Wages not cause of less investment

Wages not cause of less investment

Jeff Ballinger, Director Press for Change, Cambridge, Massachusetts, USA

Far from being "arbitrary and unjustified," as suggested by
Peter Gardiner (The Jakarta Post, Bread Crumbs for the Poor Jan.
4), reasonable increases in the minimum wage are an essential
element in Indonesia's economic recovery plan. The logic behind
economists' theorizing must, in the real world, be balanced with
considerations such as equity and the citizens' ability to press
for change.

A look at the recent history of minimum wage law and
enforcement in Indonesia is instructive. A USAID "Human Rights"
grant in 1989 funded a study of minimum wage compliance. The
findings were quite shocking: With the minimum wage set at 86
U.S. cents per day, barely half of the 220 businesses surveyed in
the Jakarta area were in compliance.

The reason was obvious. Figures from that year showed that
while the 700 inspectors from the Ministry of Manpower found over
16,000 labor law violations, there were only 12 cases that made
it to the first adjudicative step.

Then minister Cosmas Batubara reacted with a media campaign,
aimed at shaming businesses into compliance. We will never know
how many factory managers actually paid heed to his exhortations
but, what we do know is, the number of strikes quadrupled in
1990, as workers took action themselves. Over the next seven
years -- while facing serious pressure from human rights groups
on the issue of suppressing labor rights -- the government raised
the minimum wage over 300 percent.

The minimum wage reached US$2.47 per day (in Greater Jakarta)
just before the "Asian contagion" struck in 1997. What is most
interesting about this period is that foreign investment
continued to flood into Indonesia -- workers assembling Nike
shoes and apparel, for example, increased from 18,000 to over
100,000. This flies in the face of most economists' dire
predictions about raising workers' wages.

Gardiner raises the specter of companies "shedding jobs" along
with the spurious claim that businesses will be forced to raise
prices after "unreasonable" wage increases. Two examples from
2001 cast doubt on the latter threat. Faced with rising leather
costs due to European farmers' struggle with "hoof and mouth"
disease, Nike announced a lower dividend to be paid to
shareholders.

Similarly, when a $400 million supply-chain computer program
performed below the company's expectation, it declared that the
profit forecast for that quarter would be lower. It is only when
labor cost increases are suggested (or enacted) do companies such
as Nike claim that consumers will suffer a passed-along cost.

Finally, it is folly to suggest that non-formal-sector workers
only benefit from higher minimum wages because the overall wage
rate is influenced.

Many small traders benefit when workers have some disposable
income above mere subsistence. More importantly, when factory
workers can send a small amount of money back to families in the
villages (usually because they have worked a great deal of
overtime), this may mean that a younger brother or sister can
stay in school, rather than add to the already bloated ranks of
the marginally-employed, thus driving that pitiful "pure market"
wage even lower.

Press for Change is a non government organization working on
consumer information, which specializizes in labor rights in
Asia.