Mixed Response to Govt's Fixed Formula for Labor Wage Hikes
Jakarta. Analysts were split over the projected impact of the Indonesian government’s fourth economic stimulus package, with some saying that a set formula to raise workers' salaries each year could be the right way to settle everlasting disputes between workers and employers, and others fearing this would be too heavy a burden for companies to bear.
Chief economics minister Darmin Nasution on Thursday unveiled a fixed formula to determine increases in labor wages across the country, which will require provinces to adjust labor wages based on the provincial inflation rate and economic growth.
“The fourth package is all about employment, which is important for all parties, whether it’s the laborers or the investors," said David Sumual, chief economist at Bank Central Asia. "Investors need certainty on how much they have to spend [to accommodate the pay raise]."
Employers and laborers have never been on the same page in Indonesia, with employers usually complaining that workers' demands are unrealistic as their productivity is lower than that of their colleagues in neighboring countries.
Meanwhile, laborers complain that salaries are often barely enough to make ends meet, as actual costs are much higher than the estimations made by local wage councils, which consist of governmental officials as well as representatives from business associations and worker unions.
The administration of President Joko Widodo -- backed by the outspoken businessman Sofyan Wanandi, who chairs a special team that advises Vice President Jusuf Kalla -- has now tried to come up with a solution for the continual standoff.
Besides the adjustment of labor wages at set intervals based on inflation and growth numbers, there will also be adjustments every five years in the index for minimum living costs, to make sure the number is realistic.
All of these initiatives will be included in a government regulation to provide legal basis for implementation.
“The formula is quite good, but the laborers must also increase their productivity,” said David of BCA, adding that he feared that workers would be granted pay hikes regardless of their performance.
David also argued that higher wages create "an illusion" of better welfare, because with higher incomes, price increases will quickly follow and purchasing power will be eroded.
Meanwhile, Lana Soelistianingsih, an economist from Samuel Sekuritas, said she wasn’t that sure that the fixed formula would be good for companies.
Lana, who is also a lecturer at the economics department of the University of Indonesia (UI), said not every company could afford to increase wages.
“I don’t know whether the government has consulted with associations," she said. "It is clear that the government has a good intention, but it could also backfire."
“It is clear that the government wants to boost consumers’ purchasing power, but the risks are just as clear,” she said.
Lana said manufacturers are having a hard time keeping their prices low in the face of consumers' declining purchasing power, and yet the government is now asking them to increase labor expenses.
"This will become another reason to lay off employees,” she said.
Lana explained that in more advanced economies increases in labor expenses often force companies -- especially in labor-intensive industries -- to replace workers with cost-efficient machines.
The Jakarta Composite Index was flat on Thursday’s as investors were waiting for the government’s announcement on the package, which came late in the afternoon.
The JCI rose only a slight 0.54 percent to 4,507.19. About 6.7 billion shares worth Rp 5.4 trillion were traded on the Indonesia Stock Exchange (IDX) and foreign investors, who made up 40 percent of the trading activity, booked a net sell of Rp 18.5 billion.
Tags: Keywords: