Labour-Intensive Sector Requires Solutions

Strategic steps need to be consistently taken in the long term to strengthen the growth of the sector, which relies on labor absorption.

KOMPAS/WAWAN H PRABOWO

Activities of workers in the shoe manufacturing industry in Cikupa, Tangerang, Banten, Tuesday (30/4/2019). The factory employs as many as 15,000 people.

JAKARTA, KOMPAS — The phenomenon of job terminations continues to haunt labor-intensive sectors, especially the footwear industry, as well as the textile and textile product (TPT) industry. This situation requires an immediate solution. Strategic steps also need to be consistently taken in the long term to strengthen the growth of the sector, which relies on labor absorption.

Indonesian Footwear Association (Aprisindo) executive director Firman Bakri, believes that a short-term solution to overcome the employment crisis in the footwear industry is to implement flexible working hours. It is believed that this can reduce the occurrence of layoffs (PHK).

A similar opinion was expressed by the Indonesian Textile Association (API) employment and human resources development vice chairman Nurdin Setiawan, earlier this week. Business associations in labor-intensive sectors, including the API, have requested the government to legalize flexible working hours for labor-intensive industries oriented toward exports since the end of last year. At that time, there were already waves of layoffs.

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On 8 March, the government began implementing Minister of Manpower Regulation No. 5/2023 regarding the adjustment of working hours and wages in labor-intensive companies oriented toward export affected by global economic changes.

The regulation applies to labor-intensive industries that meet the criteria of having a minimum of 200 workers, with labor costs accounting for at least 15 percent of production costs, and dependence on orders from the United States and Europe. These labor-intensive export-oriented industries include the textile and garment industry, footwear, leather and leather goods, furniture, and children's toys.

Companies have the flexibility to adjust the number of working hours and wages for workers up to a minimum of 75 percent of their regular wages. This wage adjustment does not affect the calculation of contributions and payments for social security benefits, severance compensation and other rights as stipulated by laws and regulations. The adjustment of working hours and wages must be agreed upon by employers and labor unions (Kompas, 17/3/2023).

Asia Floor Wage Alliance (AFWA) officer Rizki Estrada, believes that even before the COVID-19 pandemic and stagflation haunted the global economy, workers in the footwear, leather and TPT sectors were already at a crossroads.

KOMPAS/TOTOK WIJAYANTO

Several employees of the PT Dean Shoes Karawang shoe factory, West Java, hugged each other after receiving a letter of termination of employment, Tuesday (28/3/2023). PT Dean Shoes in Karawang Regency closed the factory and stopped its operations in April 2023 and 3,329 workers were laid off.

The trend of nominal wages for workers increased, both in Indonesia and in most other countries. However, the general conditions for workers remained vulnerable due to the temporary nature of employment relationships.

The downstream textile and footwear industry, which is export-oriented, heavily relies on brand owners. The production capacity, design, tools and materials are determined by brand owners. The AFWA is pushing for factory management to be more open to labor unions regarding the realities that are happening.

Improving capacity

Acting director general of chemical, pharmaceutical, and textile industry at the Industry Ministry, Ignatius Warsito, stated that amid the phenomenon of layoffs in labor-intensive sectors, there is still investment growth in West Java, such as in Majalengka, Cirebon and Tasikmalaya. The same goes for Central Java and East Java.

Warsito acknowledged that the global economic slowdown has indeed reduced the demand for Indonesian exports. To enhance the capacity of domestic industries, the Industry Ministry is implementing a restructuring program for machinery and equipment in the refining and fabric-printing industry starting from 24 March. It is also promoting the improvement of human resources through strengthening vocational education.

In addition to capacity enhancement, market access must also be expanded. To boost exports, the government is currently striving to accelerate the Indonesia-European Union Comprehensive Economic Partnership Agreement (IEU-CEPA) trade agreement.

Also read:

> Policy to Prevent Layoffs Deemed Urgent

> Beware of Layoff Wave in 2023

Regarding the management of the domestic market, the head of the Trade Policy Agency at the Trade Ministry (Kemendag), Kasan, explained that the government will implement domestic market protection and encourage the use of domestic production through the optimization of central and regional government spending.

One of the strategies to protect the domestic market is by utilizing trade remedy instruments, especially trade safeguard measures that have relatively fast procedures and implementation. These measures are considered effective in protecting domestic labor-intensive industries that are adversely affected by import surges.

As part of the long-term strategy, Kasan added that the Trade Ministry had issued Minister of Trade Regulation No. 25/2022 concerning import policies and regulations.

According to this regulation, there is a list of products that are regulated or restricted in terms of importation, which requires certain import licensing requirements, including mandatory registration of importers, manufacturer importers, import approvals and surveyor reports.

We observe that the government imposes high import costs on upstream industry players, while downstream import costs are kept low.

Institute for Development of Economics and Finance (Indef) researcher Ahmad Heri Firdaus, believes that the competitiveness of the TPT and footwear industry in Indonesia is influenced by competitors in both the domestic and international markets. "They also have to compete with TPT and footwear manufacturers from other countries who may have more efficient and advanced production methods," he said.

In the domestic market, players in the TPT and footwear industry also have to compete with imported products. "Imports also have a significant impact. We observe that the government imposes high import costs on upstream industry players, while downstream import costs are kept low," he said.

Ahmad hopes that the government will promptly implement industrial policies that have a significant impact. For example, the government could start calculating the production costs incurred by labor-intensive companies in the country and similar companies in other countries, and then formulate fiscal and non-fiscal incentives. These incentives need to target aspects such as energy, equipment/technology and labor.

This article was translated by Tenggara Strategics.