked in the formal
sector in urban areas.

Quoting data from the Central Statistics Agency (BPS), Bambang
said there had been massive cuts in labor-intensive industry in
2001. For instance, the food and beverage industry lost 15,653
workers, textiles 66,437, garments 4,000, and the communications
industry 79,000.

Although the wage policy had prompted growth in the informal
sector it was not followed by increased wages in the sector,
Bambang said.

Real wages for workers in the informal sector had not changed
compared with their levels prior to the economic crisis. Minimum
wages for workers in the formal sector had increased by 20
percent from precrisis levels.

Stagnant wages for workers in the informal sector such as farm
laborers and motorcycle taxi and pedicab drivers, have made them
vulnerable to slipping below the poverty threshold.

In Indonesia, only about 30 percent of those in work are in
the formal sector, with the rest in the informal sector.

The wage policy also has partly contributed to a rise in open
unemployment. Bappenas projects open unemployment will increase
to 10.13 million this year and reach 11.19 million by 2005.

Open unemployment is described as those who are not working,
looking for work or are occupied in their own business, and those
who are not looking for work because they feel it would be
impossible to find it.

Bambang said that in order to tackle unemployment, the
government ought to turn informal sector workers into waged
workers by cutting red tape in the issuance of business licenses
and providing credits for small-scale businesses.

"Waged workers already have their own safety net. It is time
to pay attention to informal sector workers because they don't
have anything to ensure their security," he remarked.