Dilemma of Wage Increase amid Growth Expectations

Penulis: Amal Ihsan Hadian

Editor: Yura Syahrul

Selasa 6/11/2018, 19.00 WIB

Workers threaten to stage a rally because they saw a low wage increase, while employers fear domestic products will lose the competitiveness.

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Leo Wolfert | 123RF.com

A number of provinces have announced an increase in the 2019 Provincial Minimum Wage (UMP) in accordance with the formula set by the government. However, several worker federations and employer associations rejected the new UMP increase. Workers threaten to stage a rally because they saw a low wage increase, while employers saw that domestic products are at risk of losing competitiveness due to the UMP hike.

Until last Friday (11/2), at least 26 provinces had reported the UMP increase for next year. According to the Minister of Manpower Hanif Dhakiri, all provincial governments (Pemprov) increase the UMP in accordance with the standards set by the central government at 8.03 percent. This is stated in the Manpower Minister Circular Letter (SE) N0. B.240/M-NAKER-PHI9SK-UPAH/X/2018 on the Submission of Data on National Inflation and Growth of Gross Domestic Product in 2018.

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Based on the Government Regulation (PP) No. 78/2015 on Wages, the formula for calculating wage increase is the current UMP + [current year UMP x (national inflation + economic growth)]. Until September 2018, the inflation and economic growth figures calculated by the Statistics Indonesia (BPS) were at 2.88 percent and 5.15 percent, respectively. Thus, the percentage of the UMP increase for next year is 8.03 percent.

The benchmark percentage of the 2019 UMP is lower compared to the increase in this year’s UMP at 8.71 percent. The reason is that inflation between September 2016 and September 2017 hit 3.72 percent. Although economic growth from the third and fourth quarters of 2016 until the first and second quarters of 2017 was only 4.99 percent, the percentage increase in wages is higher due to high inflation.

Hanif hopes the increase can be a win-win solution for both workers and employers. On the one hand, workers get the certainty of wage increase for next year. On the other hand, the business world also has the certainty of cost increase for Human Resources (HR) next year, so it does not interfere with the smooth running of businesses.

Buruh Pabrik
Factory Workers (ANTARA/Yulius Satria Wijaya)

Several employer and worker associations choose to follow this stipulation. Although he acknowledges the employers are facing tough economic conditions, the Indonesian Chamber of Commerce and Industry (Kadin) Deputy Chairman Sarman Simanjorang hopes all employers will comply with the UMP increase and no one will submit a suspension of the increase.

Meanwhile, the Indonesian Workers Organization (OPSI) Secretary General Timboel Siregar believes, with the controlled inflation as it is today, workers will see that the minimum wage increase is still quite feasible.

However, there are some who object to the new UMP. The Indonesian Textile Association (API) Chairman Ade Sudrajat said the increase in the UMP will hit the industry of textile and textile products (TPT) in West Java, especially industrial centres in Bogor, Bekasi, Karawang, Purwakarta, and Depok.

This is because the minimum wage in the region is already high. With another wage increase next year, production cost will increase and textile products in the region may lose its competitiveness. Not surprisingly, many factories chose to relocate to other areas, such as Central Java that has a lower minimum wages.

In Karawang, for example, there are only eight textile manufacturers. A few years ago, there were 22 TPT factories operating in the region.

Ade admits, prior to the issuance of PP No. 78/2015, many regional heads promised minimum wage increases for political purposes. With the issuance of the regulation, its formula is more generalized. However, he hopes there are special rules that regulate regional minimum wage for labour-intensive industries. This is because the worker cost portion, such as in the textile downstream industry, reaches 15 percent-23 percent of the production cost.

There are also entrepreneurs who rejected the wage increase because their regions have just been hit by a disaster. The Indonesian Employers Association (Apindo) of West Nusa Tenggara (NTB), for example, requested the next year’s UMP in NTB to remain the same as this year’s UMP at Rp 1,825,000. “This is because business conditions are still sluggish,” said the Chairman of Apindo NTB Ni Ketut Wolini, as quoted by Radar Lombok.

If the UMP must increase next year, it will put pressure on entrepreneurs who are still in a bad condition. Currently, some companies have already been forced to lay off their employees as they are unable to pay salaries due to a sluggish national economic condition, which was also coupled with the earthquake that damaged the economy in NTB.

Besides entrepreneurs, Worker Unions also refused the new UMP. They argues that inflation and economic growth cannot be used as a reference in determining the UMP. This is because the basic cost of living (KHL) of workers in Jakarta, Bekasi, and Tangerang reached Rp 4.2 million-Rp 4.5 million as of October 2018. This calculation is based on a survey of 60 items used as a benchmark.

Prior to the issuance of PP No. 78/2015, the annual UMP increase was quite large. In 2012, the average UMP increase was 10.27 percent. In the following year, it reached 18.32 percent. This is because the determination of minimum wages is based on KHL survey and tripartite forum agreement between employers, workers, and regional governments.

As a result of this disagreement, KSPI stressed that it would hold a demonstration this month to reject the new UMP. It will also file a lawsuit to the government regarding a reasonable UMP increase based on the KHL survey. “The calculation based on KHL is mandated by Law No. 13/2003. The PP No. 78/2015 violates Article 88 and 89 of the Law No. 13,” the KSPI President Said Iqbal said.

Pabrik rokok
Cigarette Factory (ANTARA FOTO/M. Risyal Hidayat)

According to the Economist from University of Indonesia (UI) Fithra Faisal Hastiadi, the UMP increase of 8.03 percent is still relatively high compared to the productivity of the manufacturing sector, which is only around three percent per year. This is because, according to the theory of labour economics, wage increases must be based on sectoral productivity levels.

For the sake of generalization, the new wage formula uses economic growth as a proxy variable that reflects productivity. Inflation factor is also still added into the formula because it affects the worker’s purchasing power. Therefore, he assessed, a 8.03 percent increase is sufficient for both employers and workers.

The Minister of Finance Sri Mulyani said the government will observe the impact of the the 2019 UMP increase from the economy of household and corporation. She acknowledges the business world, which is burdened with the wage increase, hopes that the decision will lead to an increase in worker productivity.

The increase in the manufacturing industry productivity is very important because it can encourage growth. “If productivity also increases, it also means that the UMP increase is the right decision,” Sri said.

On the other hand, the UMP increase is actually needed to improve household welfare, with the hope that it will also help the economic growth.

On Monday (11/5), the Statistics Indonesia (BPS) announced the economy grew 5.17 percent during the third quarter of 2018, higher than 5.06 percent in the same period of previous quarter. Household consumption accounted for a large contribution of 5.01 percent, rising from 4.93 percent in the same period last year.

According to BPS Head Suhariyanto, the strengthening of household consumption indicates an increase in purchasing power. In the third quarter of 2018, about 64.9 percent of the people spent their income for consumption.

The percentage was higher than 64.73 percent in the same period last year. Other indicators that reflect a strengthening in purchasing power are retail sales that are still growing, imports of consumer goods that are still happening, and automotive sales that are still positive.

Maintaining growth is important because Indonesia will face a downside risk next year due to weakening world economic growth. The International Monetary Fund (IMF) has corrected global economic growth to 3.7 percent this year from previously 3.9 percent.