Minimum wage raised

Minimum wage raised

Trade unions are understandably disappointed with the 10.63 percent average increase in the minimum wage level. The raise, effective as from April 1, will increase the workers' purchasing power by only about 2 percent, given last year's inflation of 8.64 percent. Moreover, the increase is the lowest over the last three years -- 17.7 percent in 1993, 30 percent in 1994 and 18.6 percent in 1995.

However, as Manpower Minister Abdul Latief explained, the rate of the increase was the most that the government could ask for from employers. In fact, even with such a small raise, executives of the Indonesian Employers Association have expressed concern that quite a number of small firms may not be able to meet the new minimum wage level.

It should be understood first of all that this wage increase, like the previous ones, has nothing to do with labor productivity. That, we think, is one of the main reasons why the employers' association has agreed to such a modest raise. That means the increase serves simply as an adjustment to the inflation rate to prevent the workers' purchasing power from being eroded by the higher consumer price index.

The workers' complaints are quite legitimate because the current minimum wage level is still far below what the government defines as the minimum requirement for subsistence living. Even after the increase in April, the minimum wage level will still be about 10 percent below the requirement for subsistence living and will remain the lowest among the ASEAN countries.

There is, we reckon, another reason why the new wage increase is seen as too low. The 8.64 percent inflation last year hurt mostly low and fixed-income earners because a high portion of the inflation was caused by increases in the prices of food, housing and clothing.

Nonetheless, since the raise is not related to labor productivity and will therefore only add to production costs, too great an increase may hurt many enterprises. That in turn may force a reduction in the size of labor forces, thereby worsening the unemployment problems and consequently having potentially damaging repercussions on social, economic and political stability.

The wage increase is likely to adversely affect many small firms which rely solely on the domestic market. But export- oriented enterprises should be able to meet the new wage level. Even after the increase, the minimum daily wages will range only from Rp 3,200 (US$1.4) in Yogyakarta to Rp 5,200 in the greater Jakarta area; the exception being Batam island near Singapore which will see a rise to Rp 7,350.

If export-oriented firms are not able to live with such low labor costs, there must be something wrong in the structure of their production costs, particularly because the social security scheme for workers in Indonesia is not as comprehensive and expensive as those in other countries.

The government should further decrease the costs of doing business in the country, especially what most investors consider as invisible costs related to regulatory requirements and licensing procedures. We are afraid that enterprises, notably the small and medium-sized ones, will not be able to increase employment and to raise wage levels to the minimum requirement for subsistence living by 1998, if the invisible costs are not reduced.

Of course the government has the power to force annual increases in the minimum wage levels without taking into account any gains in labor productivity. But such increases will not be sustainable because they erode the competitiveness of enterprises and make the country less attractive to new investments by both domestic and foreign businessmen.