Faisal Maliki Baskoro, Jakarta – Indonesia's planned minimum wage increase in 2026 is unlikely to sway foreign investors, who continue to favor other Southeast Asian countries due to economic inefficiencies, an economist said Tuesday.
Even after the increase, Indonesia's minimum wage remains mid-range within Southeast Asia – below Malaysia and far behind Singapore, but broadly comparable with Vietnam, Thailand, and the Philippines.
Nailul Huda of the Center for Economic and Law Studies (Celios) said structural challenges – including high operational costs, low-quality human capital, and business uncertainty – pose a bigger barrier to investment than labor costs. "Even with lower wages, foreign investment often bypasses Indonesia in favor of Vietnam, Thailand, or Malaysia," Huda told the Jakarta Globe.
Under a new regulation signed by President Prabowo Subianto, provincial minimum wages will be calculated using a formula that links increases to inflation, economic growth, and a coefficient known as alpha, which determines how much economic growth is passed on to workers. The alpha has been lifted to a range of 0.5 to 0.9 from 0.1 to 0.3 previously, giving regional wage councils greater room to recommend higher pay.
In Jakarta, where the current minimum wage is roughly Rp 5.4 million ($323) per month, the formula is expected to raise wages by 5%-7%, bringing them to about Rp 5.68-5.77 million in 2026.
Huda criticized the lack of transparency in the alpha coefficient, stating that it is unclear how worker contributions are calculated, including whether employees in the informal sector are counted.
"Eliminating alpha would favor workers," he said, calling for a more straightforward method to determine wage growth and avoid potential disputes.
Concerns have emerged over the potential impact of higher wages on labor-intensive sectors such as textiles and footwear. Huda dismissed fears of mass layoffs, arguing that higher wages can boost household consumption, which in turn supports economic growth and benefits businesses through increased demand.
"Raising wages is not something employers should fear. Higher consumption can drive expansion and create more jobs naturally," he said.
Huda added that not all provinces will see the same gains, as local economic growth rates vary. Jakarta's projected wage growth under the new formula is around 6.1%, slightly below the potential maximum of 6.82% achievable in regions with higher growth and alpha values.
Shinta W. Kamdani, Chairwoman of the Indonesian Employers Association (Apindo), said the government's alpha (?) coefficient range does not fully account for business realities.
"While businesses understand that wage policies are meant to protect workers and maintain purchasing power, these policies need to be implemented carefully and proportionally to align with company capacity and local labor conditions," Shinta said Thursday.
Labor unions say the planned increases still fall short. Said Iqbal, president of the Confederation of Indonesian Trade Unions, argued the formula fails to reflect the real cost of living. Monthly living expenses in Jakarta can reach around Rp 15 million, covering housing, food, transport, education, and healthcare.
"It is unrealistic to claim that people can live decently in Jakarta on a salary of around Rp 5 million a month," Iqbal said.
Source: https://jakartaglobe.id/business/high-costs-not-wages-keep-investors-away-celios-say