Tuesday, December 04, 2012

On wage increase

This never-ending tug-of-war between businesses and workers has been so frustrating. After the government bowed down to two demands (wage raise, ban on outsourcing), the workers asked for social protection - for free.

Now the business association pleads to the government to postpone the raise.

The recent minimum wage raises have been indeed dramatic. Jakarta, for example, set an increase of about 45%, Bogor 60%, and Bekasi 30%.

It's the workers' right to ask for pay increase, obviously. But we should understand that there's always two sides of a transaction. While the increase in wage benefits the existing workers, it suppresses the incentive for business to employ more workers (in fact, it creates incentive to lay off some of the existing workers) - so it is bad for those who are still looking for jobs. This especially hurts the SMEs whose labor costs can add up to 25% of total production costs (compared to less than 10% in the case of bigger firms).

Yes, we are still competitive in terms of labor wage, compared to countries like China, Philippines, or Thailand. But I'm not sure if the minimum wage keeps increasing in the order like those in the past weeks. Also, it's not just a matter of wage component. Presumably other labor-related costs will increase, for example severance payment (whose formula is a function of wage level). In the end, firms might shift the burden onto the product price. And hence creates inflationary pressure.

I'm not against wage increase (as a worker myself, I love a pay increase!). But as any econ-101 book tells us, wage should be a reflection of productivity. In the case of Indonesia, however, an increase in unit labor costs of 8% has induced a decline in export growth rates of 1.6 percentage points (World Bank 2012). Which means the wage bill has increased faster than productivity. OECD (2008) also calculates that since 2002 real minimum wage in Indonesia has been hovering above labor productivity. In fact if one takes the ratio of minimum wage to median wage, Indonesia has ratio higher even compared to the OECD countries.

I don't really understand why the government has been so lenient to these demands. Once in 2006 they attempted to revise the labor law but then backed-off following a big protest. And silent since then. I thought they were still fighting hard to cut down the unemployment rate. Maybe not so seriously.

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