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.