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.