Minimum Wage Dilemma

KOMPAS/RONY ARIYANTO NUGROHO

-A number of female workers finish harvesting spinach vegetables at Kemang farm, Bogor Regency, West Java, Wednesday (21/4/2021). These women workers earn Rp. 70,000 per day for work.

The 2022 minimum wage increase using the new calculation formula is estimated to be just 2-3 percent, far lower than that demanded by workers as well as the average increase over the last five years.

To cope with the decline in buying power among workers due to the minimal increase in the minimum wage, the government has been urged to provide various incentives and social assistance to maintain their buying power (Kompas, 5/11/2021).

The planned minimum wage increase has drawn criticism even before it was announced. One labor union has threatened to hold demonstrations in 26 provinces to pressure the government to meet their demand for a 7-10 percent wage increase. The business community views their demand as irrational, as business activities have not yet recovered from the impacts of the Covid-19 pandemic.

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The latest minimum wage formula is based on Law No. 11/2020 on Job Creation and Government Regulation (PP) No. 36/2021 on Wages. In the regulation, minimum wage is no longer based on inflation and economic growth, but on economic and employment conditions.

The variables in the new formula are more complex. There are 20 types of economic indicators issued by Statics Indonesia (BPS) that are used to calculate minimum wage as well as special wages for micro and small businesses, such as purchasing power parity, employment and median wages.

Kompas/Priyombodo

Workers receive change from behind a property project fence in the Kebon Melati area, Tanah Abang, Central Jakarta, during break time, Tuesday (28/9/2021).

Given that Indonesia has not fully recovered from the pandemic and the economy remains in an “abnormal” situation, the workers’ minimum wage demand is considered unrealistic. Holding demonstrations would be counterproductive, as doing so will only draw crowds that could further increase Covid-19 transmission.

Regardless of the formula and indicators used, we must not forget that the essence of minimum wage is to provide protection and safety nets for workers. Workers’ concerns that their position would only weaken as a result of the Job Creation Law, which aims to encourage investment, should be addressed with a policy approach that does not sacrifice them.

By maintaining their buying power, the government will be able to keep the economic wheels turning, since household consumption contributes 56.9 percent of gross domestic product (GDP).

Given the current situation of the economy and the labor market, workers may eventually be forced to accept the modest wage increase. However, it must be ensured that the workers will not be sacrificed. There must be a safety net so their buying power and welfare will not decline. By maintaining their buying power, the government will be able to keep the economic wheels turning, since household consumption contributes 56.9 percent of gross domestic product (GDP).

The problem is the potential for fiscal constraints during the three remaining years of the Joko Widodo administration. The President has promised that the state budget deficit, which swelled during the pandemic, would return to below 3 percent of GDP in 2023. This means that the extraordinary increase in government spending must be put on hold in 2022, at a time when extra funds are still greatly needed to cope with the pandemic and to finance social protection programs.

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It must also be ensured that the implementation of the Job Creation Law will attract massive investments as intended, so as to maintain growth. Business actors should also have good intentions, especially regarding the new minimum wage. They should prioritize dialogue and fulfill the rights of workers if they are able to do so, because in the end, harmonious and just industrial relations will benefit all.

(This article was translated by Hendarsyah Tarmizi).