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Anies' 'labor politics' and the questionable wage formula

Jakarta Post - December 23, 2021

Vincent Lingga, Jakarta – Jakarta Governor Anies Baswedan recently decided to increase the capital city's minimum wage by 5.1 percent for 2022, much higher than the 1.09 percent set in the central government's guidelines. Businesspeople, economists and some senior government officials immediately suspected the decision was part of his political strategy ahead of the 2024 presidential election.

The Indonesian Chamber of Commerce and Industry threatened to sue the governor at the Administrative Court. The Manpower Ministry and analysts lambasted Anies' defiance of the government's minimum wage policy, saying that other governors eyeing the 2024 election might follow in his stead.

Bahana Securities economists warned in a research note that the controversial wage increase to Rp 4.64 million (US$330) for 2022 would only derail Jakarta's job market, scaring away labor-intensive businesses to set up shop in other provinces with lower wages like West and Central Java, which had a minimum wage of only Rp 1.8 million.

According to Bahana, Jakarta's current minimum wage of around Rp 4.4 million ($308) was already much higher than Thailand's $214 and Vietnam's $181, while Jakarta's blue-collar productivity was only half that of these two ASEAN neighbors.

But Anies' argument that his wage policy was aimed at bringing justice to workers and strengthening their purchasing power to reinvigorate consumption, the biggest driver of economic growth, seemed to make sense.

The question, then, is why has Anies' renegade wage policy for 2022 caused such heated furor? After all, the economy is projected to grow 5.2-5.6 percent next year, up from this year's estimated 3.5 percent.

There was barely any fuss when Anies raised Jakarta's minimum wage for 2021 by almost 3.3 percent, even though the central government decided to freeze wages in 2021 because of the country's 2.1 economic contraction in 2020.

The issue took another twist on Tuesday, when United States employee healthcare and investment consulting firm Mercer announced the findings of its 2021 Total Remuneration survey. It concluded that, given the expectation that the economy would grow 5.6 percent in 2022, wage increases in Indonesia would also rebound to pre-pandemic levels at a projected median pay rise of 6.5 percent.

At first glance, the results of the Mercer survey seem to support the rationale behind Anies' wage policy. But the caveat to the global consultancy's survey is that it is not representative of the country's minimum wage outlook, since 83 percent of the 533 Indonesian organizations surveyed were multinational companies.

Under the old formula that used gross domestic product (GDp) and the inflation rate as key indicators for determining annual minimum wage, the government raised the provincial minimum wage for 2017 by 8.25 percent, by 8.7 percent for 2018 and by 6.9 percent for 2019, whereas GDP growth averaged only 5 percent over this three-year period.

The government even raised the minimum wage 8.5 percent in 2020, when the economy contracted.

So the actual question should be: Why is the minimum wage hike a negligible 1.09 percent using the new formula under the 2020 Job Creation Law, which has been applied for the first time to determine the 2022 minimum wage?

The new formula has three other indicators besides GDP and the inflation rate to calculate the minimum wage, namely buying power, labor absorption rate and median wage. The meager wage rise is indeed difficult to understand, especially since the economy is projected to grow 5.6 percent in 2022 and the inflation estimate is a mere 1.6 percent this year and 2.2 percent next year.

Government Regulation No. 36/2021, the implementing regulation for the jobs law's labor policies, was praised internationally for making the labor rules more flexible and more conducive for companies to cope with the rapid changes in the job sector due to high digital growth. Both domestic and foreign employers lauded the new labor rules as a great incentive for wooing new investments.

But trade unions staged massive street demonstrations last year against the proposed labor rules, rejecting the new minimum wage formula as inimical to workers' interests.

They continued their fight against the new labor rules at the Constitutional Court, which decided their favor in November and ordered the government to revise the jobs law in its entirety by the end of 2023. As part of its decision, however, the court also ruled that the law and its implementing regulations would remain in force over that two-year period.

Revising the jobs law is a good opportunity for the government and the National Wage Council to revisit the new minimum wage formula to prevent noisy street protests on each annual review of the minimum wage.

But union leaders should also realize that wage hikes without a corresponding increase in productivity would only lead to higher unemployment in the long run, as factories will cut their payrolls to save costs.

New investors will also shun labor-intensive businesses, thereby killing the chance for 65 percent of the 140 million-strong workforce to move from the informal economy, where labor rules do not apply, to the formal sector.

Source: https://www.thejakartapost.com/opinion/2021/12/23/anies-labor-politics-and-the-questionable-wage-formula.htm