Why the Minimum Wage Should Not Be Raised
More than 20,000 workers in the capital and its satellite cities rallied earlier this month to demand a fifty percent increase in provincial minimum wage. The labors asked for a wage hike to 3.7 million rupiah from 2.2 million rupiah per month.
Teguh Maianto of the All-Indonesian Workers Trade Union said that the increase was necessary because of increases in commodity and subsidized-fuel prices.
There are two factors to be weighed before deciding whether to raise the minimum wage or not; domestic and international considerations.
Domestically, these demands should be understood in two terms. First, the relationship between rising prices and wages. The protesters’ outcry that the minimum wage should be set higher because of rising prices is unfounded. Findings presented during a public seminar in the Center for Strategic and International Studies (CSIS) between relevant stakeholders on the same day of the rallies showed that the relationship between inflation – the rise in prices – and wage hike was weak. From 2007 to 2013, there were only 5 out of 34 provinces whose minimum wage rise closely corresponded with inflation.
Second, the potential layoffs because of the rise in the minimum wage. A joint study by scholars from CSIS and Atmajaya University presented in the same seminar surveyed small-to-medium sized firms in the shoe and garment industry on the issue. 66 percent of those surveyed from the shoe sector have let their workers go because of previous minimum wage rise. 81 percent from the garment sector have also done the same. As workers’ salaries rise, so do production costs, eating away profits – or worse, resulting in losses. Imagine what these firms will be forced to do if the minimum wage is raised to Rp 3.7 million.
As for international consideration, the regional competitiveness of our labor-intensive manufacturing industries should be taken into account. Our labor cost has been soaring and is now already one of the highest in the region. Calculated based on purchasing power parity, the World Economic Outlook Database in 2013 estimated that Indonesia’s average minimum wage stands at US$313, Thailand $511, Vietnam $237 and the Philippines $542.
A 50 percent increase in 2014 means $526 for Indonesia. This will decrease our competitiveness in luring overseas investment in labor-intensive manufacturing sectors such as garment and shoes.
Bear in mind that the need to boost exports is at the moment more urgent than ever because it contributes massively to Indonesian rupiah’s recent depreciation to the US dollar. Especially, manufacturing exports since commodity exports proves unreliable in the slowdown of commodity demand from China and India.
National and local leaders should resist pressure by some union leaders for an increase in the minimum wage. The increase has not been in line with inflation, unlike what the protesters claim. Moreover, the raise will result in further worker layoffs and damage our regional competitiveness in labor-intensive manufacturing. That is an undesirable outcome for everyone.