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.