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Contract worker system: A call for reform

Jakarta Globe - June 8, 2024

Yessi Vadilla, Lili Yan Ing –- Think for a second, it can happen to you. Warsiah (not her real name), a 46-year-old single working mother, was involved in an accident at an intersection and fainted while riding her motorcycle home from work.

Her office colleague, who was riding with her, explained that Warsiah had not eaten all day, looked very pale, and was shaking after leaving her supervisor's office. It was later discovered that her contract was not renewed without any explanation from the institution where she works.

Among her colleagues, Warsiah was known for her hard work and intelligence. The sudden termination shocked not only her but also the entire company and, of course, her family. The head of the institution declined to provide comments. The decision to discontinue her contract remains unexplained; these decisions are often based on personal preferences or whims.

Warsiah has two children, Qoriah (14 years old) and Kodijah (11 years old), who are in senior high and middle school. She lives with her parents, who depend on her support, and she has a three-year motorcycle mortgage and a rental house she pays for monthly, as her contract status prevents her from securing a housing mortgage.

The sudden contract termination, without proper explanation or prior notice, means catastrophe for her and her family after 26 years of dedicated service to the same institution under a "contract system."

Warsiah is not the only one prone to being a victim of a frequently abusive contract system.

As of February 2024, it was recorded that out of 142 million people employed in Indonesia, 64.2 million or 45.2 percent of total employment in Indonesia fall under the category of contract or honorarium workers, with about 9.8 million employed by the government (SAKERNAS, 2023).

The contract workers range from relatively high-skilled professionals, including doctors, lawyers, lecturers, teachers, accountants, nurses, health workers, and other professionals, to relatively unskilled workers.

Globally, it is estimated that almost half of the 1.9 billion workers were contract workers of one type or another (ILO, 2023). In 2023, approximately 2 billion people worked in informal jobs, comprising almost 70 percent of the labor force in developing and low-income countries, and 18 percent in high-income countries.

Unlike in developed countries, where workers' rights are protected by law with solid law enforcement, workers in Indonesia (and other developing and least developed countries) often struggle against unfair treatment and termination.

The situation is even worse as a contract system could exacerbate rising inequality. In 2024, Indonesia's GDP per capita is forecasted to be Rp 83.3 million annually $5,109 (EIU, 2024), while the average monthly labor wage is merely Rp 3.04 million or Rp 36.5 million annually ($2,239), based on Statistics Indonesia, February 2024.

This highlights a significant income gap between the overall economy and average working people. The disparity becomes even more pronounced when comparing capital owners to workers, with the rate of the rising gap potentially increasing exponentially.

To give you an illustration, in 2000, the average income/wealth of the top 1 percent in Indonesia was IDR 120.1 million, while the bottom 50 percent had only Rp 12.7 million. By 2020, this disparity had worsened, with the top 1 percent holding an average of Rp 715.7 million compared to just Rp 42.3 million for the bottom 50 percent. Employers, motivated by cost-cutting measures, may exploit the availability of the contract worker system, eventually driving down wages for all workers (Standing, 2014).

In the case of Indonesia, even with Government Regulation number 35/2021, which was derived from Law number 11/2020 (Omnibus Law on Job Creation), and labor regulations that limit the number of contract renewals (maximum of five years, after which the company or institution should offer a permanent position), most if not all, companies or institutions simply renew the contract, have a pause of 2 weeks, and repeat the same cycle of contracts. In the end, most contract workers end up with the repetitive "Vicious Contract Cycle."

There are at least three pressing concerns associated with the proliferation of contract workers, perpetuating economic instability and insecurity.

First is declining productivity. Contract workers are often tasked with performing essential services in sectors such as healthcare, education, and public administration, yet they may lack the necessary support and resources to carry out their duties effectively.

This can result in increased workloads, burnout, and decreased morale among contract workers, ultimately compromising the quality of care and services delivered.

Moreover, the use of contract workers in critical sectors such as healthcare and education can have serious implications for public health, safety, and learning outcomes. Furthermore, the excessive use of contract workers distorts incentives for human capital accumulation.

Workers may be less inclined to pursue higher education or invest in new skills if job stability is lacking, while firms are less willing to invest in their employees through training. Both factors stifle innovation, productivity, and economic growth in the long run.

Second, another significant consequence of the prevalence of contract workers is the perpetuation of social inequities, particularly in education and health. The lack of job security and access to benefits faced by honorary workers can lead to far-reaching social consequences, including increased rates of poverty, housing instability, and poor health outcomes.

This is especially relevant in Indonesia, where a substantial portion of the population belongs to vulnerable groups. Many individuals, while marginally staying above the poverty line, can easily fall back into poverty in the event of job loss.

Third, fiscal burden for the government. Most contract workers will be terminated when they are older than 40, or a maximum of 50 years old. They have no savings, no pensions, no unemployment benefits, and no health, or life coverage.

Having a contract worker system without strong law enforcement will only mean shifting the cost from the private sector (companies, international organizations, or any form of institution) to the government. In Indonesia, government expenditure to GDP averaged around 9.04 percent in the last decade, while it was 7.45 percent in 2023 (Statistics Indonesia via CEIC, 2024).

In conclusion, contract workers are more likely to experience irregular employment patterns, lower wages, and limited access to benefits such as healthcare and retirement plans.

This lack of stability not only undermines the financial well-being of honorary workers themselves but also has broader implications for the overall economy: lower outcomes on health and education, lower purchasing power, increased fiscal burden for the government, and perpetuating a cycle of stagnation and inequality. The prevalence of contract workers in the modern workforce has far-reaching implications for individuals, communities, and the economy in the long run.

While we understand Indonesia is competing with other developing countries in attracting investment, putting our workers' lives at risk will not solve the issue. Plus, do we really want to attract irresponsible investment that relies their business on worker exploitation? There are several crucial factors to attract good investment, among others: good governance, transparent laws and regulations, and the most important one is the quality of workers.

Only by recognizing the inherent dignity of all workers and ensuring that they have access to stable, dignified employment, we can build a more just, equitable, and inclusive society for future generations.

In the meantime, if you are based in Indonesia and have any issues with your working term, you can contact 1500-630 or ppid@kemnaker.go.id or 0811-9521150 or 0811-9521151.

There are also free legal services provided to support any issues related to civil litigation, such as Yayasan Lembaga Bantuan Hukum Indonesia (info@ylbhi.or.id), LKBH-PPS FH UI (lkbhppsui@gmail.com), Pusat Konsultasi dan Bantuan Hukum FH UGM (pkbh@ugm.ac.id) or https://umbra.law/lawyers/. Also, some free information on workers' rights will be helpful: Indonesia Employment Law Update: New Supreme Court Guidance on Compensation Pay and Balance of Contract Pay for Fixed-Term Employees – SSEK Law Firm.

[Lili Yan Ing is the Secretary General of the International Economic Association (IEA). Yessi Vadilla is an economist specializing in Indonesian trade. The views expressed in this article are those of the authors.]

Source: https://jakartaglobe.id/opinion/contract-worker-system-a-call-for-refor