Workers and trade unions in Indonesia have nothing to celebrate on Labor Day today. Job prospects have become gloomier and gloomier as more companies have turned to less labor-intensive operations and new investors prefer to wait on the sidelines because of what they regard as to rigid labor regulations.
With more than 11 million unemployed, some 30 million under-employed, thousands more in the financial service industry facing the threat of massive layoffs and some 2.5 million new job seekers entering the labor market each year, the outlook is not good. Most analysts forecast annual economic growth of 6.5-7 percent is needed to make a significant dent into the country's huge unemployment, but actual economic expansion over the past two years has only been around 5.5 percent.
Even more discouraging is that the government has no plans to amend the 2003 labor law, succumbing to the threats by agitating trade union leaders who have steadfastly opposed any amendments to make the rules more flexible. The government instead is only drafting a regulation to ease some of the "too rigid" provisions in the 2003 Labor Law.
The government and trade union leaders may not realize it but the too rigid labor regulations have cost the economy a chance to woo foreign investments badly needed to improve the crumbling infrastructure and tap the country's vast natural resources to generate jobs.
The recent enactment of a unified investment law, though greatly welcomed by foreign businesspeople, may yet fall short of what is needed to regain investor confidence as the labor law has been proving a major deterrent to investors.
Most damaging are the requirements that dismissed workers in all industries, both foreign and locally owned, receive up to nine times their monthly salary in severance pay. Yet more ridiculous, even employees who quit are entitled to payouts. No wonder severance pay in the country is 10 times costlier than in India, three times more than in Malaysia and Bangladesh and China and two times more than in Thailand.
These labor issues add to Indonesia's investor woes including poor infrastructure, extensive government corruption, an unreliable judiciary and arduous licensing procedures.
Workers do need protective labor regulations because the market cannot always strike a good balance between the interests of workers and employers who often oppose each other. But overly protective regulations could debilitate growth in the formal-sector employment that accounts only for around 65 percent of the total employment.
Workers need markets to expand jobs available to them but they also need effective regulations to set in place labor policies, which are able to deliver high, job-creating economic growth and to provide a strong framework in which wages and fair working conditions can be set.
But too repressive labor policies as those imposed under Soeharto's authoritarian regime would result in worker exploitation, widening income inequality at the expense of social cohesion and political stability. On the other hand, a free-wheeling labor market or too flexible labor regulations will never work in the interest of workers
Amendments to the labor regulations certainly should strike a good balance between the objectives of spurring new investment to create jobs and protecting basic worker rights as well as ensuring as high worker welfare as possible within Indonesian condition. Too rigid labor regulations will further dampen the demand for workers in the already glutted labor market.
Why do businesses need more flexible labor rules? Because companies now have to face a steadily-changing economic condition with its different affects on the various sectors in which businesses operate. Easing the regulations will thus provide more flexibility in the hiring of contract-based workers and outsourcing to enable companies to adapt to changes in the economic condition, which are the only certainty now in the business scheme of things.
A more flexible labor market could also be an incentive for workers to continue investing in their social capital and life-long learning in the competition for better jobs
Reducing the burdens on employers related to layoff and transferring the bulk of the burden to the state-run workers social insurance company PT Jamsostek could be a win-win solution to the current deadlock over the amendments of the labor regulations. Such arrangements would be able to put more workers in the informal sector which are currently not protected by the labor law into the Workers' Social Insurance Scheme
Such flexibility however will be effective only when all companies join the social insurance scheme by registering all their employees with Jamsostek and pay all the dues and contribution related to the labor insurance scheme.