Concerns Over the Benefits of Higher Minimum Wage

By webadmin on 11:22 am Nov 18, 2012
Category Archive

Lenny Tristia Tambun & Muhamad Al Azhari

The Jakarta government is set to increase the monthly minimum wage by 44 percent in the nation’s capital.

But for both workers and employers, concerns abound on the impact of each other’s livelihood.

Tari, 25, who works in Kota, Central Jakarta, said she was concerned that a higher minimum wage would prompt her employer to fire some workers, including herself as she had only been employed for a year.

“Yes, the prospect of layoffs worry me. If I lose my job, my life will become worse than it is today,” she said, adding that she works in administration. But she said that the proposed pay increase would help to support her 1-year-old baby.

“It is very costly to raise a toddler. The cost of formula milk and diapers accounts for almost 40 percent of my current salary,” said Tari, who earns Rp 1.9 million ($197) a month. “My husband and I must compromise other spending in order to meet our basic needs. The increase in minimum wage will allow us to breathe.”

On Wednesday, the Jakarta Wage Council chose to raise the monthly minimum wage to Rp 2.22 million, which is higher than business leaders’ proposal of Rp 1.98 million but less than workers’ demand of Rp 2.79 million. Higher wages are typically meant to be in line with higher consumer prices, which have been rising on average around 5 percent in the past three years across the country. Inflation last month hit 4.61 percent.

Jakarta last raised the minimum wage a year ago to Rp 1.53 million from Rp 1.29 million.

A wage increase that is double the rate of last year’s could affect cost structures for many companies, particularly on micro-, small- and medium-sized businesses (UMKM). In order to maintain operating costs, some companies may be forced to fire workers and pass on the costs to consumers by raising prices on goods and services.

Yusuf Hardy, the deputy chairman of the Food and Beverage Businessmen Association (Gapmi), said such wage increases would also mean higher product prices.

“Go ahead, increase it as much as they want,” he said. “How will businesses usually respond? By raising the price. The price of bread will never be the same.”

Some business leaders called a minimum wage increase of more than 40 percent unfair.

“Usually the wage increase is adjusted by the inflation rate plus around 2 or 3 percent,” said Ernovian Ismy, secretary general of the Indonesian Textile Association (API). “Now, the proposed increase is way too high. What I am worried about is whether some small textile companies can afford it or not.”

He added that the textile industry would also face stiff competition from imported goods.

“So when companies are overburdened, what typically happens? They may start reducing work shifts, send workers home or just import the goods if the cost of production is too expensive,” Ernovian added.

The high increase in wages could also make it challenging for companies to meet the sudden spike in labor costs, particularly in the manufacturing industries, which employ hundreds of thousands of workers to make shoes, clothes and other household goods.

“The government forgets that by taking a populist decision, employers will suffer losses,” Sofjan Wanandi, chairman of the Indonesian Employers’ Association (Apindo), said on Thursday. “As a consequence, employers will have to lay off workers.”

Textile and garment manufacturers employ around 2.5 million people while the shoemaking business employs around 500,000 workers, he said.

“Take pity on the UMKM sector, shoes and garment businesses, all labor-intensive [industries],” he said.

“They cannot afford this wage hike. Salaries are already 30 percent of their cost, not to mention the electricity and gas-price hike. How can we compete next year?”

For workers, the wage increase is a welcome relief for those living in and around the nation’s capital, which has the highest living expenses in the country. Minimum wages in other parts of the country would be a small fraction of Jakarta’s.

Tari hopes that she will be able to save some of her income for emergency spending or leisure trips.

“I once intended to buy education and health insurance for my baby but couldn’t afford it with my salary. Now hopefully I will be able to get my baby insured,” she said.

Jakarta Governor Joko Widodo said on Thursday that the decision to increase the monthly minimum wage to Rp 2.2 million was not yet final. But he said he hoped to find a win-win solution for both workers and employers.

Still, some workers are skeptical that once the minimum wage increase pushes through, employers might not follow suit.

“It’s very kind of the government to raise the minimum wage by 44 percent,” said Ester, who works in sales promotion in the Gunung Sahari business area in Central Jakarta.

“And it would be nice if the company agrees to adjust the minimum wage according to the new standard. But in fact, the company used to pay less [than the required standard], only between 5 percent and 15 percent. That’s the best it can do.”

The 34-year-old, who earns Rp 2.2 million per month, said the new minimum wage would normally provide a pretext for the company to reduce the number of workers.

“[The company] would argue layoffs are in place because it cannot afford the new wage, but the truth is that after the layoffs, the workers are paid less than the minimum wage.”