Wage earners in RI fare better than in other nations

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)