Thu, 23 Dec 2010

Among the poorest performance records of President Susilo Bambang Yudhoyono’s government over the past six years could be its miserable failure to make significant policy reforms in the labor and basic infrastructure sectors.

Consequently, excessively rigid labor regulations and acute shortage of infrastructure have become the biggest barriers to new direct investment - virtually the only means able to create productive jobs.

The overly protective regulations stipulated in the Labor Law of 2003, notably those which set severance compensations prohibitively high, not only dampen demand for workers, but also scare away new investment in labor-intensive businesses.

The problem is that the rigid regulations cover only workers in the formal sector, which absorbs less than 35 percent of the total workforce.

Worse still, according to a recent study by the World Bank, the labor rules turn out to be ineffective in protecting employees who are fired. Less than 35 percent of all eligible employees who are separated from a job reported to have received severance pay. More discouraging is that of the fired workers who received severance pay, almost 80 percent reported to have collected much less than the amount to which they were legally entitled.

That means the rules, designed to protect workers, have failed to achieve their objective. But the mere stipulations of the rigid regulations in the labor law are a significant deterrent to new investment in labor-intensive ventures.

No wonder so many analysts have attacked Indonesia’s economic growth over the last few years as low-quality because of the smaller number of jobs generated by each percentage of economic expansion.
Even though official statistics put hard-core unemployment at only about 8.6 million, or 7.50 percent of total workforce, underemployment is estimated at more than 35 million.

That is because most direct investment prefers capital-intensive projects, services industries and natural resource extraction (mining, quarrying, etc). Investors shun labor-intensive manufacturing industries for fear of being entangled in the arduous, excessively expensive procedures for severance compensations which could amount to as much as 20 times monthly salary, depending on the tenure.

Amending the regulations would not provide incentives to companies to irresponsibly fire workers as they please. Businesses now simply have to face steadily changing economic conditions, with different impacts on the various sectors, which require management to make changes in employment structure to remain competitive.

The government has been fully aware of the adverse impact of the rigid labor rules that make the country unable to capitalize on what the World Bank often calls the demographic dividend - whereby the working population grows faster than the population of non-working dependents.

Unfortunately, anytime the government has tried to amend the labor regulations it has succumbed to the threats of massive protests, demonstrations and strikes by trade unions. The misguided House of Representatives has shown similarly narrow-minded, short-term views, resorting to populist stances to the detriment of job creation.

Amendments to the labor law should therefore strike a good balance between the objectives of spurring new investment to create jobs and protecting basic worker rights.

In light of this, amendments to the regulations on the onerous severance compensations should be tied to a plan that provides some form of unemployment benefits.

In fact, it is regulations on the proposed unemployment benefit scheme that should first be propagated to make public opinion friendly to such amendments.