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THE MINIMUM WAGE DEBATE IN decentralized INDONESIA The power of unions and local government

Indrasari Tjandraningsih, AKATIGA - Social Analysis Center

AKATIGA - Social Analysis Center AKATIGA is a non-profit research institute that was founded in 1991, by a group of social science researchers at Institut Teknologi Bandung and Bogor Agricultural University. Through various activities, AKATIGA helps the marginalized in expanding their access to resources and policy-making processes, especially in areas such as labor, small business, agriculture, community development, budgetary policy, and public services. AKATIGA provides input and recommendations based on the results of research to drive policy change. The process is done through advocacy and strengthening networks of marginalized groups, civil society, government, the media, and international institutions.

indonesia

80

6.3

38.1

Unemployment Rate

GINI

36.5

11461

Wage and salaried workers, total (% of total employed)

GDP per person employed (constant 1990 PPP $) Global Wage Debates: Politics or Economics?

CHAPTER

THE MINIMUM WAGE DEBATE IN decentralized INDONESIA

05

The power of unions and local government

Indrasari Tjandraningsih, AKATIGA - Social Analysis Center

Introduction The fall of the New Order under President Suharto

Freedom of association in Indonesia ended the

in 1998 ended authoritarian rule and marked the

era of a single nationwide and government-

beginning of a democratic era in Indonesia. In the

controlled trade union. During the New Order,

political context of Reformation Era Indonesia, the debate over minimum

wages

has

been

influenced to a significant degree by changes in labor policy and the move toward decentralization. Since 2000, the minimum wage increased significantly as a direct result of the rise of the labor movement and the impact of a new governance structure based

By shifting authority over labor affairs to local governments, this new governance structure has resulted in greater politicization of the wage-setting process.

the

government

curbed

collective bargaining in three important ways: (1) It subsumed all

worker

under it

one

limited

representation organization;

the

mandate

(2) of

that singular organization to social and economic activities, circumscribing the ability to bargain collectively; and (3) it ensured control over the national

on regional autonomy. During the last six years

union by placing its own party members in

(2007-2013), the real average minimum wage

leadership positions.1

among the provinces increased by 61.8 percent, with the highest single annual increase being

After the fall of Suharto, the newly established

31.5 percent in 2013.

freedom of association prompted a proliferation

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81

of unions and almost instantly strengthened the

This chapter discusses the political economy of

power of workers’ organizations vis-à-vis local and

minimum wage setting that has developed in

central governments. Since the year 2000, several

Indonesia and seeks to examine the changing role

government plans to revise labor regulations

of workers, employers, and local governments.

that – from the unions’ point of view – had the

First, the chapter explains the differences

potential to reduce workers’ rights, were thrown

between New Order-era minimum wage setting

out because of strong opposition from workers.

and the regulations of the current Reformation Era. It then explains how these reforms, along

Workers’ bargaining position also grew stronger

with the newfound freedom of association,

within the process of minimum wage setting, as

have transformed the political economy of the

trade unions were afforded greater representation

minimum wage-setting process.

on wage councils. The expansion of unions’ power is related not only to freedom of association, but

The next section explores empirically how

also to regional autonomy policies introduced at

much minimum wages have actually increased.

the time. By shifting authority over labor affairs

After a brief discussion of enforcement and

to local governments, this new governance

compliance, the chapter concludes with policy

structure has resulted in greater politicization of

recommendations toward improving Indonesia’s

the wage-setting process.

wage-setting mechanisms.

Minimum wage setting in Indonesia’s political regimes Three factors distinguish the minimum wage

by national and regional wage councils that

policies of the New Order period (pre-1998)

consisted of government, employer and union

and the Reformation period (post-1998): the

representatives. The latter two, however, were

mechanics of determining minimum wages;

appointed by the government.

the level of trade union involvement; and the

82

role of local governments. In the New Order

In the New Order, the minimum wage applied to

era, minimum wage setting was carried out

workers with less than 12 months of employment,

Global Wage Debates: Politics or Economics?

– with compensation rising afterwards based on



Provincial level of economic development.

experience and on the company’s wage structure – and the minimum wage review process took

The minimum wage setting process was very

place every two years. The minimum wage

simple and efficient in the New Order era. There

setting was executed by the Minister of Labor,

was no objection to the minimum wage, largely

assisted by the national wage

research

council,

based on a proposal by the local government and local wage council. There

were

i

six

determining

factors

minimum

wages as stated in the same regulation: •

Minimum needs for decent living, or KHL (Kebutuhan Layak),

Hidup

determined

through

In the political arena, the issue of minimum wages has become a vehicle for picking up workers’ votes in local elections. In some cases, local candidates have – in an effort to rally last-minute support from workers – intervened in the minimum wage setting process by violating its procedures and regulations.

redress mechanisms nor workers’

organizations.

Even

the

context

Asian

financial

of

the

in

crisis of 1998, when the government decided not to increase the minimum wage, there was no labor unrest.2 Soon after the fall of Suharto, new minimum wage

regulations

introduced,

market

surveys administered by regional wage councils;

were

transferring

authority over minimum wage setting to the local government, i.e. the governor, mayor or district head. Under the new laws, the local district head



Consumer Price Index;



The

potential

because there were neither

impact

(or mayor in cities) proposes the minimum wage on

companies’

profitability; •

Local and regional average wages;



Labor market conditions;

to the governor, based on the recommendation of a local wage council. The local wage council now has a more balanced composition of members, including government officials, trade unions and employers’ associations.

i As stated in the Minister of Labor’s regulation no 1/1999 on Minimum Wage. Another feature of the minimum wage law stipulated that the basic wage must make up at least 75 percent of total earnings (benefits can make up the other 25 percent).

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83

Figure 1

Provincial minimum wage setting process 1

The Local Wage Council of the city or district - a tripartite body of workers’ and employers’ representatives and government - creates a survey team of its own members, plus academic experts and local officials from the Central Bureau of Statistics.

2

3

4

The survey team conducts a market survey to understand workers’ living needs (or Kebutuhan Hidup Layak).

The survey results and the recommendation of the local wage council are submitted to the governor, the head of the province.

In consultation with a Provincial Wage Council, the governor sets a provincial minimum wage.

In addition to the provincial and local minimum

determining the minimum wage are equivalent

wage, the new regulation also sets the sectoral

to the previous regulations. However, a new

minimum wages. The process is depicted in

ministerial decree in 2005 expanded the number

Figure 1.

of items included in “minimum needs for decent living” (KHL), adding education, health,

Beyond mere representation on these councils,

transportation, recreation and savings.

the power of trade unions to influence wage council proposals grew significantly as compared

Another post-1998 change in the minimum wage

to representatives of government and employers,

setting is the right of employers to apply for

as the following paragraph will explain.

temporary suspension of payment of minimum wages with the approval of the union, as stated

Another fundamental change is that the review

in an article in the Employment Law of 2003.

of the minimum wage now happens once a

This particular article is contrary to the general

year, doubling the frequency at which unions

applicability of the minimum wage, which is

can exercise their power. The variables used in

compulsory.4

3

Minimum wage setting in the Reformation Era: The power of unions and local governments

84

After Suharto stepped down, Indonesia’s first

under B. J. Habibie – set up a plan reforming

Reformation Era presidential administration –

employment law with the aim of promoting the

Global Wage Debates: Politics or Economics?

freedom of association. The new regulations

a more complex minimum wage setting process

attempted to create a modern system of industrial

at the local level, especially in industrial zones.

relations

This growth in complexity has created additional

that

would

guarantee

collective

bargaining rights. The government also ratified 5

opportunities for intervention by unions.

ILO Convention no. 87, Freedom of Association and Protection of the Right to Organize, and a

Minimum wages act as the core issue that unites

new law on trade union rights was enacted.

competing unions and mobilizes hundreds of thousands of workers across the country. For

The immediate result of these policies was

each of the last 10 years, unions have leveraged

the mushrooming of workers’ organizations.

the annual minimum wage setting process to flex

The latest data from 2013 show that there

their muscle, placing tremendous pressure on the

are six confederations, 92 federations, 11,852

central and local governments to set higher wages.

company-based unions, and 170 state-owned

In Jakarta and the most important industrial areas

enterprise unions – with a total membership

throughout Indonesia, the minimum wage fixing

base of 3,414,455 workers.6 This still represents

process is always marked by street protests and

only 3 percent of Indonesia’s workforce, but the

the mass mobilization of union members, who

proliferation of voices in the collective bargaining

aim to influence the sessions on minimum wage

landscape has significant implications for the

setting in the local wage council.

7

ways in which minimum wage setting functions. In the political arena, the issue of minimum wages Due largely to the reforms discussed above –

has become a vehicle for picking up workers’ votes

along with the newfound freedom of association

in local elections. In some cases, local candidates

– the political economy of minimum wage setting

have – in an effort to rally last-minute support

has undergone a dramatic transformation in the

from workers – intervened in the minimum wage

Reformation Era. Nearly every stage of the process

setting process by violating its procedures and

has become a political battleground between

regulations.

trade unions, the government, and employers. In 2012, for instance, a district-level incumbent Minimum wage setting has become a very

made large minimum wage increases a central

dynamic process because unions now have the

campaign promise.9

political capital to get actively involved in the

“Jokowi” Widodo – the current president of

process.8 Moreover, regional autonomy created

Indonesia – approved a 40 percent increase in

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85

the minimum wage of Jakarta while serving as

and for increasing the allocations for existing

governor, igniting protests from employers. In

components, arguing that workers are entitled to

other cases, local governments have tried to

better quality goods as well. For example, unions

counter major union-led protests with steep

have proposed changing certain household

increases in the minimum wage. This kind of

needs, such as suggesting that the allocation for

action is seen by many as undermining the role

cookware should cover the cost of a gas stove

of the wage council and violating the minimum

rather than an oil burner. These proposals become

wage setting procedure. Technically, however,

the subject of debate between unions and

the local head is granted this right based on the

employers. In 2012, a ministerial decree increased

minimum wage law.

the number of items in the KHL basket from 46 to 60 items based on the results of a study on living

Unions see the KHL – or basic needs index

wages,10 though the change did not meaningfully

– as another way to influence the process.

alter the KHL calculation.

They advocate for additional components Table 1

Monthly Minimum Wage 2015 – Comparison of West Java and Central Java Districts West Java District / City

Minimum Wage

Central Java District / City

Minimum Wage

Bandung

Rp 2.001.195 (US $150)

Semarang

Rp 1.419.000 (US $107)

Purwakarta

Rp 2.600.000 (US $195)

Pekalongan

Rp 1.271.000 (US $95)

Karawang

Rp 2.957.450 (US $222)

Boyolali

Rp 1.197.800 (US $90)

Bekasi

Rp 2.840.000 (US $ 213)

Sukoharjo

Rp 1.223.000 (US $92)

Bogor

Rp 2.590.000 (US $195)

Karanganyar

Rp 1.226.000 (US $92)

Source: Daftar UMP-UMK 2015 Seluruh Indonesia. Accessed on August 15, 2015.

86

Global Wage Debates: Politics or Economics?

Figure 2

Average Minimum Wage vs. Average Wage in Informal Small Industry Sector (1997-2013) (expressed in adjusted 2010 currency) 1200

1000

800

600

400

200

Real Average Wage in Small Industries (*) Real Average Minimum Wage 0 1997 1998

1999

2000

2001

2002

2003 2004 2005 2006

2007

2008

2009

2010

2011 2012 2013

* A small industry/enterprise is defined to have between 5 and 19 employees. Source: Daftar UMP-UMK 2015 Seluruh Indonesia. Accessed on August 15, 2015.

West Java, the heart of the labor movement and

lower minimum wages – about half, on average

where the country’s most important industrial

– and a weaker labor movement. Table 1 shows

areas are located, has witnessed significant

a comparison of minimum wages in some

increases in minimum wages. One consequence

important industrial cities and districts of West

of the increases is the growing number of factory

Java and Central Java.

relocations into Central Java,11 which has much

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87

How much have minimum wages increased?

The result of this new dynamic of minimum wage

minimum wages, and those who work in the

negotiations means that the national average

informal economy, where most small enterprises

minimum wage has risen much faster than

are located. This could be one reason for growing

average wages in other parts of the economy.

inequality in the country.

Figure 2 compares the national average minimum wage to the average wage in informal

Moreover, the gap between minimum wages

small enterprises over the Reformation period.

and wages in small, informal economy industries

The

graph

important

shows trends:

two First,

it demonstrates that the difference

between

the

minimum wage and wages levels that firms would “naturally” set has grown. This could have adverse impacts on employment, hours worked, and non-

88

Increasing wage polarization between those who work in Indonesia’s formal economy, earning minimum wages, and those who work in the informal economy, could be one reason for growing inequality in the country.

is widening. This means that, barrier

in to

theory,

one

formalization

faced by small business – the requirement to pay workers in accordance with minimum wage standards – has grown significantly. Interestingly,

Indonesia

is in fact not witnessing greater levels of informality.

wage benefits. Second, the graph illustrates the

In 2015, 52 percent of the country’s workers were

increasing wage polarization between those who

in the informal economy, compared to nearly 66

work in Indonesia’s formal economy, earning

percent in 2011.12

Global Wage Debates: Politics or Economics?

Compliance and the private sector’s stance on wage developments Employers claim the minimum wage increases

The

have eroded Indonesia’s competitiveness, soured

wage regulation is highly dependent on the

the investment climate, and made foreign

characteristics of the company and on the

investors reluctant to come to Indonesia.13 This

effectiveness of local law enforcement. The

claim is rejected by unions and has become a

minimum wage regulation says that only workers

central point of debate surrounding the minimum

with less than 12 months of employment at the

wage issue. Trade unions see

the

significant

increases in the minimum wage as the end of an era of undervalued, cheap labor in Indonesia. Businesses

object

most strongly to sharp increases in the minimum wage

that

bypass

level

of

compliance

A stronger industrial relations system, where unions and employers negotiate employment terms bilaterally, would also reduce the political pressure that currently weighs down the minimum wage setting process.

with

minimum

firm are supposed to be compensated at the minimum

wage,

with

compensation

rising

afterwards

based

on

experience

and

the

wage structure of the company.

In

reality,

workers with more than a one-year tenure are commonly

paid

the

procedures for wage setting. Some employers,

minimum wage.15 Another violation is delay in

through industrial associations, have taken legal

payment. Suspension of wage payments is only

action against government decisions.14 Anecdotal

allowed with union and government approval,

evidence shows that other employers have shut

but companies sometimes take this measure

down their factories, while many simply do not

unilaterally without the necessary permission.

comply with the government’s edicts.

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89

Conclusions and policy recommendations Since minimum wages are politically highly

negotiate employment terms bilaterally, would

contentious between unions and employers, the

also reduce the political pressure that currently

government must play the role of a mediator. The

weighs down the minimum wage setting process.

current environment for minimum wage setting is the result of Reformation Era policies, and

To establish a more coherent and productive

both unions and employers feel that the central

minimum wage setting process that is less

government is in a weak position when it comes

disruptive and politicized, several steps must be

to wage policy.

taken: 1.

Reinforce the definition of the minimum

First of all, local government leaders need

wage as a safety net for workers with

to play a more productive role in setting the

less than a year tenure, rather than a

minimum wage according to the norms laid out

replacement for collective bargaining. The

in official policy. They have to respect unions’

government should require that companies

considerations but cannot ignore other factors,

paying a high proportion of their workers

such as the business environment. Currently,

at minimum wage levels, including more

government leaders prefer to avoid confrontation

experienced employees, submit to a review

with unions by bowing to their demands, even if

of their compensation structures.

that means bypassing the established procedures for minimum wage setting, which are designed to

2.

procedures

take into account the needs of all stakeholders.

minimum under

wage the

setting existing

regulations. Local governments should resist the path of political expediency and

Another reason why minimum wage has become

follow existing procedures for minimum

the focus of such intense political debate is

wage setting, rather than issuing pre-

because it is one of the only redress mechanisms

election edicts to solicit workers’ votes. This

available to workers. Whereas minimum wage was

kind of unpredictable policy environment

intended as a basic wage for only those workers

will ultimately detract from their districts’

with less than a one-year tenure at their company,

competitiveness.

it now functions as a kind of welfare policy, with other forms of collective bargaining playing a

Maintain

3.

Revitalize and strengthen the role and

minimal role, if any role at all. A stronger industrial

authority of local wage councils. Local

relations system, where unions and employers

governments should, first of all, respect the authority of local wage councils and

90

Global Wage Debates: Politics or Economics?

only

override

their

recommendations

of the decentralized wage-setting policy

in extraordinary circumstances. Second,

to determine whether it is still the most

the government has a role to play in

effective method. Just as minimum wage

strengthening these wage councils to

setting has become a union-dominated

ensure they reflect appropriate, equal

process in parts of the country where the

representation of unions and employers,

labor movement is strong, it is also possible

and that they adequately follow established

that minimum wages are too low in less

procedures

industrialized regions where workers are not

for

recommending

local

minimum wages. 4.

Review wage

mobilized and the political economy favors

the

decentralized

setting

policy.

The

minimum

employers.

central

government should undertake a review

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91

Endnotes 1

Cahyono, n.d, Sejarah Gerakan Buruh Indonesia, sebuah tinjauan ringkas. Accessed on August 15, 2015. http://fsplem.blogspot.com/2008/08/sejarah-gerakan-buruh-indonesia-sebuah.html.

9

T. Sunarto. 2004. Studi Kebijakan Upah Minimum dalam Pelaksanaan Otonomi Daerah di Jawa Tengah (A Studi on Minimum Wage Policy in Regional Autonomy in West Java). Masters thesis, Program Pascasarjana. (Semang: Diponegoro University).

10

2

P. Anarita and R. Setia. 2003, Studi Institusi Dewan Pengupahan: Mencari Format Institusi Yang Adil dan Partisipatif bagi Buruh, Working Paper. (Bandung: AKATIGA); B. Widianto. 2003.; T. Sunarto, ibid.

3

C. Saget. 2006. Fixing Minimum Wage Levels in Developing Countries: Common Failures and Remedies. (Geneva:ILO).

4

A. Mufakhir. 2012. Hukum yang retak dan Grebek Pabrik. Accessed on August 15, 2015. http://indoprogress.com/2012/11/hukum-yang-retak-dan-grebekpabrik-2 / I. Tjandraningsih and R. Herawati. 2009. Menuju Upah Layak (Toward Decent Wage), (Bandung: AKATIGA-SPNGarteks-FES). Ben Bland. 2014. “Indonesia pushes Central Java as Asian low-cost manufacturing hub.” Financial Times, August 6, 2014. Accessed on August 15, 2015. http:// www.ft.com/cms/s/0/7543ad72-f7a4-11e3-b2cf00144feabdc0.html#axzz3fU476ClB; Suntex. 2013. “60 textile factory moving to Central Java.” Accessed on August 15, 2015. http://www.suntexasia.com/details/ newsid/4687/ttl/60_textile_factory_moving_to_central_java.html

11

BPS. 2015. Accessed on August 15, 2015. http://data. tnp2k.go.id/?q=content/keadaan-ketenagakerjaan-februari-2012-bag2

12

Patrick Quinn. 2003. Freedom of association and collective bargaining : a study of Indonesian experience 1998-2003. (Geneva: ILO).

5

Liputan6. Accessed on August 15, 2015. www.bisnis. liputan6.com/read/2146331/demo-buruh-bisa-hambat-investasi-asing-masuk-ri

13

Departemen Tenaga Kerja Dan Transmigrasi. Accessed on August 15, 2015. http://ppid.depnakertrans. go.id/pemerintah-segera-verifikasi-serikat-buruh-serikat-pekerja-di-indonesia/ 6

7 Accessed on August 15, 2015. binwasnaker.depnakertrans.go.id

I. Surbakti. 2005. Labour Standards under Decentralisation and Globalisation: The Impact of Minimum Wage Policy in West Java. PhD dissertation. (Palmerston North, New Zealand: Massey University).

8

92

Koran Jakarta. 2014. “Apindo Jabar Gugat Penetapan UMK di Empat Daerah.” Accessed on August 15, 2015. http://koran-jakarta.com/?24525-apindo-jabar-gugat-penetapan-umk-di-empat-daerah

14

15

I. Tjandraningsih and R. Herawati, ibid.

Global Wage Debates: Politics or Economics?

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THE MINIMUM WAGE DEBATE IN decentralized INDONESIA The power of unions and local government Indrasari Tjandraningsih, AKATIGA - Social Analysis Cente...

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