The governments of Jakarta and West Java, Indonesia’s most densely populated areas with 10 and 40m inhabitants respectively, made the move to raise pay rates.
In the capital, the government raised the figure by almost 10% to Rp900,560 ($98). In neighbouring West Java, it increased by roughly 13% to Rp504,000 ($55).
Minimum wage levels in Indonesia are based on living costs in specific regions. All provincial administrations are currently negotiating with employers and unions for new levels for 2007. Agreements must be reached and publicly announced before December, with the new wages to be in place by January 1, 2007.
The increases in Jakarta and West Java, are less than workers and their unions had hoped for. The Jakarta Minimum Wage Settlement Board, consisting of representatives from all three sides, initially proposed a new level of Rp991,998 ($109).
Employment is estimated to decrease by 0.11% for each percent increase in minimum wage according to estimates by the Central Agency Statistics. As such, authorities have been cautious in assessments.
The wage increases come at a time when Indonesia is trying to attract more foreign direct investment (FDI) to generate economic growth and employment.
With official figures for direct unemployment reaching almost 11%, and estimates for hidden unemployment much higher, Indonesia is exerting efforts to attract labour intensive industries such as manufacturing and construction.
However, many insiders are speculating why investors refrain from making substantial investments in the country. They point to a need for greater improvements in the business environment before major players step in.
For the past two years the government has been working hard to reform the investment climate. They began a process of streamlining bureaucracy, embarking on an anti corruption drive and introducing several legislative initiatives to improve areas such as tax, customs and labour.
While the government is slowly progressing in most areas, the first serious setback they experienced was when they tried to revise the labour law earlier this year.
Demonstrations compelled the government to withdraw the draft law, which was more liberal than the current labour law.
After withdrawing the law, the government assigned a tripartite institution to jointly review labour legislation and come up with solutions. However, the explosive growth of different labour unions after the implementation of the 2003 labour law have not strengthened their bargaining position, with the employers association Apindo complaining about the lack of a clear unified counterpart. The unions complained that the government was overrepresented in the tripartite talks, having 12 representatives while both the employers and unions were allowed only six.
The current labour law is considered so restrictive that it diminishes Indonesia’s competitiveness as an investment destination in the region, with Vietnam and China being serious competitors.
Companies for instance have to pay more than 100 weeks of wages when they fire someone (or if that person himself decides to leave for that matter) while the regional average lies just over 40 weeks according to a recent World Bank Study.
Calls for relaxing the labour situation are becoming louder. This week, both Thomas J Donohue, the president of the American Chamber of Commerce, who was on a visit to Indonesia, and Lee Hu Soon, the Chairman of the South Korean Government’s Presidential Committee for cooperation, also on a visit to Jakarta, called upon the Indonesian government to revise its labour legislation.
And it seems the government is listening. Hatta Rajasa, the minister for transportation, told OBG earlier this week “Right now the government is working very hard to revise the existing labour regulations in order to resolve this paragraph, and create a win-win situation for investors, workers and the government.”
Already in September local media reported that the government was preparing new regulations specifying severance payment and termination procedures. State-owned social security insurance firm PT Jamsostek would be the one to take over the burden of paying for severance payments from companies, one of the most criticised elements of the current labour law in the eyes of the business community.
This week, Iwan P. Pontjowinoto, the president director of PT Jamsostek, confirmed to OBG in an interview that his company, currently managing funds of around Rp45 trillion ($5bn), is ready to become the institution administering severance payment to dismissed workers.
“Some people perceive the labour law as excessive,” Pontjowinoto asserted. “However, if we reconstruct the law, put some of its burdens into the social security law that regulates the operations of PT Jamsostek, then the labour law will start to become acceptable for good and responsible businesses,” Pontjowinoto continued.
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