LABOR PRODUCTIVITY AND
EMPLOYMENT POLICY IN INDONESIA:
RECENT DEVELOPMENT
Rahma Iryanti
Director for Manpower and
Employment Opportunities Development
Jakarta, 18 September 2013
1
OUTLINE
• Background:
– Current Conditions
• Labor Productivity
• Current Conditions – Minimum Wage and
Production Growth
• The Needs of Improvement in Minimum
Wage Setting Mechanism
• Government Policy: Directions and Steps
2
CURRENT CONDITIONS
GDP GROWTH BY SECTOR
Source: Statistics Indonesia; *) Quarter III/2012
• Service sector replaced industry since 2005. However, from 2009 industry grows
faster and in 2012 growth of industry has exceeded service sector.
• We indeed have a “red district” due to 1997 financial crisis, but we are on the
track to recover.
3
In most sectors, labor productivity has
improved gradually …
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
Agriculture
Industry
Service
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
-20%
1993
Labor Productivity Growth Rate (%)
LABOR PRODUCTIVITY GROWTH RATE
Total
• Our labor productivity is growing at around 4,5% rate.
• In 2011, the growth is dominated by agriculture sector.
4
… but gains in productivity are slowing
20.0%
Average Productivity Growth by Sector in the Last Decade
17.2%
2000-2005
15.0%
2006-2011
10.0%
8.1%
7.8%
5.4%
4.6%
5.0%
5.3%
3.8%
3.6%
3.2%
1.8%
1.5%
3.3%
2.2%
1.3%
0.0%
-1.0%
-5.0%
-4.2%
Agriculture,
hunting,
forestry, fishing
Mining &
quarrying,
utilities
Manufacturing
Construction
Wholesale and
Transport,
Other Activities
retail trade,
storage and
restaurants and communications
hotels
Total
Source:
Indonesia’s productivity – and competitiveness – is
lagging behind neighboring countries
Value Added per Worker (2005 PPP$)
14,000
1995
12,000
2005
10,000
2010
8,000
6,000
4,000
2,000
Cambodia Mongolia
Indonesia Phillippines
China
Thailand
Malaysia
Lao PDR
Vietnam
Source: WDR 2013 core statistical tables, I2
… as well as across most other sectors
Value Added per Worker (2005 USD)
2010 Productivity by Sector: Comparing Indonesia with East Asian Neighbors
30,000
25,000
Indonesia
Malaysia
Thailand
Vietnam (2009)
Philippines
20,000
15,000
10,000
5,000
0
Agriculture,
Manufacturing
hunting,
forestry, fishing
Construction
Wholesale and
Transport,
Other Activities
retail trade,
storage and
restaurants and communications
hotels
Total
Source: CEIC
… and in a highly informal labor market, the quality of
jobs for most workers is low
• The majority of
workers are in the
informal sector
• Over 80 percent of
formal workers do not
have a contract.
• Employees without
contracts earn less and
are less likely to
receive any benefits.
Employers
2%
Permament
contract
employees
3%
Informal
agricultural
27%
Informal
nonagricultural
27%
Employees
with no
contract
38%
Fixed-term
contract
employees
3%
8
EDUCATIONAL BACKGROUND vs ECONOMIC SECTOR
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Basic
Secondary
Higher
Share of Employment
Source: National Labor Force Survey,
Feb 2012, (Bappenas Calculation)
•
•
Almost 40% of employment are in agriculture, but around 90% of workers in
this sector are low-skilled.
Sectors such as social/personal services; electricity, gas, water; and finance
require more skill (higher education). The rest is dominated by people with
basic education.
9
Overview: Past Trends of Minimum Wages
•
•
Since 1999, the average of national minimum wage has been increasing with
the average of 13 per cent annually.
The relatively high increase of minimum wages in certain years has caused
uncertainties for business.
Minimum Wages of Several Regencies in Banten,
2012-2013
Kabupaten/Kota
2012
2013
Change
Minimum Wages of Several Regencies in Jawa Barat, 2012-2013
Kabupaten/Kota
2012
2013
Change
Kab. Bekasi
1,491,866
2,002,000
34.19%
Kota Tangerang
1,381,000
2,203,000
59.52%
Kota Bekasi
1,422,252
2,100,000
47.65%
Kab. Bogor
1,296,320
2,042,000
57.52%
Kota Tangsel
1,381,000
2,200,000
59.30%
Kab. Sukabumi
885,000
1,201,020
35.71%
Kab. Tangerang
1,379,000
2,200,000
59.54%
Kota Depok
1,424,797
2,042,000
43.32%
Kab. Sumedang
1,007,500
1,381,700
37.14%
Kab. Subang
Kab. Purwakarta
862,500
1,047,500
1,220,000
1,639,167
41.45%
56.48%
Kab. Karawang
1,269,227
2,000,000
57.58%
Kota Bogor
1,174,200
2,002,000
70.50%
Kota Cilegon
1,340,000
2,200,000
64.18%
Kab. Serang
1,320,500
2,080,000
57.52%
Kota Serang
1,230,000
1,798,446
46.22%
10
Rapid increases in minimum wages may also discourage
investment and affect productivity
Minimum Wage per Month (USD)
300
250
China
Indonesia
Philippines
Thailand
Malaysia
Vietnam
*
200
150
100
50
0
2007
2008
2009
2010
2011
2012
2013
11
Current Conditions – Minimum Wage
 Minimum wage has become one of the main worker demands in recent
demonstrations. If such condition continues, there will be two major
impacts on employment and workers’ welfare in medium and long term:
 First, minimum wage will grow faster than inflation and productivity.
 Second, the government intervention on wage setting may hinder the
process of collective bargaining between employers and labor unions.
 Minimum wage setting has become the main mechanism to determine
wages and to increase workers’ welfare.
 The increase of provincial minimum wages since 2007 is no longer
consistent with the increase due to inflation, basic requirements of living,
and the scale of the wage change itself.
 Since 2007, surveys to determine minimum basic requirements for living
(KHM) have been conducted by regional wage councils. Before 2007, the
surveys were conducted by the Statistics Agency.
12
Current Conditions – Production Growth

Medium and Large Manufacturing Industries: In general, production of
manufacturing industries indicates a positive growth in 2012. However, not all
industries show a production increase.
Positive Growth
Types of Industries
Negative Growth
Growth
Types of Industries
Growth
Pharmacies
13,19% Basic metal
-8,48%
Food
12,75% Textile
-8,32%
Tobacco
5,42% Leather and footwear
-6,96%
Clothing
4,91% Furniture
-6,60%
Transport equipment
3,57% Paper
-4,37%
Road vehicles
3,23% Beverages
-0,50%
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Current Conditions – Production Growth
Labor-intensive Manufacturing Industries: There are three labor-intensive
manufacturing industries that should be considered, i.e. textile, clothing, and
footwear.
 In 2012, large and medium textile and footwear industries shifted by minus 8,32
per cent and minus 6,96 per cent, respectively.
 Meanwhile, micro and small industries showed a positive growth, including
clothing industries.
Type of
Industries
Medium and Large
Micro and Small
Q4/2011-Q4/2012
(y-on-y)
2012
Q4/2011-Q4/2012
(y-on-y)
2012
-8,32%
-14,78%
2,96%
8,26%
Clothing
4,91%
9,14%
4,15%
8,76%
Footwear
-6,96%
-3,18%
8,89%
13,91%
4,12%
11,09%
4,06%
1,89%
Textile
Manufacturing
industries
14
Keep in mind:
Principles of Minimum Wages
Minimum wages act as the safety
net for workers with the lowest
income while at the same time
increase their purchasing power.
“Indonesia has dualistic labor
market structure, indicated by
high numbers of informal workers
and small numbers of formal
workers.”
“The Government shall set
minimum wages based on basic
requirements of decent living by
taking into account productivity
and economic growth.” (Article
88 of Labor Law No. 13/2003)
“Minimum wages in Indonesia
are used more as a primary wage
setting than as a safety net.”
(World Bank, Indonesia Jobs
Report 2010)
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Keep in mind: Other Principles
 Minimum wages cannot be set based on any pressure imposed by
either employers or workers.
 Minimum wage setting must consider other factors such as average
wage level, worker’s requirements of living, inflation, productivity,
economic growth, available jobs, and capacity of business entities.
Indonesia
1,500,000
1,000,000
500,000
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
KHM Indonesia
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Re-formulating the minimum wage setting
process to protect low-wage workers
• Improving the minimum wage setting mechanism, so that the process
is more predictable and formulaic, and protected from political
pressures.
• Revise the legal framework.
• Use the minimum wage as a floor wage, not for all workers.
• Strengthening collective bargaining at the plant level so that workers
are not forced to negotiate only in national policy-setting forums.
• Differentiate between various industries and types of firms.
• Improving non-compliance.
• Link to Grand Bargain.
Minimum Wage Setting:
Improvement by Government – 2014 Onwards
 The increase of minimum wages in 2014 should be prudently and
proportionately set. This is very important considering the current
condition of the business, especially SMEs.
 The Government is willing to ensure that the amount of minimum wage
increase in 2014 is determined proportionately with two points of
consideration:
 First is the need to transfer income among worker groups. Such income is
essential to safeguard the purchasing power and keep the demand high.
 Second is to maintain a conducive investment climate. Minimum wages are
not allowed to increase in such a high amount that it makes unfavorable
impact to investment climate. In order to make sure such matter happens,
the change of minimum wages in 2014 must be fair.
 In medium term, the Government is preparing a draft of government
regulation (RPP) on wage policies. It consists of not only minimum
wage, but also overall wage policies.
18
Government Policy:
Direction
1. Maintaining current available employment (preventing
any business closures and worker lay-offs).
2. Improving the quality of employment (e.g. increasing the
number of formal employment).
3. The setting of basic requirements of decent living is still
based on moving targets. It has not yet considered the
productivity improvement factor.
 Therefore, the productivity improvement factor will be
considered as one of the variables used in the formula of
minimum wage setting. International benchmarking will also
be considered.
19
Government Policy:
Direction
4. The Government is considering providing incentives for
labor-intensive industries.
5. To improve the purchasing power of workers in
agriculture and informal economy, the Government will
expand empowerment programs, including labor-intensive
programs such as cash for work.
 Such programs will be targeted to part-time workers, so they
will obtain additional incomes.
 The programs are short term. The most important is to
improve the productivity of agricultural sector.
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Government Policy:
Steps for Implementation
1. Determining two categories of wages, i.e. minimum wage
and individual wage. The latter is based on negotiations.
2. Indonesia has wage councils as the entities to recommend
minimum wages. The councils should be empowered not
only to set wages but also to improve the mechanism of
wage negotiation in determining individual wages.
3. Improving the quality of human resources.
 Education plays a very important role in improving productivity
and high-quality education and trainings are unquestionably
needed. Therefore, the quality improvement of our education in
general is a must, while at the same time we need to increase the
enrollment rate of higher education.
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Government Policy:
Steps for Implementation
4.
Negotiation between two parties at company level becomes an
optional mechanism in determining wages.
 Improvement of bargaining coordination between employers and
workers is focused on two-parties negotiation mechanism.
 In order to make sure both parties can negotiate wages accordingly, a
strong relation with the company is needed.
 Meetings of both parties conducted by employer associations and labor
unions to resolve any disputes and other employment issues are
strongly encouraged.
5.
Be prudent in increasing the level of minimum wages to avoid any
problems arising from adoption of high minimum wage rise policy.
 Some problems have already occurred in Indonesia, such as low
compliance of labor standards, slow rise of formal employment when
the minimum wages increase, and low number of poor workers moving
from informal economy. These problems must be cautiously dealt to
avoid further consequences.
22
Thank You
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