Striking a balance: Organised labour holds the reins of power, for now

Labour relations emerged in 2012 as one of the key downside risks facing Indonesia. Already constrained by one of the world’s most restrictive labour laws, new rules in 2012 hiking the minimum wages in important industrial production areas and curbing the use of outsourced staff to circumvent rules on full-time employees have prompted protests from employers.

However, with resilient corporate earnings, exemptions for small and medium-sized enterprises (SMEs), and a legacy of wages lagging behind wider economic growth, the higher employment standards are part of a regional drive to increase disposable incomes and boost domestic consumption. In the medium term Indonesia will have to revise its labour law and improve labour productivity to improve the attractiveness of doing business there, but in the run-up to the 2014 election employees and unions have significant power to negotiate better employment terms.

WAGE GAP: While Indonesian growth was affected by the global financial crisis, particularly in 2009, the country’s unemployment rate has sustained its long-term decline from 8.4% in August 2008 to 6.3% by February 2012. Meanwhile wage increases have lagged wider economic growth by a larger margin than in neighbouring Thailand and the Philippines, according to investment bank Religare; while manufacturing wages doubled from 2003 to 2011, GDP per capita more than tripled. A key driver of part-time employment has been the use of outsourcing to circumvent onerous rules on hiring and firing. Under the 2003 Labour Law, companies must give three written warnings for serious offences before being able to fire an employee and then must still pay onerous levels of severance pay according to the length of employment.

Companies have increasingly used third-party firms in order to hire part-time workers on their behalf, thereby enabling them to be more flexible in terminating contracts. Although outsourced employees perform similar functions to full-time staff, they often do not receive health care, pension fund cover or holiday pay.

With some 60% of employed workers part of the informal sector and under-employment levels (of people working less than 35 hours a week) still high at 29.5% of the labour force in the third quarter of 2012, the perception of jobless growth has persisted. “Much foreign direct investment (FDI) into Indonesia has not been labour-intensive, with labour accounting for less than 5% of output,” Helmi Arman, vice-president of Citi Research, told OBG. With growing FDI in manufacturing rapidly increasing demand for workers, average turnover rates have increased to above 10%, adding to the bargaining power of unions. Although the number of Indonesians living below the national poverty line of Rp200,000 ($20) a month has dropped from 16.7% in 2004 to roughly 12% by 2012, a full half of Indonesia’s 245m-strong population lives within 1.4% of this line, representing a large number who are vulnerable to relapsing into poverty, according to the World Bank.

STRESSED RELATIONS: Union action gathered steam from January 2012, when large-scale protests and strikes involving over 100,000 demonstrators began in the industrial Jakarta suburb of Bekasi, in the north-east, organised by the Action Committee for Social Security umbrella group. The government’s efforts to reform social security by 2014, enfranchising more Indonesians and lifting contributions and terms of contract, also contributed to the reopening of the social contract.

“Labour strife is a concern of late, driven by looming elections and the government’s drive to extend social security, which has the potential of altering contract terms,” Anton Gunawan, the chief economist at Bank Danamon, told OBG.

With minimum wages fixed by local governments, opposition parties in control of local governments have reacted differently to wage demands. When the Bekasi local government raised minimum wages 30% to Rp1.8m ($180) a month in January, the Association of Indonesian Businessmen (Apindo) filed legal action against the authority. As the labour movement heated up throughout the year, some 2m workers turned out to protest in major industrial centres including Jakarta, Bogor, Tangerang, Bekasi and Karawang from late September, requesting increases in minimum wages (from an average of Rp1.5m [$150] a month to Rp2.5m [$250] in Jakarta) and health insurance as well as the abolition of outsourcing. An estimated 100,000 workers might lose their jobs, with a potential investment loss of $2bn, should the West Java government insist on the new wage standard, according to Apindo. “Up to 2011 the main perceived constraint for investors was land, but we are seeing increasing concern about labour issues,” Himawan Hariyoga, deputy chairman for investment promotion at BKPM, told OBG. “We have a medium-term plan and the government is proposing amendments to the labour law to make it more flexible in 2013.” In November the government announced a series of measures meant to appease protesters, starting with an up to 44% wage increase, raising wages to Rp2.2m ($220) a month in Jakarta. Five other provinces raised their minimum wages, albeit to lower levels, including Papua at Rp1.7m ($170), Bengkulu at Rp1.2m ($120) and South Kalimantan at Rp1.34m ($134). SMEs with less than Rp1bn ($100,000) in annual sales and Rp2bn ($200,000) in assets will be exempted from the higher wages in the short run, however. In an April 2012 study Japan’s External Trade Organisation (JETRO) found that a monthly wage of Rp2m ($200) would still be roughly 70% of wages in Bangkok and lower than the $240 in Shenzhen. “When corporate earnings are between 20% and 30% as they have been in recent years, labour militancy may be noisy, but even a hike in the minimum wage will not stop investors from coming,” Fauzi Ichsan, managing director and senior economist at Standard Chartered Bank, told OBG. Research from Bank Indonesia reveals that labour accounts for 10-12% of total average production costs. While the sums involved are in line with regional peers, the growing social pressure for wage increases has elicited concern from businesses about further wage inflation in the run-up to the 2014 presidential election. “A rise in the minimum wage could also cause the rate of under-employment to rise,” said Anton Gunawan.

NEW RESTRICTIONS: More significant reform in the near term came from the Ministry of Manpower and Transmigration (MMT) in November 2012, when it issued a new regulation curbing the use of outsourced labour for five non-core functions, including catering, security, cleaning and drivers. “The 2003 Labour Law provided for outsourcing but there was a need for rules to specify the terms,” Iskandar Maula, secretary of the Directorate General for Industrial Relations and Social Security at the MMT, told OBG. “The new outsourcing rules are applied from 2012, while we are proposing amendments to the Labour Law to parliament in 2013 to further restrict abuse.” Labour-intensive industries like light manufacturing (such as garments and textiles), plantations and construction will likely be the most affected by the new measures and are expected to react by shifting production to lower-wage areas. “From the employers’ perspective, outsourcing represents an added cost and could push employment to lower-wage areas like central Java, for instance, where wages are half Jakarta levels,” Helmi Arman told OBG.

Meanwhile, the MMT also enacted new restrictions on the number of foreign employees in managerial positions in late February 2012, aiming to protect access to employment for Indonesian white-collar workers and improving training of the labour force. “New regulations have capped the number and type of foreign staff a company can employ, while we are also imposing requirements for training of local staff so they can take over once the foreign employee leaves,” Maula told OBG. Employers balk that stringent restrictions on hiring foreigners may hamper growth, given the relative lack of capacity in complex areas, but the government appears set on requiring firms to invest in training locals and extending similar benefits to all employees.

PRODUCTIVITY GROWTH: While wage increases in 2013 will improve levels of disposable income and retail spending, both the public and private sectors will need to divert resources to boost productivity growth to match higher pay. “The government will work with companies to improve productivity to match the minimum wage increases,” Iskandar Maula told OBG.

While the ability of labour movements to command higher wages is increasing in the region, with wage inflation higher in Thailand and the Philippines, for example, according to Religare, Indonesia will need to improve its human element to raise production capacity. In the near term employers hope that higher wages will allow them to demand higher productivity rates.

“The labour issues we are living through this year could be a door to improve productivity: higher salaries will allow employers to demand more discipline, more knowledge and a better-educated workforce,” Victor Hartono, the chief operating officer of Djarum, told OBG. According to an October 2012 report by the management consultancy Hay Group, Indonesia will face a shortage of some 10m skilled workers by 2025, with demand far outstripping supply. Arguing for firms to invest more in training and staff development, the group also calls for an increase in the current retirement age of 55 years old and reform of the labour law to allow for easier contract termination and thus incentivise employers to hire more full-time staff. While Indonesia is not alone in the region in witnessing higher wage claims, with workers asking for a larger share of the strong economic growth of recent years, the strict constraints of its labour law have made the process much more politically charged than in neighbouring countries.

Reform of the labour law will remain a priority in the medium term, as employers face more restrictions from 2013. Wage levels remain attractive by regional comparison yet the public and private sectors will both need to divert more resources to train the labour force and improve productivity in order to sustain growth.