economic issues

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LABOR PRODUCTIVITY AND EMPLOYMENT POLICY IN
INDONESIA Recent Development

• Rahma Iryanti
• Director for Manpower and
• Employment Opportunities Development
• Jakarta, 18 September 2013

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OUTLINE

• Background
• Current Conditions
• Labor Productivity
• Current Conditions Minimum Wage and Production
  Growth
• The Needs of Improvement in Minimum Wage Setting
  Mechanism
• Government Policy Directions and Steps

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GDP GROWTH BY SECTOR

• CURRENT CONDITIONS

Source Statistics Indonesia ) Quarter III/2012

• Service sector replaced industry since 2005.
  However, from 2009 industry grows faster and in
  2012 growth of industry has exceeded service
  sector.
• We indeed have a red district due to 1997
  financial crisis, but we are on the track to
  recover.

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LABOR PRODUCTIVITY GROWTH RATE
In most sectors, labor productivity has improved
gradually

• Our labor productivity is growing at around 4,5
  rate.
• In 2011, the growth is dominated by agriculture
  sector.

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but gains in productivity are slowing
Source
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Indonesias productivity and competitiveness
is lagging behind neighboring countries
Source WDR 2013 core statistical tables, I2D2
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as well as across most other sectors
Source CEIC
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and in a highly informal labor market, the
quality of jobs for most workers is low

• The majority of workers are in the informal
  sector
• Over 80 percent of formal workers do not have a
  contract.
• Employees without contracts earn less and are
  less likely to receive any benefits.

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EDUCATIONAL BACKGROUND vs ECONOMIC SECTOR
Source National Labor Force Survey, Feb 2012,
(Bappenas Calculation)

• Almost 40 of employment are in agriculture, but
  around 90 of workers in this sector are
  low-skilled.
• Sectors such as social/personal services
  electricity, gas, water and finance require more
  skill (higher education). The rest is dominated
  by people with basic education.

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Overview Past Trends of Minimum Wages

• Since 1999, the average of national minimum wage
  has been increasing with the average of 13 per
  cent annually.
• The relatively high increase of minimum wages in
  certain years has caused uncertainties for
  business.

Minimum Wages of Several Regencies in Banten, 2012-2013 Minimum Wages of Several Regencies in Banten, 2012-2013 Minimum Wages of Several Regencies in Banten, 2012-2013 Minimum Wages of Several Regencies in Banten, 2012-2013
Kabupaten/Kota 2012 2013 Change
Kota Tangerang 1,381,000 2,203,000 59.52
Kota Tangsel 1,381,000 2,200,000 59.30
Kab. Tangerang 1,379,000 2,200,000 59.54
Kota Cilegon 1,340,000 2,200,000 64.18
Kab. Serang 1,320,500 2,080,000 57.52
Kota Serang 1,230,000 1,798,446 46.22
Minimum Wages of Several Regencies in Jawa Barat, 2012-2013 Minimum Wages of Several Regencies in Jawa Barat, 2012-2013 Minimum Wages of Several Regencies in Jawa Barat, 2012-2013 Minimum Wages of Several Regencies in Jawa Barat, 2012-2013
Kabupaten/Kota 2012 2013 Change
Kab. Bekasi 1,491,866 2,002,000 34.19
Kota Bekasi 1,422,252 2,100,000 47.65
Kab. Bogor 1,296,320 2,042,000 57.52
Kab. Sukabumi 885,000 1,201,020 35.71
Kota Depok 1,424,797 2,042,000 43.32
Kab. Sumedang 1,007,500 1,381,700 37.14
Kab. Subang 862,500 1,220,000 41.45
Kab. Purwakarta 1,047,500 1,639,167 56.48
Kab. Karawang 1,269,227 2,000,000 57.58
Kota Bogor 1,174,200 2,002,000 70.50
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Rapid increases in minimum wages may also
discourage investment and affect productivity
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Current Conditions Minimum Wage

• Minimum wage has become one of the main worker
  demands in recent demonstrations. If such
  condition continues, there will be two major
  impacts on employment and workers welfare in
  medium and long term
• First, minimum wage will grow faster than
  inflation and productivity.
• Second, the government intervention on wage
  setting may hinder the process of collective
  bargaining between employers and labor unions.
• Minimum wage setting has become the main
  mechanism to determine wages and to increase
  workers welfare.
• The increase of provincial minimum wages since
  2007 is no longer consistent with the increase
  due to inflation, basic requirements of living,
  and the scale of the wage change itself.
• Since 2007, surveys to determine minimum basic
  requirements for living (KHM) have been conducted
  by regional wage councils. Before 2007, the
  surveys were conducted by the Statistics Agency.

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Current Conditions Production Growth

• Medium and Large Manufacturing Industries In
  general, production of manufacturing industries
  indicates a positive growth in 2012. However, not
  all industries show a production increase.

Positive Growth Positive Growth Negative Growth Negative Growth
Types of Industries Growth Types of Industries Growth
Pharmacies 13,19 Basic metal -8,48
Food 12,75 Textile -8,32
Tobacco 5,42 Leather and footwear -6,96
Clothing 4,91 Furniture -6,60
Transport equipment 3,57 Paper -4,37
Road vehicles 3,23 Beverages -0,50
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Current Conditions Production Growth

• Labor-intensive Manufacturing Industries There
  are three labor-intensive manufacturing
  industries that should be considered, i.e.
  textile, clothing, and footwear.
• In 2012, large and medium textile and footwear
  industries shifted by minus 8,32 per cent and
  minus 6,96 per cent, respectively.
• Meanwhile, micro and small industries showed a
  positive growth, including clothing industries.

Type of Industries Medium and Large Medium and Large Micro and Small Micro and Small
Type of Industries 2012 Q4/2011-Q4/2012 (y-on-y) 2012 Q4/2011-Q4/2012 (y-on-y)
Textile -8,32 -14,78 2,96 8,26
Clothing 4,91 9,14 4,15 8,76
Footwear -6,96 -3,18 8,89 13,91
Manufacturing industries 4,12 11,09 4,06 1,89
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Keep in mind Principles of Minimum Wages
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Keep in mind Other Principles

• Minimum wages cannot be set based on any pressure
  imposed by either employers or workers.
• Minimum wage setting must consider other factors
  such as average wage level, workers requirements
  of living, inflation, productivity, economic
  growth, available jobs, and capacity of business
  entities.

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Re-formulating the minimum wage setting process
to protect low-wage workers

• Improving the minimum wage setting mechanism, so
  that the process is more predictable and
  formulaic, and protected from political
  pressures.
• Revise the legal framework.
• Use the minimum wage as a floor wage, not for all
  workers.
• Strengthening collective bargaining at the plant
  level so that workers are not forced to negotiate
  only in national policy-setting forums.
• Differentiate between various industries and
  types of firms.
• Improving non-compliance.
• Link to Grand Bargain.

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Minimum Wage SettingImprovement by Government
2014 Onwards

• The increase of minimum wages in 2014 should be
  prudently and proportionately set. This is very
  important considering the current condition of
  the business, especially SMEs.
• The Government is willing to ensure that the
  amount of minimum wage increase in 2014 is
  determined proportionately with two points of
  consideration
• First is the need to transfer income among worker
  groups. Such income is essential to safeguard the
  purchasing power and keep the demand high.
• Second is to maintain a conducive investment
  climate. Minimum wages are not allowed to
  increase in such a high amount that it makes
  unfavorable impact to investment climate. In
  order to make sure such matter happens, the
  change of minimum wages in 2014 must be fair.
• In medium term, the Government is preparing a
  draft of government regulation (RPP) on wage
  policies. It consists of not only minimum wage,
  but also overall wage policies.

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Government Policy Direction

• Maintaining current available employment
  (preventing any business closures and worker
  lay-offs).
• Improving the quality of employment (e.g.
  increasing the number of formal employment).
• The setting of basic requirements of decent
  living is still based on moving targets. It has
  not yet considered the productivity improvement
  factor.
• Therefore, the productivity improvement factor
  will be considered as one of the variables used
  in the formula of minimum wage setting.
  International benchmarking will also be
  considered.

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Government Policy Direction

• The Government is considering providing
  incentives for labor-intensive industries.
• To improve the purchasing power of workers in
  agriculture and informal economy, the Government
  will expand empowerment programs, including
  labor-intensive programs such as cash for work.
• Such programs will be targeted to part-time
  workers, so they will obtain additional incomes.
• The programs are short term. The most important
  is to improve the productivity of agricultural
  sector.

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Government Policy Steps for Implementation

• Determining two categories of wages, i.e. minimum
  wage and individual wage. The latter is based on
  negotiations.
• Indonesia has wage councils as the entities to
  recommend minimum wages. The councils should be
  empowered not only to set wages but also to
  improve the mechanism of wage negotiation in
  determining individual wages.
• Improving the quality of human resources.
• Education plays a very important role in
  improving productivity and high-quality education
  and trainings are unquestionably needed.
  Therefore, the quality improvement of our
  education in general is a must, while at the
  same time we need to increase the enrollment rate
  of higher education.

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Government Policy Steps for Implementation

• Negotiation between two parties at company level
  becomes an optional mechanism in determining
  wages.
• Improvement of bargaining coordination between
  employers and workers is focused on two-parties
  negotiation mechanism.
• In order to make sure both parties can negotiate
  wages accordingly, a strong relation with the
  company is needed.
• Meetings of both parties conducted by employer
  associations and labor unions to resolve any
  disputes and other employment issues are strongly
  encouraged.
• Be prudent in increasing the level of minimum
  wages to avoid any problems arising from adoption
  of high minimum wage rise policy.
• Some problems have already occurred in Indonesia,
  such as low compliance of labor standards, slow
  rise of formal employment when the minimum wages
  increase, and low number of poor workers moving
  from informal economy. These problems must be
  cautiously dealt to avoid further consequences.

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Thank You