Press Release

Activity of factory workers in a wig or fake hair industry in Banjarsari village, Purbalingga, Central Java, a month ago. Purbalingga is one of wig and eyeslashes industrial center in Central Java and Indonesia. Around 52,000 workers in the district absorbed into the export-oriented manufacturing industries. Currently there are 18 foreign investors and 14 local investors in Purbalingga that engaged in this industry. (Joko Santoso / Wawasan)
Activity of factory workers in a wig or fake hair industry in Banjarsari village, Purbalingga, Central Java, a month ago. Purbalingga is one of wig and eyeslashes industrial center in Central Java and Indonesia. Around 52,000 workers in the district absorbed into the export-oriented manufacturing industries. Currently there are 18 foreign investors and 14 local investors in Purbalingga that engaged in this industry. (Joko Santoso / Wawasan)

Jakarta, Transformasi—In the last six years (2008-2014), the average labor Provincial Minimum Wage (Upah Minimum Provinsi or UMP) in Indonesia has increased by 115 percent or more than doubled. However, only 20 percent of labors have enjoyed such rise of the average UMP. The remaining 80 percent workers have not received the benefit. On the contrary, their wage have actually gone down, especially for agricultural and informal sector workers. As a result, labor prosperity in Indonesia becomes more unequal.

That is the analysis of Transformasi with the Emmeritus Professor of Economics from Boston University, Gustav F Papanek, on the manpower situation in Indonesia in the last six years, which was launched Monday (1/12) in Jakarta. This analysis was enshrined in the second progress report presented by Tranformasi with Papanek in November 2014 against a number of Indonesian macroeconomic indicators.

Papanek reveals that on 2008, the average UMP in Indonesia was at Rp. 743.200. Every year that amount keeps on rising, until it becomes Rp. 1.595.500 in 2014.

“In the last six years, the average wage of industrial workers has gone up 39 percent during that period, as a result of increasing average UMP, which more than doubled, namely around 115 percent. Workers in the industrial sector were receiving income way above the average income of Indonesian people, which in six years has only gone up by 28 percent,” said Papanek.         

Unfortunately, continued Papanek, such drastic minimum wage increase has only been beneficial for a small number of labors in Indonesia. From 118.864.477 labors in Indonesia, only 23.313.980 labors were receiving minimum wage, or only abount 20 percent (BPS, 2014). Such labors were labors working in the industrial sector, especially in large companies that still adhered to the minimum wage regulation. Around 80 percent labors have not been included in the minimum wage structure. These people works as agricultural labors, informal workers, construction workers, temporary workers, and household assistants.   

“This means UMP is higher, but most of the labors are not getting more prosperous, because only a small number of them receive the benefit. What actually happens is an increasingly widening income gap,” said Papanek.

Agricultural labors are suffering the most

Data also shows that wage in the agricultural sector continues to decrease in the midst of the ever increasing industrial sector wage in the last six years since 2008. In 2008, wage in the industrial sector was only 30 percent above the wage in the agricultural sector. But, on 2014, the gap is widening by over 100 percent. This means that the industrial sector wage is twice the agricultural sector wage in 2014.

The wage for labors in agricultural sector is always lower than those who rok in the industrial sector. Their wages are even only half of those who work in the manufacturing sector. This is mostly caused by the fact that since 1996, the number of workers in the agricultural sector continues to rise. The supply of workers is increasing and is larger than the demand, causing many workers to not be protected by the minimum wage policy, or due to other factors related to the decrease of their wages’ value as inflation occurs. 

Source: Papanek (2014), processed by Transformasi
Source: Papanek (2014), processed by Transformasi

The vastly increasing wage in the industrial sector is making labor intensive industries in Indonesia less competitive in the global market. As a result, the growth of import of manufactured goods rises, while the growth of export of manufactured goods slows down. Higher labor cost also makes labor intensive as a production method less competitive. As a result, many factories prefer to use machineries and reduce labors. Furthermore, those two tendencies contribute to the very slow job creation in the manufacturing sector between 2008 and 2014.

Because of the low demand for workers in the manufacturing sector, many workers are encouraged to enter the agricultural and informal sectors. But, income in such sectors are not protected by the minimum wage policy. Therefore, their income becomes stagnant, even goes down.

Executive Director of Transformasi, Nugroho Wienarto, added that the minimum wage increase does not only contribute to the rising average labor wages in the industrial sector, but also to the degrading income of agricultural labors and other informal sector labors.

“Most of them are not protected by the minimum wage. The number of people working in that sector are also rising as our manufacturing industry becomes less competitive. Meanwhile, the rise of minimum wage also increases inflation. So, their wage is low, and they are suffering from inflation as well,” explained Nugroho.

Devaluation and compensation strategy

Increasing labor wage does not necessarily have to be a burden to investment competitiveness in the manufacturing industry sector. China has proven that with an increasing labor wage, their manufacturing competitiveness remained high. According to Nugroho, the key is to reduce labor cost for companies, while increasing the income of labors. Currency devaluation is the most effective way to reduce labor cost and other domestic costs from exporters, as they compete with imports. Stabilization of staple food prices for 40 percent of the poor will protect workers’ income and recude the impact of inflation caused by devaluation. Other steps to reduce labor costs include increasing workers’ productivity through the provision of industrial training supported by the government.

Voluntary shift of the severance payment system can also be the next solution. That step needs to be simultaneously done with establishing an Export Processing Zone within a low wage area with a wage that is under the minimum wage, compensated by subsidized government services for workers, such as housing and health.

 

“Then, the government needs to revitalize the tax compensation system that these steps need to be taken while continuing to develop infrastructure and eradicting corruption,” he suggested.

 

Construction Workers and Household Servants  

In construction sector, there are only a few workers in that sector who are protected by minimum wage. The average wages in the construction sector have increased 19 percent from 2008 to 2014. This number is still way below the average labor wages in the industrial sector, but is significantly higher than the wages of agricultural labors. Most of labors in the construction sector are temporary or freelance, who are paid daily or weekly, with wages equal to those working in the agricultural sector, but slightly higher to cover for the larger living cost in the city.

According to Papanek, a small portion of the construction workers are hired permanently, mainly because they are more skilled and experienced. If their employer is a large company, they can receive benefit from the minimum wage policy. If not, they are paid under the minimum wage.

The wage for household servants had increased rapidly by 10 percent at one point (on 2009); then fell several percent, went up again, then went down again to 5 percent. This rate remained for over a year. In other words, for 6 years, their wages only increased by 5 percent in total, or less than 1 percent a year. This is ironic because during this period, the income per person in this country is rising about 3,5 percent per year. (HAN-Transformasi)