Mon, 14 Aug 2006

Workers' survival hinges on robust business, not on rigid labor rules

Sahminan, Jakarta

In many countries, the government is often at odds with workers. In Indonesia that situation happens, too. Recently, for example, the government draft on the revision of the 2003 Labor Law triggered the anger of workers. The workers contend that the revision is biased against them as the revision will reduce their bargaining power. The government, on the other hand, argues that the revision is in line with investors' demand for more favorable investment conditions.

Both workers and the government are, to some extent, correct. An abundance of manpower coupled with not enough jobs makes it difficult for workers to have bargaining power. Given that condition, the workers perceive that they need to be protected by government regulations on labor.

On the other hand, the government argues that, as complained by many companies, one of the difficulties in doing business here is the country's rigid labor market: There are many restrictions on hiring and firing workers as well as regulations on wages. Therefore, to increase investment, the government needs to give more flexibility to firms in dealing with their workers.

The question is: Which policies can protect workers?

If the government regulates labor markets to keep workers' bargaining power, it may drive out existing employers and discourage the establishment of job-generating businesses. This will result in job losses. On the other hand, if the government gives more leeway for firms to fire their workers, some workers will lose their jobs, too.

True, the minimum wage policy may increase wages, but such a policy may also lead to the reduction of employment. A study by Ann Harrison, an economics professor at the University of California at Berkeley, shows that the minimum wage policy in Indonesia had raised the real wage of unskilled workers in manufacturing firms by 50 percent between 1990 and 1996. However, it was not without costs for workers: The increase of the minimum wages led to a 10 percent employment loss for unskilled workers in the Indonesian manufacturing sector.

In this more integrated world economy, it is not the government's direct regulations on the labor market that protect workers. And, of course, neither does the benevolence of firms. What protects workers is the growth of the private sector, as the presence of more private enterprises will create more jobs.

When there are many employers that want to hire workers, the employers are less likely to exploit the workers. In other words, with the presence of more employers, the workers have stronger bargaining power.

The essential role of the government to protect workers is to provide a framework that facilitates a favorable environment for businesses and investments. Prior to the 1997 crisis, government policies to open the country for multinational companies and government policies to shift from inward-oriented to export-oriented industries contributed to higher wages and employment in Indonesia.

As the Ann Harrison study shows, in 1990 the average wage paid by foreign firms was three times that paid by domestic firms, and the average wage paid by exporting firms was more than 70 percent higher than that paid by non-exporting firms.

The favorable situation in the first half of the 1990s also benefited from the lack of competitor countries: China, Vietnam, and other former communist countries were relatively closed economies. Now, circumstances have changed. Many countries that used to be closed economies before the 1990s have opened their doors to foreign investors as well as for exports.

As a consequence, multinational companies have many more choices to obtain cheap labor. If they view the condition in Indonesia is not favorable, they can easily move their production to other countries. In fact, this has happened already, where a number of foreign companies have shifted their plants from Indonesia to Vietnam and other countries in the region.

No doubt, even if many employers exist, moving from one employer to another cannot be done by a worker overnight. And true, an enterprise cannot replace their employees overnight, and many enterprises cannot arise overnight. But, although it's not perfect, promoting the growth of private enterprises to create many employers is the best way to protect workers.

Because it takes months or a few years for the emergence of many new employers, and while people need to meet their necessities everyday, the role of the government remains necessary. The government has to lay out the provisions of social security and training for unemployed workers. This policy is intended to protect workers during their transition periods and to maintain their ability to adjust with new technology and business.

The writer holds a PhD in economics from the University of North Carolina at Chapel Hill, U.S. He is now an economist at Bank Indonesia. The article is a personal view.