Minimum wage policy 'bad for workers'

Dewi Santoso, The Jakarta Post, Jakarta

Researchers have suggested that the government limit its minimum wage policy as their findings showed that the existing practice of annually raising the wage was counterproductive for the overall employment situation in the country.

Conducted with over 40 private and state-owned companies in Greater Jakarta and Bandung from April to October 2001, their research found the minimum wage policy benefited white-collar workers at the expense of blue-collar workers.

Asep Suharyadi, one of the Social Monitoring and Early Response Unit (SMERU) researchers, said on Friday the study discovered that for every 10 percent increase in real minimum wage, approximately 1 percent of that particular region's workers would lose their jobs.

"Female, young and less educated workers, who make up the bulk of the country's labor force are those most vulnerable to the impacts of the wage policy," said Asep.

The research, conducted by Asep, Wenefrida Widyanti, Daniel Perwira and Sudarno Sumarto was published in the April edition of Bulletin of Indonesian Economic Studies magazine and won on Friday the H.W. Arndt Prize, a special prize intended to encourage Indonesian scholars to publish their work in the Australian bulletin.

The researchers found that the number of blue-collar workers decreased to approximately 75.6 million in 2000 from 77.7 million in 1996, while minimum wages increased by 49 percent from 1999 to 2000.

They also discovered the employment varied with respect to minimum wages for female and young workers (aged between 15 and 24 years) were around -0.3, and -0.2 for less educated (those who do not finish elementary schools) during the period of study, compared to 1.0 for white-collar workers.

"This means the higher the minimum wage is, the lower the employment rate for female, young and less educated workers is," Asep said.

Sudarno said when the level of minimum wages increased, firms reduced the employment of other types of workers and replaced them with white-collar workers. This may be due to the substitution of more skill-intensive production processes in place of labor-intensive ones in response to minimum wage rises.

"It's very clear that high minimum wages can lead to dismissals, as companies realize they cannot afford to pay that many people, and replace them with machines," Sudarno said.

These results imply that the policy benefits those who keep their factory jobs, and of course, white-collar workers.

"But for those who are disadvantaged by the policy, they will be forced to take up lower paid jobs with poorer working conditions in the informal sector, which is already overcrowded," said Sudarno.

He said informal sector workers, including street vendors and street hawkers, was a productive form of creating employment for lower-class people.

"But being in an overcrowded sector they are the least protected by the government and have no access to the wage policy," he said.

SMERU is an independent research institution that focuses mostly on social, economic and poverty issues.