Wage earners in RI fare better than in other nations

JAKARTA (JP): The World Bank says real manufacturing wages in Indonesia grew by 5.5 percent a year between 1970 and 1991, surpassing the wage growth in most other countries, except South Korea.

The Washington-based development bank observes in its 1996 report on Indonesia that the wages of agricultural workers in the country rose at an annual average of 3.7 percent, higher than in other countries, except Egypt, South Korea and Malaysia.

"Rapid and sustained economic growth since 1970 has led to big gains in wages and incomes for Indonesian workers," says the annual report, which was issued here last week.

The report, however, warns that caution must be exercised in further raising the minimum wages for fear of eroding competitiveness, lowering employment growth and paradoxically, of increasing poverty and labor unrest.

The 121-page report, which is supplemented with a statistical annex containing basic data on Indonesia's economy, devotes a special chapter to discussing and analyzing the labor market developments based on the 1994 Labor Survey. The survey estimated the total workforce (employees and job seekers) at about 85.7 million people.

The following is more excerpts from the report:

The annual growth of real manufacturing wages in 1970-1991 even surpassed the 4.2 percent growth of Indonesia's real per capita gross domestic product.

The average real earnings-- the product of wages and hours worked-- of laborers grew even faster than wages as workers have moved to better paid jobs and have found steady employment for longer hours.

Income growth in labor-intensive manufacturing has been particularly rapid for female workers, rising from Rp 50,933 monthly in 1989 to Rp 113,497 in 1994.

Prior to the mid-1980s, when the government largely left wage determination to the labor market, wages for urban industrial workers were typically not much higher than for agricultural laborers with similar qualifications.

However, in 1989 the government introduced new legislation on minimum wages set by region and, sometimes, by sector, and in 1990 it ruled that the minimum wages should be adjusted once a year in line with the consumer price index changes (inflation).

As a result, minimum wages on average tripled in nominal terms and doubled in real terms between 1989 and 1995.

Encouraging was that productivity growth has been rapid enough to keep pace with the large increases in minimum wages, at least until 1993.

Thus until 1993, overall manufacturing productivity kept pace with minimum wages and the recent increases in minimum wages had little adverse impact on employment growth.

It also appears that minimum wages are increasingly binding for female and male workers. In 1994, the minimum wage as a proportion of average wages was a staggering 83 percent for women and 53 percent for men.

Employment falls

But the recent sharp increases in minimum wages during the 1990s are estimated to have raised labor costs and reduced waged employment and investment. Part of the slowdown in manufacturing employment growth during the early 1990s from the late 1980s can be attributed to the minimum wage policies.

While workers in large private firms and public sector companies are more likely to enjoy a significant gain in their earnings as a result of the stronger enforcement of the minimum wage policy, it is likely to occur at the expense of other workers, particularly women and young workers, who will experience a decline in their employment opportunities in the formal sector.

Hence, the minimum wage is not an appropriate instrument for poverty alleviation. It only covers wage employees, and of those, only formal sector workers, while the poor are, by and large, not wage earners but the self-employed and rural people.

Since most of the poor are self-employed, the direct role of labor markets in the welfare of the poor continues to be small. However, the indirect effects are important and growing because over time the shift of population out of self-employment in rural areas and into urban wage employment has played an important role in poverty alleviation.

Therefore, labor market policies such as the minimum wage policy which slow down the rate of wage employment creation in the highly productive formal sector is likely to have an adverse impact on poverty alleviation.

Last April the government effectively raised the minimum wages by 30 percent. But future minimum wage increases need to take into account local market conditions and to be based increasingly on local indicators such as the local rates of growth of wages and employment, rather than poverty-based measures.

Given that the costs of the minimum wage policy are clearly visible but the benefits are not, reliance on minimum wages as a tool to improve workers' welfare and to reduce poverty should be reduced.

The focus of government policy needs to be employment creation with the determination of wages left largely to market forces. In addition, the government needs to intervene into certain areas to improve social outcomes such as with issues of child labor and women in the workforce.(vin)