Anies’ “labor policy” and the questionable wage formula – academia

Vincent Lingga (The Jakarta Post)

Jakarta ●
Thu 23 December 2021

2021-12-23
16:10
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Jakarta Governor Anies Baswedan recently decided to increase the capital’s minimum wage by 5.1% for 2022, well above the 1.09% set in central government guidelines. Businessmen, economists and some senior government officials immediately suspected that the move was part of his political strategy ahead of the 2024 presidential election.

The Indonesian Chamber of Commerce and Industry threatened to sue the governor in administrative court. The Manpower Department and analysts have lambasted Anies’ contempt for government minimum wage policy, saying other governors considering the 2024 election could follow in her place.

Bahana Securities economists warned in a research note that the controversial increase in wages to 4.64 million rupees (US $ 330) for 2022 would only derail Jakarta’s labor market, scaring off companies with high prices. labor intensive to settle in other provinces with lower wages like the west and the center. Java, which had a minimum wage of just 1.8 million rupees.

According to Bahana, Jakarta’s current minimum wage of around 4.4 million rupees ($ 308) was already much higher than Thailand’s of $ 214 and Vietnam’s of $ 181, while collar productivity Jakarta blues was only half that of these two ASEAN neighbors.

But Anies’ argument that his wage policy aimed to do justice to workers and boost their purchasing power to reinvigorate consumption, the main engine of economic growth, seemed logical.

The question then is, why has Anies’ renegade wage policy for 2022 caused such fury? After all, the economy is expected to grow 5.2 to 5.6 percent next year, up from an estimated 3.5 percent this year.

There was virtually no fuss when Anies raised Jakarta’s minimum wage for 2021 by almost 3.3%, even though the central government decided to freeze wages in 2021 due to the economic contraction of 2, 1% of the country in 2020.

The problem took another turn on Tuesday, when Mercer, a U.S. employee health care and investment consultancy firm, announced the results of its 2021 total compensation survey. It concluded that, given the forecast With the economy growing 5.6% in 2022, wage increases in Indonesia would also rebound to pre-pandemic levels with a projected median wage increase of 6.5%.

At first glance, the results of the Mercer survey seem to support the logic of Anies’ wage policy. But the caveat to the global consultancy firm’s survey is that it is not representative of the country’s minimum wage outlook, as 83 percent of Indonesia’s 533 organizations surveyed were multinational companies.

Under the old formula which used the gross domestic product (GDP) and the inflation rate as key indicators to determine the annual minimum wage, the government raised the provincial minimum wage for 2017, by 8.25%, from 8, 7% for 2018 and 6.9% for 2019, while GDP growth was only 5% on average over this three-year period.

The government even increased the minimum wage by 8.5% in 2020, when the economy contracted.

The real question, then, should be: why is the minimum wage hike negligible by 1.09% using the new formula of the Job Creation Law of 2020, which was first applied to determine the minimum wage of 2022?

The new formula has three other indicators in addition to the GDP and the inflation rate to calculate the minimum wage, namely the purchasing power, the labor absorption rate and the median wage. The meager increase in wages is indeed difficult to understand, especially since the economy is expected to grow by 5.6% in 2022 and the estimate of inflation is only 1.6% this year and 2.2% next year.

Government Regulation No. 36/2021, the Regulation for the Application of Labor Policies of Labor Law, has been praised internationally for making labor rules more flexible and more conducive to businesses to cope with rapid changes in the labor market. employment sector due to strong digital growth. Domestic and foreign employers hailed the new labor rules as a great incentive to court new investment.

But unions staged massive street protests last year against proposed labor rules, rejecting the new minimum wage formula as being against workers’ interests.

They continued their fight against the new labor rules before the Constitutional Court, which ruled in their favor in November and ordered the government to revise the employment law in its entirety by the end of 2023. In the As part of its ruling, however, the court also ruled that the law and its regulations would remain in effect for that two-year period.

The revised employment law is a good opportunity for the government and the National Wage Council to review the new minimum wage formula in order to avoid noisy street protests at each annual minimum wage review.

But union leaders should also realize that wage increases without a corresponding increase in productivity would only increase unemployment in the long run, as factories reduce their payrolls to cut costs.

New investors will also avoid labor-intensive businesses, thus killing the chance for 65% of the 140 million workers to move from the informal economy, where labor rules do not apply, to the sector. formal.