There was some hope that the long-standing dispute on the issue of setting the minimum wage might be resolved, when the Joko “Jokowi” Widodo administration, under a series of deregulation measures in the fourth economic policy package, introduced a new formula for setting the annual minimum wage rise for workers.
The proposal is that the current minimum wage be increased by the sum of the inflation rate and economic growth. The government says this will establish a “self- regulating mechanism” that will guarantee certainty for employers to run and expand their business — although it is interesting that there is no evidence of any correlation between minimum wage rises and job creation. Ironically the proposal that workers enjoy an automatic annual minimum wage rise, has been praised by employers, but has been rejected by the vast majority of trade unions who say it will create uncertainty and is unfair.
The proposed formula is backed by good intentions — to find a lasting solution for the long-standing dispute in setting minimum wages between workers and employers, as evidenced by the number of protests and rallies on the issue.
However, the proposed rule is potentially flawed for a number of legal, technical and administrative reasons. Unless those problems are addressed, the proposed policy will be dysfunctional and far from the lasting solution that is envisaged.
From the trade union perspective, the problem with the new draft regulation lies in the lack of a detailed and integrated regulatory framework, since the proposed rule contradicts the current Law No. 13/2013 on manpower and other relevant rules and regulations (including the Presidential Decision on Wage Councils). Among other problems, a key issue is that the draft provides the authority for a governor to make a final decision on minimum wages.
It is clear that the government has to do its homework and make the necessary adjustments to the proposed policy to address these issues. If they do not, then events may spiral out of control — and that is not in the interests of workers, employers or our economy.
Currently the calculation supporting the decision is made according to both national and regional wage council recommendations, based on surveys undertaken on the basic cost of living (KHL), including 60 items necessary for a reasonable standard of living, each year.
Under the current practice, the governor considers the recommendation to set a minimum wage at the provincial level. The good thing about the new rule, however, is that it will prevent the current politicking by local authorities who use their final decision to set minimum wages for their own political interests to gain votes at election time. Frequently governors (followed by authorities at municipal and district level) make use of the authority to decide minimum wages for electoral purposes.
Unfortunately, such a new formula will limit the role of the tripartite mechanism representing workers, employers and the government who are mandated to set minimum wages. This is what the workers and their unions prefer as the mechanism.
The proposed policy has also made the unions skeptical about the direction of future policy development and implementation. They say, with some veracity, that not only does the proposal sideline them, as major national stakeholders, in setting the minimum wage; it also implies that they will be side-lined from the formulation of broader socioeconomic policies in the future.
Removing national and regional tripartite mechanisms from minimum-wage setting, including trade union involvement, violates decades of practice. But more than that, it potentially breaches Indonesia’s 1990 commitment to ILO Convention Number 144 on tripartite consultation (1976). That convention requires tripartite consultation in relation to formulating any labor and employment policies, including wage formulation.
If the unions agreed to adopt the new rule it would be seen as endorsing the exclusion of trade unions — not only from setting minimum wages in national or regional tripartite mechanisms, but also from any meaningful labor and employment policy dialogue in the future.
The International Trade Union Confederation has criticized this move away from tripartism (the usual practice of involving both union and employers’ organizations in setting minimum wages, as well as broader socioeconomic policy dialogue) in many countries.
Worse still, the other big challenge, apart from wage setting, is wage implementation, especially law enforcement to ensure employer compliance with the prescribed minimum wage in workplaces, especially small and medium enterprises.
Added to this problem is that many enterprises are allowed by the existing law to apply to postpone the implementation of the minimum wage in their workplaces. That also creates uncertainty on the workers’ side and feeds into the unions’ reaction to the new proposal.
Under these circumstances, how should trade unions react and what plausible solutions should they offer? Instead of rejecting the government formula entirely, it would be more strategic for the unions to use the government proposal as the basis for further negotiation. They should propose modifications and set strict conditions for the planned rules.
This includes modification to accommodate technical, legal and process aspects of the new rules to ensure acceptable figures, legal consistency and certainty. Above all they should insist on the retention and strengthening of social dialogue through a tripartite mechanism.
A few comments on the technical aspects first. If we review existing minimum wage trends with trends in national economic growth and inflation, it is clear that the tripartite wage council outcomes in minimum wages have delivered higher minimum wages for workers.
For example, between 2010 and 2014 national average hikes in the minimum wage from the wage councils stood at 14.9 percent per annum, compared to 11.9 percent under the formula-based approach. If applied, the formula-based approach would have led to lower increases in minimum wages in 22 out of 34 provinces over the same time period.
In provinces like Jakarta, where minimum wage growth has been strong, a formula may subdue minimum- wage growth. In provinces such as Yogyakarta a formula may stimulate growth. The formula-based approach provides a smoother adjustment, however, it will probably suppress wage growth in provinces with stronger growth and productivity.
Taking into account income and growth disparity, instead of using national inflation and growth rates, it would be fairer to use regional indicators as the basis for the minimum wage rise.
Most importantly the unions should also suggest revising the proposed rule to ensure the continued role of tripartite wage councils at national and regional level, stipulating that these councils undertake the annual survey of the 60 KHL components as a basis for the minimum wage rise. In the long run, the Manpower Law, which allows the postponement of the implementation of prescribed minimum wages, also needs to be addressed.
Second, the unions should propose special negotiations in setting an initial minimum wage in the provinces, particularly in those provinces that are less compliant with the KHL criteria. This may extend beyond the eight provinces (East and West Nusa Tenggara, Maluku, North Maluku, Central Kalimantan, Gorontalo, West Sulawesi and West Papua) as indicated by the government, because there are other provinces in which the minimum wages are still low.
Finally, trade unions should propose that both the formula and market survey on the KHL be referred to as a benchmark/wage bracket by the wage councils so that they can, in turn make recommendations to governors for a final decision.
If agreed by both parties, the figure should be based on the formula and survey outcomes as a solution to providing business with certainty while also accommodating social-dialogue process and being consistent with the current practice, the existing regulations on wages and our international obligations.
It is clear that the government has to do its homework and make the necessary adjustments to the proposed policy to address these issues. If they do not, then events may spiral out of control — and that is not in the interests of workers, employers or our economy.