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Minimum Wage setting in Indonesia - a History

Minimum Wage setting In Indonesia - a History

By Maarten van Klaveren, Researcher WageIndicator Foundation

Introduction

This paper covers the country’s minimum wage setting; recent developments in the formal setting, in particular the 2015 reform of the uprating system; the relation of minimum wages to wages and the cost of living; the effects of minimum wage levels and rises on the informal sector; and minimum wage compliance in Indonesia. 

 

  • The labour market: formality, informality and inequality
  • The trade union movement
  • The early years
  • The statutory, formal setting
  • Setting regional minimum wages
  • The 2015 reform
  • The politics around minimum wage-setting
  • The 2015 reform: the effects on employment and wage growth
  • The 2015 reform: minimum wage setting and collective bargaining
  • The current situation (early 2020)
  • Sectoral minimum wages, workers driven
  • Minimum wages related to cost of living
  • Minimum wages: compliance
  • Conclusions

 

References

1. The labour market: formality, informality and inequality

 

 

According to the 2000-01 National Labour Force Survey (Sakernas) of BPS, by then slightly less than 29 per cent of all employed Indonesians worked in formal employment: nearly 3 per cent as an employer with permanent workers and 26 per cent regularly as an employee in wage employment. Rapid growth of wage employment could be noted from 2004-2013, resulting in formal workers by 2013 making up nearly 40 per cent of the labour force. Between 2013 and 2016, the formal share stabilized at 40 per cent. A large amount of all workers continue to be engaged in low-productivity employment as shown by the relatively high proportion of own- account workers and contributing family workers (in 2016 31%). Moreover, even working in the Indonesian formal sector is far from a guarantee for job security and good working conditions. For example, in its 2016 Indonesia’s Rising Divide report the World Bank noted that around one-third of Indonesian employees, or some 13 million, lacked any formal written contract (World Bank 2016: 18).

In the 21st century the earnings gap between the formal sector, with a large minority of skilled employees, and the majority of unskilled workers in the informal sector has widened. In particular the relative incomes of the self-employed have fallen. In August 2012, the average earnings of casual workers and self-employed amounted to 48 percent and 65 percent of employees’ average wage, respectively. The World Bank (2016, 79) regards this widening gap one of the main drivers of the Indonesia’s increasing inequality. Clearly, the robust growth of the Indonesian per capita GDP between 2000 and 2015 did not translate in a parallel increase of decent employment opportunities (Tadjoeddin 2016).

The strong GDP growth between 2000 and 2014 helped to pull many out of poverty and create a substantial middle class. Indeed, by 2014 45 million people (the richest 18%) were economically secure, a segment growing at 10 per cent per year. However, the Rising Divide report also emphasized that “the economically secure are leaving the other 205 million behind“ (39).

2. The trade union movement

Following the Reformasi the existence of independent trade unions was officially recognized, particularly through the enactment of Law No. 21/2000. The numbers of unions mushroomed from the single union federation to more than one hundred federations registered at the national level in 2015. Moreover, thousands of plant-level trade unions have registered at district level (Tjandra 2016: 260). Nevertheless, trade union density is low in Indonesia and lately even seems to have decreased, from 10 per cent in 2006 to 8.5 per cent in 2016 (BPS 2016). Various factors may explain the weakness of the Indonesian trade union movement (cf. Tjandra 2016: 78-85, 98). First, Indonesia’s democratization process was initiated during a major economic crisis. In spite of rising expectations in the labour force, this left little room for trade unions to achieve wage rises. Second, the unions met immense problems in overcoming the legacy of state-control and learning the tricks of the trade of collective bargaining. Internal union problems were persistent: fragmentation, lack of coordinated action and strong personal rivalry among leaders. Third, from 1998 to 2006 the reform program dismantled various protective aspects of the previous legislation (Tjandra and Van Klaveren 2015: 145).

Fourth, the widespread violations of trade union rights by employers have most likely contributed to decreasing union coverage. Until the current day employers continue to throw up manifold obstacles for union activities, including violence in the workplace and dismissal of unionists. Mistrust between unions and employers remains often deep. Such lack of trust provides a major explanation for the limited number of collective agreements as compiled in the WageIndicator Collective Bargaining Agreements Database. Also, the large majority of collective agreements is factory-based; only a small minority has sectoral coverage. Their contents are mostly limited as well: specifications in agreements often reiterate provisions existing in official labour regulations. Examples of meaningful bargaining can mainly be found in subsidiaries and suppliers of those multinational enterprises. Sime have become aware of the risks of reputation damage when international labour standards are violated (Tijdens et al. 2018).

3. The early years

In the mid-1950s the Sukarno administration, reacting to growing labour unrest, requested the ILO for technical assistance on wage policy and industrial relations. In 1958, an ILO advisor submitted his report recommending that “the ultimate goal of wages policy should be to ensure that all wage earners earn at least a living wage from their principal employment” (Tjandra and Van Klaveren 2015: 146). Thus was an early reference to the ‘living wage‘ concept. It lasted until 1969-71 when under the Suharto regime the first minimum wage legislation was passed. National and regional Wage Councils were installed. Until the late 1980s this regulation was merely cosmetic. By then the Suharto administration lifted the statutory minimum wage, in the early 1990s even doubling its real value. Growing internal and external pressure coincided here: internally, from domestic labour rights activists and NGOs, 

externally, from US activists pointing to the systematic violation of labour standards in Indonesia and recommending the withdrawal of the country’s preferential trade status under the GSP (Generalized System of Preferences) for its exports to the US (Tjandra 2016: 165-166). A World Bank evaluation of this minimum-wage doubling found limited effects, noting only a 2 per cent decrease in wage employment in mainly small firms (Rama 1996).

However, a later World Bank policy report exaggerated the negative outcomes of the minimum-wage doubling. It led, amidst the Reformasi turbulence, in government circles to heated debate (Tjandra 2016, 68). Although the latter report’s claim could not be substantiated that minimum wages would erode the country’s business profitability, the idea that minimum wages by default would hardly or not affect the wage distribution could no longer be maintained either. Somewhat later a SMERU study (2001) argued that already by 1992 the effect of minimum wages on the wage distribution had become apparent and that spikes around the minimum wage were visible. Based on 2005 and 2009 data for Indonesia, an ILO research team confirmed the existence of a significant spike at or around the minimum wage level, while sharing this phenomenon notably with India (Rani et al. 2013: 388).

4. The statutory, formal setting

The Indonesian statutory minimum wages formally cover all employees except domestic workers. This results in an overall coverage of approximately 95 per cent with a smaller proportion of female workers and low-skilled workers being covered (cf. Rani et al. 2013: 408). Moreover, only workers with less than 12 months of employment at the company are supposed to be compensated at the minimum wage, with compensation rising after one year based on experience and the company’s wage structure. Currently, the levels of minimum wages vary by province, district and sector. Over time, ‘needs‘ became essential components. In 1989, the Suharto administration released a regulation defining the rate of Kebutuhan Fisik Minimum (KFM, Minimum Physical Needs), replaced in 1995-1997 by a broader consumption bundle. In the Reformasi era, following regulations as of 2003 and 2005, the goal set for minimum wages became to increase until they would have reached the Kebutuhan Hidup Layak (KHL), or ‘Decent Living Needs’: a list of items covering the expenses of a single adult worker on food and beverage, household, clothes, education, health, transportation, recreation, and savings, with the food basket targeted at 3,000 calories/capita/day. Moreover, according to the 2003-2005 legal framework, productivity at national and local levels, economic growth, and the position of marginalised industries had to be considered.

5. Setting regional minimum wages

In the course of the 2000s, Wage Councils, consisting of representatives of government, employers, and trade unions, became leading in the process of setting regional minimum wages. This development seems to have happened rather autonomously, without apparent reference to foreign examples although similar tripartite bodies known as Wage Boards already existed in India and Pakistan. As such, in Indonesia the creation of the Wage Councils did not arouse much debate. Initially, in its 2010 Indonesia Jobs Report, the World Bank welcomed the growing role of the Wage Councils that “parties engaged in more constructive minimum wage negotiations ( ) took economy-wide considerations into account“ (93).

Public discussion mainly focused on the material basis for minimum wage setting, that is, on the basket of basic food and other commodities. According to the revised Ministerial Regulation No. 17/2005, surveys of prices of such a basket in local markets should provide the basis for estimating the district’s KHL. Wage Council discussions on the survey outcomes were supposed to result in joint recommendations to the provincial governors on next year’s 

minimum wage rates. However, the parties involved mostly approached the survey and subsequent decision-making from different angles. Regional union alliances targeted the level of the KHL whereas employers’ and government’s representatives tended to regard setting the KHL as a mere formality; they focused on the uprating percentage as such. In practice, the exchange of arguments concentrated on the number of items required in the ‘basket‘, the quality of the goods and services to be measured as well as the inflation rate. Union alliances and employers often undertook their own surveys and arrived at different estimates of the KHL, and thus of the minimum wage. The lack of legal rules of conduct for the Wage Councils was not helpful in guiding this process. As a result, the provincial governors were often confronted with competing estimates and these elected politicians had to arbitrate between these (Cornwell and Anas 2013: 23; Tjandra 2016: 173-176, 182-186). Political expediency had taken on a central role.

6. The 2015 reform

Under the presidency of Susilo Bambang Yudhoyono (two terms, 2004-2014), various proposals were brought forward for revising the minimum wage fixing system, but the ‘SBY‘ administration showed no commitment to push through reforms. This changed in 2014, when Joko Widodo was elected president. Straight after his inauguration, the Widodo administration took up preparations for revising the system. In workshops for union representatives, ILO officials gave presentations including significant criticism of the existing framework. Yet, they failed to persuade the representatives of the main trade unions of the need for radical change. What followed does not stand out as a textbook example of tripartism. A technical team was formed including senior officials from various ministries and government agencies. None of the experts had strong links to the union movement while it has been recognised that APINDO, the main employers’ association, played a significant role in the team’s discussions. The unions, for their part, denied being invited to any consultations. They jointly submitted a proposal in writing that advised to maintain the current system while expanding the range of items as to calculate the KHL.

By contrast, government and APINDO officials drafted a system with automatic annual adjustment as its core. This was expected to depoliticise the ‘KHL process‘, eliminate the strikes and other workers‘ protests supposed to relate to the minimum-wage setting process, and leave business with less uncertainty about future labour cost developments. In brief, the reform would produce a more “fair, simple and reliable” system (Allen and Ryloh 2016, 20, 44-45, 53). Finally, on October 23, 2015, Government Regulation No. 78 of 2015 on Wages was enacted. Under this regulation, all provincial, district and municipal minimum wage levels should be adjusted annually to reflect the percentage increase in the national CPI (Consumer Price Index) and the annual percentage increase in the GDP as the national rate of economic growth in the previous year. Thus, the uprating mechanism changed, but the KHL index as such remained the basis for regional-differentiated minimum wage-setting. Under the new law, the index can be adjusted every five years, to be determined by the regional wage councils (website WageIndicator / Minimum wages in Indonesia).

7. The politics around minimum wage-setting

The Widodo administration had the aim that the 2015 minimum wage fixing reform would ‘depoliticize’ wage-setting. However, the opposite happened. Both in anticipation of and in reaction to the reforms, the trade union movement organized mass demonstrations: late 2015 and early 2016 saw a wave of protest strikes. The other social partners did not undertake much to de-escalate matters, to say the least. Within the government apparatus, monitoring of those assumed to be strike leaders was coordinated with the national police and the state intelligence agency; according to the Workers’ Group of the ILO, “anti-union violence by police was again on the rise”. APINDO claimed that a national strike held in late November 2015 was illegal. In February 2016 international trade union leaders participated in large demonstrations in Jakarta against the new Regulation. The ITUC, the international trade union umbrella, had already “strongly criticised the decision of the Indonesian Government to change the minimum wage fixing system, eliminating any role for unions in the process” (ITUC website).

By now, sufficient building blocks are available that allow to assess the various political positions concerning Indonesia’s new minimum wage fixing system. First, we focus on its effects on employment and wage growth. Thereafter, we concentrate on the tension between minimum wage setting and collective bargaining.

8. The 2015 reform: the effects on employment and wage growth

Not only from the employers’ side but also from the academic side (Dong and Manning 2017: 21; Hamilton-Hart and Schulze 2016: 282) uncertainty and unpredictability have been denounced as disadvantages of the old system. The new system may indeed have diminished these disadvantages. However, it can be questioned whether this outcome outweighs a number of new disadvantages that have emerged. Let us first have a look at the development of employment. In 2016 an ILO evaluation concluded that between 2009 and 2014 the system was sufficient to encourage up-skilling and labour mobility from low-skilled labour-intensive activities to higher skilled capital-intensive industries. The ILO researchers also referred to the modest wage increases that the old system had brought forward in most provinces between 2003 and 2012, a period in which real yearly GDP growth was in the 5 to 7 per cent range and the annual increase in the CPI averaged 7.3 per cent. The ILO researchers applied the new formula on detailed 2004-2015 data, and concluded that this formula in those 12 years would have generated quite high annual nominal minimum wage increases (between 12 and 15 per

cent). Even in a province like Jakarta, with relatively high minimum wages, applying the new formula would have led to significantly higher minimum wage levels between 2004 to 2012; only in 2013-2015 the actual minimum wages in Jakarta very marginally exceeded what the new formula would have generated. Projected against these figures the new uprating mechanism might be questioned from an economic perspective.

For a province with relatively low minimum wages, like DI Yogyakarta, application of the new formula would have produced a substantially higher minimum wage in each of 12 years. Nevertheless, the gap between ‘high’ and ‘low’ minimum wage provinces would have widened. In conclusion, the application of the new formula would have led to higher nominal wage levels in most regions and most years between 2004 and 2015 compared to what actually occurred (Allen and Kyloh 2016: 46-49). In view of this analysis, the fear for wider income gaps as a consequence of the new fixing system ventilated by the ITUC and other trade union bodies, seems justified.

The outcomes of the ILO evaluation show two more disadvantages of the new uprating system. First, the fact that the development of local productivity cannot be taken into account can be regarded as disadvantageous. As noted by among others Hamilton-Hart and Schulze (2016, 282), the new system lacks a procedure for investigating local productivity growth. Second, the current formula leaves aside specific local developments in the cost of living and changes in the composition of the ‘basket‘ of basic food and other commodities within five- year intervals (Allen and Kyloh 2016: 54). Thus, it also makes sense to reconsider arguments regarding the competitiveness of Indonesia’s labour-intensive manufacturing industry that were alleged against the old system. For example, Dong and Manning (2017: 22-24) argued that minimum wages during the Yudhoyono II years (2010–14) rose much faster in the industrial centres in Greater Jakarta and Surabaya than in most other industrial regions. They linked these differences to the relocation of capital in labour-intensive industries—garments and to a lesser extent footwear—away from the main industrial centres to smaller urban regions in West, Central and East Java. It is rather ironic to conclude that under the new system the regional wage differences in question would have increased even more. By contrast, the old system would have put the brakes on such a relocation. Moreover, while wage levels in the garment industry of particularly Central Java are already higher than those of notably Bangladesh, this unfavourable margin will most likely increase with the application of the new formula (Allen and Kyloh 2016, 50; confirmed by data from Van Klaveren 2016).

9. The 2015 reform: minimum wage setting and collective bargaining

The relationship between minimum wage setting and collective bargaining is of major importance. Tjandra (2016, 287) has observed that since 1998 the Indonesian state has become more ambiguous with respect to the role of minimum wages. Successive Indonesian administrations would have liked to turn minimum wages into a genuine wage floor, while dominant forces in these administrations have been reluctant to leave wage-setting to free collective bargaining. In conjunction with ‘hardliners’ dominating APINDO, government officials have repeatedly depicted processes related to the old minimum wage system as ineffective and subject to undemocratic influences. We assessed in the above the ‘ineffectiveness’ argument as weak. Concerning the ‘undemocratic’ argument, it should be emphasized that Indonesia’s collective bargaining system is weakly developed and that unions willing to engage in meaningful bargaining mostly meet a number of serious constraints. Under these conditions, minimum wage setting has remained virtually the only forum for trade unions to show what they are doing to act on behalf of their members and the 

workers in general. Moreover, until 2015 minimum wage fixing has acted as a unifying issue in the union movement at regional, sectoral and company level. Debates related to decision- making in the regional Wage Councils have been crucial in developing union alliances (Tjandra 2016: 171-175).

10. The current situation (early 2020)

Currently four kinds of minimum wages are in existence in Indonesia. At the provincial level be the Minimum Wage Province (MWP) and the Minimum Wage Sectoral Province (MWSP) may co-exist, while that can also be the case at the district/city level for the Minimum Wage District or City (MWD/City) and the Minimum Wage Sectoral District/City (MWSD/City). By May 2019, for Indonesia no less than 287 minimum wages with a regional dimension (MWP and MWD/city) were included in the WageIndicator Minimum Wages Database (Tijdens and

Van Klaveren 2019). Besides these minimum wages, sectoral minimum wages exist in many, but not all, provinces; their number is yet unknown as documenting them meets considerable problems. The 2015 Regulation prescribes that, though finally to be established by the provincial governor, the sectoral minimum wage should be based on agreement between an employers’ association and a trade union. Also, uprating this minimum wage depends on collective bargaining; at this level the CPI/GDP formula does not apply.

11. Sectoral minimum wages, workers driven

Obviously, this part of the Regulation has codified a practice through which a sub-system of sectoral minimum wages has emerged bottom-up, that is, where workers have organized at sectoral level in union alliances and have bargained for wages higher than the district or province minimum wages (Allen and Ryloh 2016, 58; Tjandra and Van Klaveren 2015, 142- 143). The framework for setting the sectoral minimum wage takes the regional KHL as a base, and can add bargained ‘extras‘ based on factors such as productivity and skills. Examples from the Purwakarta District show that in practice sectoral minimum wages may rise to over 30 per cent above the district minimum wage (like in the automobile and large food and beverage sectors) but may also up 15 per cent lower than the district minimum wage like in the clothing and footwear industries. This was a violation of the 2015 Regulation (Art. 49, ad 3: “The provincial sectoral minimum Wage ….  must be higher than the provincial minimum Wage in the concerned province”).

12. Minimum wages related to cost of living

All evidence shows that the minimum wages in Indonesia, instead of being a wage floor, have become the effective wage for most of the workers --most likely 60 to 80 per cent-- in the formal sector. Recently, Dewi (2018) concluded that the effectiveness of Indonesian minimum wage policies have decreased in lifting the wages of the low-paid (mainly observed in the formal sector): in 2007 these policies were more effective than in 2014. In that last year, minimum wage hikes turned out to have only a small positive impact on the incomes of the poor; the best results affected those employed earning around the median wage.


Of course, the wage levels indicated here have to be confronted with the cost of living. By the end of the 2000s, evidence piled up that the minimum wages did not provide a decent standard of living for large parts of the Indonesian population, if departing from the purchasing power of a single-income household of three consumption units (three adults or two adults and two children). In 2009, the KHL-linked food and non-food costs for three consumption units were calculated at over 2.5 times the prevailing average minimum wage (Schulten 2009). There is evidence that since then in many regions the gap between the minimum wages and the cost of living has remained at about the same level. In 2013 the minimum wages in Jakarta, the country’s highest in nominal terms, were equivalent to an income of less than USD 1 per day for a single-income household of four persons. The researchers tracing this added that increases in household income from this low level could “have a nontrivial positive impact on worker productivity by improving nutrition and allowing better access to health care“ (Cornwell and Anas 2013: 22).

For 2016, WageIndicator research focusing on garment manufacturing calculated living wages compared to which virtually all average wage levels were low. For instance, the lower-bound living wage calculated for a standard family of four was 20 percent above the average upper- bound wage of a high skilled worker (Van Klaveren 2016; see for updates https://wageindicator.org/salary/wages-in-context). It has to be added that both paid and minimum wage levels and cost-of-living levels show large differences across Indonesia. In 2018 minimum wages in the three Javanese provinces where most garment factories are located were somewhat higher than the living wage for a single adult without children calculated by the WageIndicator; yet, they remained about one-fifth below the living wage for a standard famiiy of two parents (1.8 on average working) and two children (WageIndicator websites Indonesia, Minimum Wages and Living Wages).

13. Minimum wages: compliance

Recent messages from the informal sector suggest a low rate of compliance with the current minimum wage legislation in at least that sector – as indicated, still covering about 60 per cent of the Indonesian labour force. ILO research using household and labour force survey data from 11 developing countries in the late 2000s confirmed this suggestion, for Indonesia presenting disquieting outcomes for wage-earners in informal employment – but also for the formally employed. For 2005 this research estimated an overall compliance rate among Indonesian wage-earners of 65 per cent. For 2009 that rate had decreased to 49 per cent: the lowest of all countries covered. A strong fall of compliance in the informal sector (from 60 to 35 per cent) combined with a lower but still substantial decrease in the formal sector (from 67 to 55 per cent). The trend in compliance for Indonesian female wage-earners was particularly disquieting: a decrease from 50 to 39 per cent in four years’ time, the latter percentage again being the lowest out of 11 countries (Rani et al. 2013: 409). An ILO report showed that for Indonesia full compliance for regular wage employment could bring down inequality substantially: based on 2014 data, the wage inequality Gini would have been brought down by 0.11 percentage-points -- thus about one quarter lower (Allen and Kyloh 2016: 79). The ADB 2016 report produced similar outcomes. It concluded for Indonesia “that the high level of non- compliance among regular employees and the low level of earnings among informal workers means that minimum wages do not provide an effective floor for wages“ (Allen 2016: 24).


Most recently compliance in a specific sector of Indonesian manufacturing, the garment industry, has been measured through the Gajimu DecentWorkCheck Survey: a WageIndicator survey allowing workers to test whether their jobs comply with the national labour legislation including the applicable minimum wage rates (The reference for the minimum wage rates was based on the rates applicable to the location of the factory, either a city or a region within a province). This survey started July 16, 2017. A first analysis based on data collected until 6 August 2018 covered nearly 3,200 interviews with employees working for 125 garment factories. It revealed that 86 per cent of the workers surveyed had been paid at least the relevant minimum wage, and that payments were almost always on time. Compliance rates for male workers were significantly higher than for their female colleagues (90 versus 84 %). The compliance rates found in this survey may seem remarkably high, even keeping in mind that only the formal sector was covered. It may be assumed that these outcomes were positively influenced by the selection of factories where trade unions had access to (Tijdens et al. 2018).

14. Conclusions

In Indonesia under the Widodo I administration ‘free collective bargaining’ has for the most part been equivalent to the setting of sectoral minimum wages. Researchers reporting on behalf of the ILO have suggested that setting such minimum wages may be regarded as a substitute for limited collective bargaining but could also be used to provide a base for moving towards mature collective bargaining (Allen 2016: 33; more extensively Allen and Kyloh 2016: 58-59, 68-69). However, this may be overly optimistic: both options seem rather illusory in view of the country’s current labour relations. It is rather unlikely that Indonesia’s overall more restrictive decision-making on minimum wages along the lines of the 2015 reform would spark free collective bargaining. Clearly, Indonesia is one of those countries where relatively high minimum wages can be attributed at least in part to underdeveloped collective bargaining systems. It must be equally clear that in the Indonesian case the strengthening of collective bargaining is needed to address wage and income inequality more effectively; the more effective use of statutory minimum wage mechanisms alone is not sufficient (cf. Lee and McCann 2014). Steps towards free and more effective collective bargaining to be taken by the national administration have the potential to alleviate the pressure on the minimum wage fixing system and may well depoliticize that system.

 

References

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Maarten van Klaveren, 20200119

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