Recent forecasts from the International Monetary Fund (IMF) predict that economic growth will reach 5.1 percent in 2016, while estimates from the Asian Development Bank (ADB) and the World Bank are slightly more optimistic, predicting 5.4 percent and 5.3 percent, respectively. The Indonesian economy has faced many challenges in 2015, some of which will spill over into 2016.
However, the overall economic outlook for 2016 is more positive, with the recent policy reforms expected to bear fruit and see private-sector investment pick up next year.
Efforts have been made to improve the employment elasticity of growth, but it is unclear if these efforts will be able to offset the impact of a slowing economy on jobs. The implications for the reform of labor market policies, particularly wages, are also unclear. What is clear is that when the ASEAN Economic
Community (AEC) begins at the beginning of 2016, this single regional market and production base offers scope for the Joko “Jokowi” Widodo administration to further boost economic growth and to create quality jobs.
However, the benefits of the AEC are likely to be concentrated on skilled workers. With the vast majority of Indonesian workers unskilled and half of them working in low paid and precarious working conditions, Indonesia needs to look at its domestic policy settings, particularly labor market policies.
Unless a robust labor market policy, strategic intervention and law enforcement are in place, it will be difficult to optimize the potential benefits of the AEC.
Meanwhile, the issues of income inequality, non-productive jobs, lack of job protection and social insecurity remain. The government has to be able to craft and implement policies that not only support investment but also job creation and equitable outcomes for all.
The Jokowi administration released a number of economic “deregulation” packages in the second half of the year, mainly to attract foreign and domestic direct investment in manufacturing and infrastructure sector.
As the AEC approaches, the core issues that need attention relate to improving the competitiveness of the Indonesian economy. Labor has been identified as one of the key challenges herein.
In this regard, the most pressing government interventions for the future have something to do with wage policy and compliance, as well as productivity and skills. Progress in these areas is essential if Indonesia is to compete on the global market through quality rather than through prices.
Reflecting back on 2015, we can see that if issues related to labor market institutions are not tackled properly, the problems of industrial relations will more or less persist. The current issues linked to outsourcing, wages and social protections have been well known for many years.
To take advantage of the AEC in the short term, well designed labor market policies, agreed on by employers, workers and the government, are imperative. This is key for preventing widening inequality that would ultimately reduce the competitiveness of the economy.
As Indonesia is the largest country in ASEAN, constituting one third of the region’s population of 600 million and with the largest–and growing–economy, in the long run the nation will benefit from market integration.
To take advantage of the AEC in the short term, well designed labor market policies, agreed on by employers, workers and the government, are imperative. This is key for preventing widening inequality that would ultimately reduce the competitiveness of the economy.
In terms of wage policy, the biggest challenges concern growing average wages and improving compliance. Key to this is the expansion of collective bargaining. However, the low density of unionization and small number of collective bargaining agreements registered with the Manpower Ministry are two reasons why the minimum wage is such an important issue.
Reforms are currently underway that are focusing on these issues. In particular, the reforms focus on making minimum wage setting systems “fair, simple and reliable”.
However, there are question marks on how the government will deal with issues of minimum wage compliance and the expansion of collective bargaining. There are also questions about the reforms limiting the role of tripartite mechanisms – including workers, employers and government – in setting minimum wage through the wage council.
The new wage setting policy tries to reduce political influence and guarantee certainty for businesses regarding annual minimum wage increases. However, the reforms come at the expense of a forum that provides a space for constructive social dialogue between stakeholders – the government, employers and workers.
Recent events indicate that freeing up minimum wage setting rights from politicking is not so easy. Soon after the policy was enacted, Jakarta and Central Java, the two provinces which are due to have elections in 2017, refused to follow the new rules for electoral politics reasons. Rallies and strikes are also escalating as there is no room for negotiation or social dialogue in the new system.
Unless serious efforts are made to ensure social dialogue around wage setting and other employment policies, issues over minimum wage, outsourcing and social protections being pushed by trade unions will remain unsolved for many years.
The government has to involve trade unions, a key stakeholder, in minimum wage policy formulation as well as elsewhere in the employment policy decision making processes.
Trade unions are responsible for representing workers’ voices and concerns. The failure to listen to the voice of workers in a dialogue on employment policy would be counter-productive and has the potential to have adverse impacts on domestic and foreign investment for the country.
At the same time, guaranteeing economic stability through providing a sound environment for industrial relations is becoming increasingly attractive for foreign investment or global value chain manufacturers. Functioning labor market institutions can help to build confidence for foreign and domestic investment that support job creation and welfare distribution.
In terms of productivity and skills, under the AEC framework the skills mismatch is set to worsen. Analysis presented in the International Labor Organization’s (ILO) Asia Pacific Labor Market Update shows that almost a half of the employed youth in Indonesia are under-qualified for their fields due to low educational achievements.
With an underqualified workforce, there is a risk of weaker productivity growth and a slower transition to higher-value-added industries. It is essential that the government make serious commitments to expanding vocational training and certification systems, particularly in areas that will reinforce growth in the manufacturing industries.
The message is clear: invest in skills or lose out. However, dialogue is needed between employers, workers and government to ensure that investments in training institutions are the ones that are needed to drive forward growth.
Therefore, we can see that it is not only an issue of “hard skills” but also “soft skills”. This includes the need for workers to be equipped with skills in communication, negotiation and team work. Regional integration is bringing us together and we need to be better at working together – better at engaging in dialogue – so that Indonesia can benefit more. This is an important factor in competitiveness.
There are other issues related to migrant workers, the portability of social protection schemes and the recognition of skills-certification systems across national boundaries.
It is very important that the AEC comes to grips with these challenges in order to reduce the vulnerability of workers while opening access to more and better jobs. A particular challenge comes in the fact that a large portion of the Indonesian labor force is informal and unskilled. Many of these workers fill labor shortages in the extractive industry in Malaysia and domestic sector in Singapore, but these workers are not offered protection under the AEC agreement. Undocumented workers have little to gain from this new framework. This is another reason why constructive dialogue on issues related to labor is so important.
The key message is that unless labor and economic policy decision making mechanisms can balance workers’ and employers’ conflicting demands in dealing with investment, job security, welfare and social protections, then conflict and tension are likely to continue.
The dialogue that takes place between employers, workers and the government will be an important part of the fabric for strengthening the competitiveness of the Indonesian economy in the context of ASEAN.