labour reforms in indonesia: an agenda for greater … labour reforms in indonesia: an agenda for...

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Labour reforms in Indonesia: An agenda for greater equity and efficiency

By Emma Rose Allen and Robert Kyloh1

November 2016

1 The views expressed in this paper are those of the authors. They do not necessarily reflect the policies of the

International Labour Office or the Asian Development Bank. Helpful comments and advice on this report were

received from Janine Berg, Mariya Aleksynska, Patrick Belser, Susan Hayter, Matt Cowgill, Sangheon Lee and Amber Barth.

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Table of contents

List of figures ........................................................................................................................ 3

List of tables ......................................................................................................................... 5

List of boxes ......................................................................................................................... 5

List of terms and abbreviations .............................................................................................. 6

Notes on the authors .............................................................................................................. 7

1. Introduction ....................................................................................................................... 8

2. Recent economic, social and labour relations developments ............................................ 10

3. Labour reforms under the Widodo Government ............................................................... 43

3.1 The process leading to the 2015 wage reforms ........................................................... 43

3.2 The impact of reforms on wage levels and economic development ............................. 46

3.3 The role of minimum wages and collective bargaining ............................................... 50

3.4 The impact of the 2015 wage reforms on trade unions and the balance of power at the

workplace ........................................................................................................................ 52

4. The long term evolution of labour laws and institutions in Indonesia and their impact on

economic and labour market trends ..................................................................................... 21

4.1 The impact of labour institutions during the “New Order” from 1966 to 1998 ............ 22

4.2. 1997-99 Asian economic crisis and the return of democracy ..................................... 27

4.3. 1999 - 2003 Economic recovery and the foundations of a strong democracy ............. 28

4.4. 2004-2016: Robust economic growth and reasonable labour market outcomes .......... 33

5. The impact of key labour institutions and labour laws in the last decade and

recommendations for reform ............................................................................................... 59

5.1. Minimum wage fixing ............................................................................................... 60

5.2 Multi-employer or sector level collective bargaining .................................................. 67

5.3 Implementation of labour rights ................................................................................. 73

5.4 Employment protection legislation ............................................................................. 83

5.5 Non-standard forms of work and human capital development .................................... 89

5.6 Vocational training, apprenticeships and skill development ........................................ 99

6. Conclusions ................................................................................................................... 107

List of references............................................................................................................... 113

Annex: Minimum wages by province, 1997-2014 ............................................................. 118

Annex: Nominal growth rates for minimum wages by province, 1997-2014 ...................... 119

Annex II: Freedom of Association Case ............................................................................ 120

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List of figures

Figure 1: Manufacturing value added and employment trends, 2004-2015 ........................... 12

Figure 2: Nikkei Manufacturing Purchasing Managers’ Index, 2014-2016 .......................... 12

Figure 3: Minimum wage growth trends 2010-2016 ............................................................ 47

Figure 4: Minimum wage growth trends 2003 to 2016......................................................... 49

Figure 5: Monthly minimum wages for the top 20 apparel-exporting middle and low income

countries (USD, 01 January 2015) ....................................................................................... 51

Figure 6: GDP growth for Indonesia and the World, 1985-2015 (per cent) .......................... 25

Figure 7: Share of GDP by economic sector, 1985-2015 (per cent) ...................................... 26

Figure 8: Share of employment by economic sector, 1985-2015 (per cent) .......................... 27

Figure 9: Commodity price index for key Indonesian exports in the world market, 2001-2016

........................................................................................................................................... 34

Figure 10: Trends gross fixed capital formation, 1985-2015 (per cent) ................................ 36

Figure 11: Percentage of people living in poverty and the GINI ratio, 1996-2016 ................ 38

Figure 12: Consumption GINI and primary wage inequality for regular employees and all

income earners (2001-2015) ................................................................................................ 39

Figure 13: Status in employment, 2006-2015 ...................................................................... 41

Figure 14: Labour productivity and real wages in Indonesia, 2005-2015 (Index, 2005 = 100)

........................................................................................................................................... 61

Figure 15: Real average wage trends for production workers in manufacturing and non –

managerial wage workers in hotels, 1996-2014 ................................................................... 62

Figure 16: Trends in nominal minimum and average wages for Indonesia, 2001-2015 (Rp). 63

Figure 17: Contract type by union membership for regular employees, February 2016 ........ 72

Figure 18: Union membership density by sector, February 2016.......................................... 73

Figure 19: Percentage of regular employees below and above the provincial minimum wage,

2001-2015 ........................................................................................................................... 74

Figure 20: Regular employees paid below and above the provincial minimum wage, 2001-

2015 .................................................................................................................................... 75

Figure 21: Percentage of workers earning less than the provincial minimum wage, 2001-2014

........................................................................................................................................... 76

Figure 22: Percentage of employees below and above the provincial minimum wage, 2011-

2016 .................................................................................................................................... 77

Figure 23: Percentage of employees below the provincial minimum wage and the primary

wage GINI, 2006-2015 ........................................................................................................ 78

Figure 24: Minimum wage compliance and wage inequality scenario for regular employees

(2001-14) ............................................................................................................................ 80

Figure 25: Percentage of regular employees with social security benefits, February 2016 .... 82

Figure 26: Severance pay entitlement by job tenure for selected countries ........................... 85

Figure 27: Dismissal procedural requirements for dismissal for selected countries .............. 88

Figure 28: Percentage of regular wage employees with social security benefits by contract

type, February 2016 ............................................................................................................ 90

Figure 29: Contract types for wage employees, February 2016 (millions) ............................ 92

Figure 30: Regular employees with less than 36 months of job tenure by sector, 2011-2015 94

Figure 31: Employed people with less than 12 months of job tenure by status in employment,

February 2016 ..................................................................................................................... 95

Figure 32: Participation in certified workplace training by contract formality for all

employees, February 2016................................................................................................... 97

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Figure 33: Transition rates for production workers across occupations by education

attainment over 12 months .................................................................................................. 98

Figure 34: GDP per person employed (constant 1990 PPP $) for Indonesia and the World 100

Figure 35: Qualification mismatch of employed youth, (per cent) ...................................... 101

Figure 36: Prevalence of apprenticeship and youth unemployment, 2011 .......................... 104

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List of tables

Table 1: Sector output growth and employment growth, 1990-2014 .................................... 29

Table 2: Trends for regular wage employees in manufacturing ............................................ 42

Table 3: Nominal monthly earnings by status in employment, 2011-2015 ........................... 79

Table 4: Public perception survey of the most important policies for reducing inequality,

2014 .................................................................................................................................... 81

Table 5: Payments applicable to workers at dismissal .......................................................... 86

Table 6: Benefits paid according to reasons for dismissal ................................................... 86

List of boxes

Box 1: Enterprise survey in manufacturing establishments .................................................. 14

Box 2: The “old” minimum wage system in Indonesia prior to Government Regulation 78 of

2015 and ILO criticisms of this system ................................................................................ 44

Box 3: Sector and Industry Level Minimum Wages in Indonesia ......................................... 58

Box 4: The meaning of GINI ................................................. Error! Bookmark not defined.

Box 5: Why is social dialogue desirable? ............................................................................ 67

Box 6: Synchronization of Collective Bargaining and Economic Outcomes ........................ 70

Box 7: Industry's initiative to establish a vocational high school (SMK) ............................ 106

Box 8: Vocational training in Indonesia ............................................................................ 106

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List of terms and abbreviations

ADB Asian Development Bank

ASEAN Association of Southeast Asian Nations

APINDO Asosiasi Pengusaha Indonesia (The employers’ association of Indonesia)

BAPPENAS National Development Planning Agency

(Badan Perencanaan Pembangunan Nasional)

BPJS Social Security Provider (Badan Penyelenggara Jaminan Sosial)

BPS Badan Pusat Statistik (Statistics Indonesia)

BWI Better Work Indonesia

CPI Consumer Price Index

DWCP Decent Work Country Programme

EPL Employment Protection Legislation

FDI Foreign Direct Investment

G-20 Group of Twenty Finance Ministers and Central Bank Governors

GDP Gross Domestic Product

IDR Indonesian Rupiah

ILO International Labour Organization

IMF International Monetary Fund

ICFTU International Confederation of Free Trade Unions (

ITUC International Trade Union Confederation (ITUC

JCI Jakarta Composite Index

KHL Kebutuhan hidup layak (minimum decent standard of living)

KSBSI The Indonesian Prosperity Trade Union Confederation

(Konfederasi Serikat Buruh Sejahtera Indonesia)

KSPI The Indonesian Trade Union Confederation

(Konfederasi Serikat Pekerja Indonesia)

KSPSI All Indonesian Workers Union Confederation

(Konfederasi Serikat Pekerja Seluruh Indonesia)

MOM Ministry of Manpower

NTB Nusa Tenggara Barat

NTT Nusa Tenggara Timor

OSH Occupational Safety and Health

SDG Sustainable Development Goal

SJSN National Social Security System (Sistem Jaminan Sosial Nasional)

SMEs Small and Medium Enterprises

Sakernas Survei Angkatan Kerja Nasional (National Labour Force Survey)

Susenas Survei Sosial Ekonomi Nasional (National Socioeconomic Survey)

UN United Nations

USD United States Dollar

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Notes on the authors

Robert Kyloh is a Senior Economic Advisor in the Multilaterals Department of the

International labour Organisation in Geneva. He focuses on the relationship between

macroeconomic policy, employment policy, wage policy and industrial relations.

Emma Rose Allen is the Country Economist at the Asian Development Bank in Jakarta,

Indonesia. Her area of focus is labour market policy, social policy and food security.

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1. Introduction

In June 2016 the Workers’ group of the International Labour Organization (ILO) argued that:

“… important progress has been made in the post-Suharto transition period in

protecting freedom of association in Indonesia. Unfortunately, that progress came to

an abrupt end with the advent of the Widodo administration.”2

The spokesperson for Workers’ group in the ILO also stated that:

“A return to the 1980s style repression was to be feared.”3

These are serious allegations that warrant careful consideration in any review of recent

industrial relations developments. The Government of Indonesia firmly rejects these claims.

In fact during the same discussion in the ILO a representative on behalf of the Government

reiterated their:

“…. strong commitment to the implementation of the Convention ( on Freedom of

Association and Protection of the Right to Organise), and to the fulfillment of the

rights of workers, including the right to freedom of peaceful assembly and association

in accordance with national laws and regulations.”4

In all democratic market based economies it is recognized that the relationship between the

individual worker and the owner/management of an enterprise is an unequal relationship. It is

further recognized that formal sector product markets in most countries do not conform to the

textbook model of perfect competition. Oligopoly and monopoly are common features of the

private formal sector in most economies. There are thus both economic efficiency and equity

reasons for having labour laws that recognize and compensate for the power imbalances that

would otherwise exist in the workplace.

A basic component of labour law in all democratic market economies is the right to freedom

of association and the promotion of collective bargaining. The notion that workers should

have a right to join together (associate), in organizations of their choice, to protect and

further their interests vis-a- vis the employer is the bedrock of any democratic and fair

industrial relations system. Moreover, with various checks and balances, freedom of

association also includes the right of workers to strike or to take other peaceful industrial

action to further their interests. There exists a large body of international jurisprudence

concerning the implementation and limits on of these basic rights. The right to freedom of

association is universal, but the protection of these rights can be particularly important in

economies with highly concentrated patterns of capital ownership or societies without a well-

established democratic institutions and traditions.

2 International Labour Organisation (ILO), Report of the Committee on the Application of Standards (Part 2),

May-June 2016, p 51. 3 Ibid, p 51

4 Ibid, p 50.

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This paper focuses on the evolution of industrial relations, labour market policy and wage

developments in Indonesia. This analysis may help to shed light on this important debate

about freedom of association, which is ongoing at both national and international levels,

between the trade union movement and the Government of Indonesia.

In this paper we recall that despite progress in the post-Suharto era, labour relations remained

far from satisfactory in the decade-and-a-half prior to the election of President Widodo.

Indeed the ILO supervisory system has been investigating claims of violence at the

workplace perpetrated by criminal gangs hired by employers, workers and union activists as

well as some State authorities since 2011. We conclude therefore that the industrial relations

environment requires urgent remedial action. The elimination of violence plus fundamental

changes in practices and attitudes are required on all sides.

Assessments about the state of industrial relations are subjective and open to different

interpretations. Consequently, in this paper we argue for a pragmatic way forward rather than

just raking over past mistakes and current problems. While it is impossible to ignore what has

happened in recent years the focus should be on restoring social dialogue and promoting

consensus. In fact we argue that with some modifications to recent wage reforms, and

significant changes to way strikes and demonstrations are handled, Indonesia can regain a

positive international image for labour relations and fundamental labour rights. Moreover, we

make the case for expanding labour reforms into a number of additional areas and doing so

on the basis of genuine social dialogue.

Section 2 of the paper sets the scene. It focuses on very recent economic and labour relations

developments. The latter includes discussions and conclusions on Indonesia by the ILO

supervisory system on International Labour Standards in 2016. Section 3 steps back from

these recent developments and reviews the long term evolution of labour laws, labour

institutions and industrial relations practices in Indonesia over the last half century. This

history is critical to understanding why any suggestion that Indonesia may be reverting to the

practices and policies of a previous era will capture international attention.

Section 4 is devoted to the wage reforms announced on 15 October 2015 and their

repercussions. It considers the likely impact of the reforms on labour costs and the balance of

power at the workplace. Section 5 focuses on a number of other labour market issues and

potential reforms that are relevant today. These include: the future of wages policy; collective

bargaining; labour inspection and the enforcement of minimum wages and labour laws;

employment protection legislation including severance payments and regulations governing

dismissal; the expansion of non-standard forms of work including the use of fixed term

contracts, workers hired through employment agencies and other triangular employment

relationships plus the outsourcing of work to homeworkers and others who are misclassified

as independent contractors when they are actually in a dependent employment relationship;

and finally, skills and human capital development.

This lengthy list of labour market issues have been debated since the early 2000s in Indonesia

and many proposals for reforms have been advanced in the last decade-and-a-half. But up

until now labour market reforms have remained a highly contentious area of policy. At

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various times labour reforms have often been pursued in a piece meal manner and they have

either been subsequently withdrawn or have engendered massive protests.

Section 6 concludes and advocates a balanced package of reforms that cover all the policy

areas mention above. In so doing care has been taken to propose a combination of changes

that if implemented simultaneously should advance both equity and economic efficiency. The

objective is to promote compromise and sufficient tripartite consensus to make the reforms

politically realistic and enduring. If this consensual approach was adopted it would eliminate

the type of accusations mentioned at the outset of this paper.

2. Recent economic, social and labour relations developments

Like many other emerging economies Indonesia has faced significant economic challenges in

the last few years due to declining commodity prices, the economic slowdown in China and

turmoil in global financial markets. As a result economic growth rates have been on a

gradually downward trajectory since peaking in the December quarter of 2010 at 6.8%.

However the economic challenges confronting Indonesia at present remain modest compared

to those facing many emerging economies and other commodity exporting countries. The

International Monetary Fund recently forecasts GDP growth rates of 4.9% and 5.3% for 2016

and 2017 respectively.5 Both the Asian Development Bank (ADB) and the World Bank are

forecasting marginally higher growth rates in 2016 and similar growth rates for 2017.

Indonesian financial markets also appear to be in good shape compared to many other

countries. A rally in equity markets resulted in the Jakarta Composite Index rising by more

than 20 % over the year to September 2016. The Financial Times newspaper ran a very

upbeat headline declaring the “Indonesian market buoyant amid emerging market caution”.6

A strengthening of the domestic currency (the Rupiah) in the latter months of 2015 and early

months of 2016, after a steady depreciation throughout most of 2015, is another sign of

confidence and strength in the Indonesian economy.

The labour market situation is more problematic. Since mid-2014 there has been much media

attention and political discussion about job losses in the manufacturing sector. There have

been closures of a few high profile multinational enterprises and warnings about mounting

pressures in export markets. The official labour market data compiled by the Indonesian

statistical office (Badan Pusat Statistik, BPS) would suggest that aggregate labour demand

weakened somewhat. But so far there is no evidence of a sharp downturn. Over the year to

February 2016 (latest data available at the time of writing) the aggregate employment level

declined by roughly 200,000. Employment contracted in agriculture and manufacturing year-

on-year, with shifts between urban and rural labour markets helping to moderate job losses.

Employment levels in the service sector remained static. The unemployment rate remains

moderate at 5.5 %, partly because of a decline in labour force participation.

5 International Monetary Fund, World Economic Outlook, October 2016.

6 Financial Times, March 9, 2016.

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In previous recessions, including the late 1990s Asian economic crisis, Indonesia managed to

maintain aggregate employment and unemployment trends but only by substituting poor

quality jobs in the informal and agriculture sectors for better quality wage employment. At

present there is no concrete evidence of similar trends but there is some suggestion that

workers in low quality jobs may have left the labour market completely. But these trends are

accompanied by evidence of a compositional change towards better quality jobs in capital

intensive manufacturing which is reflected in an expansion of wage employment. The

combination of these trends suggests that a two-speed economy could be emerging in the

Indonesian labour market.

Given the concentration of wage employment, and particularly organised workers, in the

manufacturing sector of Indonesia, much of the previous literature about labour laws and

labour institutions focus on this sector. In this paper we also focus considerable attention on

manufacturing in an effort to decipher how the evolution of minimum wages, non-wage

labour costs and changes in labour laws have influenced employment and the quality of jobs.

Generally speaking the current state of the manufacturing sector is ambiguous. The glass is

either “half full” or “half empty” depending one ones perspective. Despite the deterioration in

global economic conditions since 2012 the performance of the Indonesian manufacturing

sector has remained reasonable. Figure 1 shows that real output from the manufacturing

sector expanded steadily, albeit not spectacularly, and between 2004 and 2015 and total

employment in the sector rose by over 40 % between 2004 and 2012. Thereafter employment

levels in the sector dipped and then recovered slightly. But real output growth in

manufacturing maintained a steady pace in the last few years. This would suggest that labour

productivity should have increased substantially between 2012 and 2015 offsetting the impact

of significant nominal wage increases in this period. A recent report by UNIDO underlined

this positive performance suggesting that Indonesia managed to expand its share of global

manufacturing activity between 2000 and 2015 and is now included within the ten largest

manufacturing countries in the world.7

Recent national accounts data confirms that the manufacturing sector helped keep overall

economic growth at respectable levels. Growth in manufacturing output accelerated to 4.7%

in the second quarter of 2016 (year-on-year). This was the fastest growth rate in this sector

since 2013. The sector contributed 1.0 percentage points to overall GDP growth in the first

half of 2016. As such, manufacturing was the sector making the largest contribution to

growth, it was followed by construction and trade. Subsectors that performed well included

food processing, automotive industries, and electronics. These are among the most unionised

industries in the private sector and these results were achieved despite a significant industrial

relations problems in the last two years. With more harmonious labour relations these sectors

have the potential to make a more significant contribution to sustained and inclusive growth.

7 United Nations Industrial Development Organisation (UNIDO), “International Yearbook of Industrial Statistics”, 2016.

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Figure 1: Manufacturing value added and employment trends, 2004-2015

Source: BPS (2015) GDP Expenditure Accounts, Badan Pusat Statistik, Jakarta. BPS (2014)

Labour force situation in Indonesia, August 2014, Badan Pusat Statistik, Jakarta.

The recent upturn in manufacturing is support by data from the Nikkei Manufacturing

Purchasing Managers’ Index, which has been in positive territory (above 50) for 5 out of 8

months so far in 2016 (Figure 2). If the trend continues, it should stimulate employment

creation within the sector, along with productivity increases.

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Figure 2: Nikkei Manufacturing Purchasing Managers’ Index, 2014-2016

Source: Source: Bloomberg (accessed 7 September 2016).

One cannot draw definitive conclusions about the future from these very recent trends. But it

is probably fair to suggest that there are no grounds for panic that the Indonesia

manufacturing sector is in dire straits and requires rapid and radical labour market reforms

that bypass the requirements for consultations and consensus building with the social

partners. On the other hand, there is no room for complacency about the state of

manufacturing given intense international competition in global supply chains. In our

globalised economy labour costs will always be a key factor in determining investment

decisions and the location of labour intensive manufacturing. If Indonesia wants to acquire a

larger share of the global market in these industries it cannot ignore the fact that wage levels

and non-wage labour costs will have a profound impact on investment decisions and the

health of the manufacturing sector.

Indeed there is evidence that many large manufacturing enterprises may be moving, or at

least contemplating a move in response to changes in relative labour costs between different

locations. But, for the moment at least, these relocations are taking place within Indonesia

rather than companies moving off shore. Discussions in August and September 2015, and

again in April 2016, between the authors of this paper and factory managers in several of the

main industrial areas of Java suggested that conditions in labour intensive manufacturing vary

between regions. For example, all managers interviewed in Central Java, where minimum

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wages remain relatively low, indicated that their factories were at full capacity and they

needed to engage their workforce in regular overtime. The majority of managers in Central

Java also indicated profits had increased in 2014 and 2015 and they had plans to invest in

new capital equipment or factories.8 Many employers in this region report difficulties in

recruiting sufficient workers to meet current orders. For example, discussions with

representatives of the Indonesian Textiles Association in early April 2016 also suggested that

their members in Central Java were facing labour shortages because of rapid expansion of

existing and new enterprises in the region.

By comparison there are industrial areas in West Java, such as Sukabumi, where factory

managers in labour intensive industries reported that increases in the minimum wage over the

last few years were having a significant impact on profitability and the continued viability of

enterprises. Some managers in these regions indicated they were planning, or considering,

moving production to lower cost locations within Indonesia. One important factor inhibiting a

more dramatic move of manufacturing firms to low wage regions are the fixed costs involved

in closing an enterprise. This is particularly true for older companies with managers who try

to respect the labour laws and who have a large labour force with lengthy tenure. For

companies that meet these characteristics the severance payments and other costs they would

legally incur if they closed, and dismissed all workers, are prohibitive.

Discussions held with foreign investors in the garment sector, as part of the ILO Better Work

Program, confirm that multinational companies in the clothing retail sector and their suppliers

see Central Java as the destination of choice for the expansion of their manufacturing

activities. The combination of low labour costs by international standards, a diligent and

disciplined workforce, plus relatively good infrastructure are cited by foreign investors as the

main attributes attracting foreign direct investment into Central Java.

Box 1: Enterprise survey in manufacturing establishments and focus group discussions

with trade union activists

The authors of this paper interviewed a small sample of managers and owners of factories

producing garments and metal products in several Provinces. Questions covered recent trends

in profitability, investment, employment, wages and labour relations in the enterprise. The

latter included questions about strikes, demonstrations and workplace violence. It should be

emphasised that this survey was not random and the sample size was small. Consequently the

results should be treated with caution.

The authors also conducted focus group discussions with trade union leaders and rank and

file union members in the manufacturing sector (clothing, footwear and metal industries) who

have organised or participated in industrial action including strikes and demonstrations.

Again the sample was small and not random. Consequently the results of these interviews

8 ILO survey of factory managers in garment and metal sector conducted in the following cities and regions between August and October 2015.

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which are reported in this paper should also be treated with caution.

Despite this reasonable track record with manufacturing output and jobs, Indonesia has the

potential to do far better. Given the size of the domestic market, and the geographical

location of Indonesia, the country should be more fully integrated into global production

chains in labour, capital and resource intensive manufacturing.9 Consequently, the expansion

of decent wage employment in the manufacturing sector is a sound objective. The movement

of workers from low paid jobs in the agriculture and informal sectors into higher paid jobs in

manufacturing makes sense from both an economic efficiency and equity perspective.

Structural shifts of this nature should help reduce inequality in the lower half of the income

distribution, although it is unlikely to help reduce the gaps at the other end of the spectrum

between the very wealthy and average worker.

Parts of the Government certainly have ambitious plans to expand labour intensive

manufacturing. For example, the current medium term economic plan produced by Bappanas

( the National Planning Agency) is prefaced on a dramatic expansion of manufacturing as a

proportion of GDP. The government unveiled 13 policy packages from September 2015 to

August 2016 to stimulate investment, strengthen competitiveness, and diversify the economy.

These measures aim to promote growth in manufacturing, construction and some service

sectors, such as tourism. Most of the economic reforms were in areas outside the main focus

of this paper such as tax policy, investment incentives including more rapid approval for

investment plans, increased public expenditure on infrastructure and incentives for special

economic zones.

There is potential however for labour related issues to undermine this economic strategy and

the optimistic outlook for labour intensive manufacturing. In particular a prolonged

deterioration in labour relations, or a major international scandal over labour practices and

human rights in the manufacturing sector, would represent a serious threat to this economic

strategy. Because competition is fierce, foreign investors seeking to tap export markets in

labour intensive industries, like clothing and footwear, are not just concerned about labour

costs. Most of the key multinational companies in the retail sector also carefully consider the

reputation of the country for implementing core International Labour Standards plus

compliance with minimum wages and national labour laws. High profile multinational

companies in more capital intensive industries such as those exporting automobile

components or electronic inputs have very similar concerns.

The potential for a consumer backlash, or boycott in export markets, related to unacceptable

labour practices in supply chains is, along with unit labour costs, a key factor influencing the

location of foreign direct investment and the sourcing decisions of high profile multinationals

that sell manufactured products.

9 Haryo Aswicahyono and Hal Hill, “Survey of recent developments”, Bulletin of Indonesian Economic Studies,

No 3, 2014, pp 338-342. For earlier reviews with similar conclusions see, Haryo Aswicahyono, Douglas Brooks

and Chis Manning, 2Exports and Employment in Indonesia. The decline in labour intensive manufacturing and

the rise in services”, October 2011. Also Haryo Aswicahyono, Hal Hill and Dionisius Narjoko, “Indonesian Industrialization”, UNU-Wider working paper , September 20111.

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For the last 5 years or more there have been complaints about attacks on workers involved in

peaceful and lawful strikes in Indonesia. There are allegations that the police and other

Indonesian authorities have either participated in these attacks, or failed in their duty to

protect striking workers from such attacks. Within the International Labour Organization

there exists a comprehensive, and well respected, system for reviewing complaints about

infringements of workers’ rights and for monitoring the implementation of International

Labour Standards. This system includes highly acclaimed legal experts (judges, lawyers and

academics specialising in labour law) drawn from all regions of the world who review labour

legislation and national practices. The work of these “experts” is complemented by

committees comprised of employer representatives, trade unionists and government officials

from a wide cross section of countries.10

For several years the various components of this

supervisory system have been making what they call “observations” on Indonesia and calling

for important reforms to laws and practices that are considered not to be in conformity with

the international jurisprudence on Freedom of Association. 11

In June 2016 at the International Labour Conference in Geneva, the relevant committee

composed of Government representatives, employer representatives and trade unions from all

around the world decided that recent developments related to the treatment of striking

workers were of such significance that they included Indonesia in a small select list of

countries in which they called for significant changes to labour laws and practices.

During this discussion the Workers’ group of the ILO argued that:

“In the name of attracting investment, anti-union violence by police or with the

acquiescence of police is once again on the rise, and public demonstrations and

strikes are being suppressed.”

Box 2: Examples of violence against striking workers cited by the ILO Workers’ Group at the

ILO in June 2016

In their submissions to the Committee on the Application of Standards, the Workers’ group

of the ILO drew attention to the following examples of violence against workers:

- On 31 October 2013 an attack by “para-military” organisations on a peaceful

demonstration demanding an increase in the minimum wage and elimination of

outsourcing in Bekasi. It was claimed that police deployed to the site of the

demonstration had not prevented the attacks by thugs armed with knives, iron rods

and machetes. This attack resulted in injuries to 28 workers.

- In November 2014 workers on strike over the minimum wage had been severely

beaten by police in Bekasi.

10 For a detailed description of the ILO supervisory system see: http://www.ilo.org/global/about-the-ilo/how-the-

ilo-works/ilo-supervisory-system-mechanism/lang--en/index.htm

11 ILO, Committee on Freedom of Association Case No. 3050 and Case No. 3176. See also Observations by the

ILO Committee of Experts on the Application of International Labour Standards in relation to ILO Convention No 87, in Indonesia.

http://www.ilo.org/global/about-the-ilo/how-the-ilo-works/ilo-supervisory-system-mechanism/lang--en/index.htm

http://www.ilo.org/global/about-the-ilo/how-the-ilo-works/ilo-supervisory-system-mechanism/lang--en/index.htm

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- In November 2014 workers in Bataam had been dispersed by tear gas and water

cannons that had been positioned in advance by police

- In Bintam, police attacked and injured several workers who were meeting in order to

march to the local government employment office.

- On 30 October 2015, a lawful protest by 35.000 workers in front of the Presidential

palace has been dispersed by police with water cannons and tear gas. It was claimed

that 23 workers were arrested.

- Heavily armed thugs were hired by employers’ organisations to intimidate workers in

the Medan North Sumatra region.

- In Jawa Timur members of the Federation of Indonesian Metalworkers had been

beaten unconscious by police.

- In the lead up to the national strike planned for 24-27 November police had occupied

offices of the KSPI union in North Jakarta and put KSPI and The metal workers union

branch offices under surveillance.

- On 25 November 2015 police had arrested five union leaders in the Bakasi Industrial

Estates.

- In early 2016 rallies and demonstrations had been banned in several regions by local

authorities.

Source: ILO Report of the Committee on the Application of Standards, (Part 2), May-June

2016.

The wave of strikes and demonstrations in late 2015 and early 2016 were in response to the

wage reforms discussed later in this paper. The Indonesian trade union movement

commenced a protest campaign on 1 September, 2015, in anticipation of the reforms with a

mass rally of workers on the main streets of Jakarta and other key cities. A further mass

demonstration was conducted on October 15, 2015 when the wage reforms were officially

announced. On October 30, 2015 further demonstrations took place in Jakarta and other

cities. Press reports indicated that a number of demonstrators were arrested in Jakarta at the

demonstration and police used tear gas and water cannons to disperse demonstrators.12

There

are also claims that the striking workers provoked the security forces into such action by

extending their demonstrating beyond the time period that had been prearranged with the

police authorities. Subsequently a significant number of trade union members and leaders

were charged with criminal offences for disobeying orders from police officials.13

The

International Trade Union Confederation (ITUC) has claimed that seven labour activists from

the North Sumatra Workers Alliance were badly injured with stab wounds at another

demonstration in October 2015 related to the minimum wage reforms.14

Demonstrations and strikes escalated in November 2015. National strikes were held between

24 and 27 November 2015 and the trade union movement has claimed that the police used

violence to repress workers in several regions and a number of workers suffered injuries.15

12 Elyda, C. (2015) Workers stage protest against new wage formula, Jakarta Post, 31/10/2015. 13 Budiari, I. (2015) Thousands of workers to hold strikes across Greater Jakarta, Jakarta Post, 24/11/2015. 14 Letter from Sharan Burrow, General Secretary of the ICTU to Guy Ryder, Director General of the ILO, 10

November 2015. 15 Letter from Said Iqbal, President of KSPU, to Guy Ryder, Director General of the ILO, 30 November 2015.

18

Meanwhile APINDO ( the National Employers’ association) has claimed that this national

strike was illegal. In early February 2016 a number of international trade union leaders

participated in large public demonstrations in Jakarta against the minimum wage reforms.

The international trade union movement has pledged ongoing support for Indonesian workers

in their battle to rescind the October 2015 wage reforms.

In the last year the ILO Committee of Experts on the Application of Conventions and

Recommendations ( the expert legal body referred to above) made several important

observations in respect of ILO Convention 87 on Freedom of Association and Protection of

the Right to Organise in Indonesia. With regard to violence against trade unionists that had

occurred in 2011, 2012 and 2014 the ILO Experts urged the Government of Indonesia:

“to ensure, by means of appropriate measures such as education and training of the

police as well as police accountability, that the use of excessive violence in trying to

control demonstrations is avoided, that arrests are made only where perpetrators

have committed serious violence or other criminal acts, and that the police are called

in strike situations only where there is a genuine and imminent threat to public

order”.16

When this report from the ILO Experts was discussed in June 2016 by the ILO tripartite

Committee on the Application of Standards, the international trade union movement raised a

number of new allegations against the Government. In particular the trade unions have

claimed that the Government has been progressively expanding their definition and

interpretation of legislation that prohibits strikes in industrial areas that are considered

“national vital object areas”.17

Regulations on this matter date back to 2004 when Presidential

Decree No 43 authorised the use of the police and military to protect certain vital companies

or industrial areas that were threatened by industrial action. In 2014 the Ministry of Industry

issued Decree No 466/2014 that added another 49 national industries and 14 industrial estates

to the list of “national vital objects” that are afforded this protection. One trade union

representative at the International Labour Conference in June 2016 stated that these

regulations had “undermined all industrial action and threatened union organisation by

authorizing military intervention against workers”. 18

In mid-2015 the authors of this paper interviewed various government officials about the

likely implications of the wage reforms that were still under negotiation at that time. In

response to questions about how the Government planned to respond if the wage reforms led

to an upsurge in strikes and demonstrations an official from the Coordination Board of

National Investment stated that his organisation had signed a memorandum of understanding

with the national police force and the state intelligence agency to monitor the activities of

expected strike perpetrators. It was further claimed that a “hot line” had been established for

16General Report and observations concerning particular countries of the Committee of Experts on the

Application of Conventions and Recommendations to the 2016 International Labour Conference, Observation

2015/86 concerning Indonesia. 17 ILO, Report of the Committee on the Application of Standards (Part 2), May-June 2016, pp51-55. 18 ILO, Report of the Committee on the Application of Standards (Part 2), May-June, 2016, p 53. See statement by the representative of the Industrial Global Union Federation.

19

employers to contact police and have them intervene with striking workers at short notice to

prevent strikes and protests.

Several high profile trade union leaders in Indonesia told the authors of this paper that they,

and their families, have been subjected to physical threats in the last year. Interviews were

also conducted with young workers who have been on the front line in many of the

demonstrations referred to above. They provided the authors with graphic accounts of

beatings they received from criminal gangs hired by employers to intimidate workers from

taking industrial action and also claimed they had been attacked by police officers.

Workers are not the only victims of workplace violence related to strikes and demonstrations

in Indonesia. Many employers also reported to the authors that they have been subjected to an

increasing number of attacks on themselves and their property by striking workers.

Furthermore, employers in Indonesia regularly complain that their staff are intimidated by

trade union representatives to participate in industrial action such as demonstrations and

strikes. Employers’ also complain that trade union members are often responsible for

damage to equipment or facilities within factories or other workplaces when trying to

advance their demands for wage increases or other improvements in working conditions.

During the discussions in the ILO Committee on the Application of Standards in June 2016,

the Government of Indonesia alleged that unions engage in a process called “sweeping”

whereby union leaders arrive at factories and other workplaces and demand that a proportion

of the workforce joins those participating in a demonstration. It was further alleged that

unions threaten to damage factories and others forms of violence if these demands are not

complied with.19

Furthermore the Government representative argued that:

“… trade unions should not carry out sweeping activities, block roads, carry weapons

or other sharp devices that might harm others, or commit acts of anarchy.”20

It was not possible for the authors to independently verify all the accounts of workplace

violence provided by workers and employers but we also have no reason to doubt the veracity

of reports by either of the social partners. Importantly neither the employers nor the workers

we interviewed denied the accounts we had heard from the other side. In short both

employers and workers acknowledged they had been involved in practices that involved

significant breaches of freedom of association.

Violence at the workplace is a not a new development in Indonesia. The tactics used by

employers and trade unions that are described above have existed for many years, including

throughout the Yudhoyono Presidency. However, based on our interviews with the social

partners and the information provided to the ILO supervisory system, it would seem fair to

conclude that the October 2015 reforms to the minimum wage fixing system, which are

discussed later in this paper, have exacerbated the level of strikes and worker demonstrations

in Indonesia. This was the opposite impact of what the Government wished to achieve. Both

19 ILO, Report of the Committee on the Application of Standards, (Part 2), May-June, 2016, p50. See comments

by the representative of the Government of Indonesia. 20 ILO, Report on the Committee on the Application of Standards, (Part2), May-June 2016, p 50.

20

APINDO and the Government have defended the wage reforms by pointing to the level of

protests and strikes that have historically taken place during minimum wage negotiations.

They have argued that an automatic annual adjustment to the minimum wage would eliminate

these disruptions to production and provide greater political and industrial stability.

Indonesia needs to significantly improve industrial relations and develop more harmonious

relationships at the workplace. Unfortunately it seems that in industries and regions where

workers are organised the current trend is the opposite of that required and violence in the

workplace is on the increase. Significant changes in attitudes and practices are required from

employers’, trade unions and Government officials. Demonstrations and strikes by workers

should be handled in a very sensitive manner and with full respect for Freedom of

Association, and the jurisprudence related to this core ILO Convention. In June 2016 the ILO

tripartite Committee on the Application of Standards, after hearing interventions from trade

unions, employers and the Government of Indonesia issued the following conclusions:

“The Committee expressed deep concern regarding numerous allegations of anti-union

violence and limitations on the rights protected by the Convention (on Freedom of

Association) by national legislation. Taking into account the discussion of the case, the

Committee urged the Government to:

- Ensure that workers are able to engage freely in peaceful actions in law and

practice without sanctions,

- With regard to violence against trade unionists by private actors or public

officials, ensure the immediate establishment of independent judicial inquiries or

determine responsibility and to punish those responsible. The Government should

also investigate allegations of police inaction in the face of these violent acts and

ensure that those who fail to carry out their official duty to protect workers from

harm are sanctioned…..” 21

The Committee also urged the Government to amend or pass legislation on various topics to

promote freedom of association and to also accept “a direct contacts mission to develop a

roadmap to implement these conclusions.”

In responding to the above conclusions the Government send some mixed messages. First, a

representative from the Foreign Ministry indicated that they had taken note of the discussion

and he “emphasised that the future promised better implementation of the Convention.

Indonesia stood ready to cooperate with the Committee of Experts.”22

However later in the proceedings a representative from the Manpower Ministry of Indonesia

took the floor. The record of the meeting contains the following statement:

“She deeply regretted that the Committee’s conclusions were based on one-sided

allegations and had been drawn without taking into account the explanations of her

21 Ibid, p 55.

22 Ibid, p 55

21

Government and the actual discussion within the Committee. She called on the

Committee to work in a more transparent and impartial manner. ”23

Despite the somewhat contradictory statements by the Government representatives, the

decision by the tripartite ILO Committee on the Application of Standards means that labour

relations in Indonesia are now under close international scrutiny. Strikes, worker

demonstrations and the responses to such actions will now be closely monitored by the

international community in the years ahead. To preserve the reputation Indonesia has

established since 1998 as a tolerant modern democracy that respects workers’ rights the

Government would be well advised to fully comply with the above mentioned conclusions.

Ensuring full respect for Freedom of Association is not just a political and social matter. As

we argue below it may also have longer term implications for Indonesian involvement in

global supply chains in the manufacturing sector. Multinational companies producing

manufactured products have become highly sensitive to consumer pressure and campaigns

centred on infringements of labour rights. The record of a country on freedom of association

can therefore have important implications for foreign direct investment, employment and

economic growth. Decisions about the location of foreign investment in labour intensive

manufacturing are also heavily influenced by wage developments and unit labour costs.

Indonesia needs to carefully balance the requirements for globally competitive labour costs

and a sound record on key labour rights.

We now turn to review the long term evolution of labour laws and labour relations in

Indonesia and their impact on economic trends to explain why there is considerable

international interest in the recent labour developments.

3. The long term evolution of labour laws and institutions in Indonesia and their impact

on economic and labour market trends

Discussions about the impact of labour laws and institutions on economic and labour market

trends in Indonesia depend, to a degree, on interpretations of economic history in the country.

For over a decade some economists writing about Indonesia have lamented decisions made

about labour laws and institutions in the early years of democratic reform.24

Between 1998 and 2004 Indonesia revised most of its labour laws, established independent

trade unions and consolidated institutions such as the minimum wage fixing system.25

The

new labour laws and institutions replaced the repressive labour market practices that had

existed for the previous 32 years. They helped ensure a minimum level of equity and social

cohesion at a time when critical political and economic reforms were being implemented. But

these labour laws and institutions have also been blamed for halting the very rapid expansion

of the manufacturing sector that had occurred in the decade or so prior to democracy, and for

hindering the transfer of workers from low productivity activities in the agriculture sector and

23

Ibid, p 55.

24 Manning, C. (2008) “ The political economy of reform: labour after Soeharto”, University of Sydney, Sydney. 25 Quinn, P. (2003) Freedom of Association and Collective Bargaining: A study of Indonesian experience 1998-2003, International Labour Organization, Geneva.

22

informal economy to higher productivity jobs in manufacturing and the services sector since

the millennium.26

To put the current debate about the minimum wage fixing system and other labour market

reforms in context, it is useful to review the longer term evolution of labour market

institutions in Indonesia and, where possible, examine the relationship between these

institutions and economic or labour market developments.

3.1 The impact of labour institutions during the “New Order” from 1966 to 1998

Throughout the 32 year period of the “New Order, beginning in 1967 under President

Suharto, freedom of association and other hallmarks of a sound industrial relations system in

a democratic nation were absent. During this period the Armed Forces played a key role in

both Government and important parts of the commercial sector. In addition, many retired

senior members of the Forces became responsible for human resources and industrial

relations within enterprises. Thus when workers raised grievances at the workplace it was

common practice for companies to call the police or the military for support.27

The local

police or military would receive bribes from employers and if intimidation was not sufficient

they were prepared to use whatever force was required against the workers to end disputes

and maintain discipline at the workplace.28

Although Indonesia had a detailed labour code, which borrowed heavily from Dutch labour

legislation and had ratified ILO Convention No 98 on the Right to Organise and Collective

Bargaining in 1956, during the New Order period a number of high profile labour activists

were imprisoned and attempts to establish independent unions were harshly repressed. There

was one official trade union, the All Indonesian Trade Unions (FSPSI) which provided a

transmission mechanism for Government policy.29

Retired civil servants, military officers and

politicians often held senior positions within this State controlled trade union. The Minister of

Manpower occupied a seat on the Consultative Council of the FSPSI and the Manpower

Ministry collected union dues from workers and then transferred them to the union. At the

factory level leaders of FSPSI affiliates had no credibility because they were selected by

employers. 30

This long history of worker and trade union repression explains why even today the

involvement, or the threat of involvement, of the police and security forces to prevent strikes

or worker demonstrations is a highly symbolic and controversial. This is why the recent

decisions in the ILO Committee on the Application of Standards (see Section 2 above) has

26 Manning, C. (2008) The political economy of reform: labour after Soeharto, University of Sydney, Sydney. 27 Embassy of the United States of America, “Country report on human rights practices for Indonesia” , Jakarta,

1997. 28 Quinn, P. (2003) Freedom of Association and Collective Bargaining: A study of Indonesian experience 1998-

2003, International Labour Organization, Geneva. 29 This trade union has undergone a few name changes. For some time it was called Federasi Serikat Pekerja

Indonesia (FSPSI) and today is called Konfederasi Serikat Pekerja Seluruh Indonesia (KSPSI). 30 Peggy Kelly, “Promoting democracy and peace through social dialogue: A study of the social dialogue institutions and processes in Indonesia”, ILO, 2002, p 8.

23

such importance and could exercise a critical influence on the international image of

Indonesia.

Within this restricted framework there was however an attempt, mainly by the ILO, to

develop methods for determining wage rates. A 1958 ILO report on Indonesia had

recommended that: “the ultimate goal of wages policy should be to ensure that all wage

earners earn at least a living wage from their principal employment.”31

The notion of

ensuring that minimum wages are adequate to meet the “decent living needs” of a worker

stem from this period in the 1950s and can be traced back to ILO policy advice.

The Suharto regime maintained tight centralized control over minimum wages and kept real

wages low, but from time to time, the Government used adjustments to the minimum wage as

a way to provide some benefit to workers and prevent social unrest. In response to

international criticism about the treatment of workers, from the mid-1980s the Suharto

regime started to take some limited action to boost minimum wages and ensure minimum

wage levels were enforced.32

The creation of a pension fund for workers in the formal sector

and a national social security system also went some way towards improving the welfare of

workers. In 1996, immediately prior to the economic and political crisis, the Government

surprisingly passed legislation that dramatically increased severance payments ( by around

100% according to some estimates) and expanded their application to cover workers who

were dismissed without “just cause”.33

The first two decades of the Suharto Government were a period of major economic reform

with a focus on orthodox policies aimed at achieving macroeconomic stability. Public

investment in infrastructure and education increased rapidly.34

The oil boom and high

commodity prices during the 1970s and early 1980s provided expanding public revenues to

fund such investments. From the mid-1960s to the mid-1980s industry policy was geared

towards import substitution. When oil prices crashed in the mid-1980s, Indonesian policy

makers were keen to find new drivers of economic growth. Indonesia adopted some key

components of the “Washington consensus” policy package, including the liberalization of

international trade and greater support for foreign direct investment, although the

Government was careful not to acknowledge that it was following this liberal economic

agenda.35

These policy shifts resulted in significant and rapid structural changes within the

manufacturing sector, with export orientated labour intensive manufacturing industries like

31 Tjandra, S. and Klaveren, M. (2015) “Indonesia” in Klaveren, M., Gregory, D. and Schulten, T. (eds)

Minimum Wages, Collective Bargaining and Economic Development in Asia and Europe, Palgrave, London. 32 Tjandra, S. and Klaveren, M. (2015) “Indonesia” in Klaveren, M., Gregory, D. and Schulten, T. (eds)

Minimum Wages, Collective Bargaining and Economic Development in Asia and Europe, Palgrave, London. 33

Ministry of Manpower Law No. 3 of 1996. See Chris Manning, “Labour policy and employment creation: An

emerging crisis?”, paper prepared for Bappenas, June 2003. See in particular Table 4.2.

34 Hill 1997 35 Manning, C. (2008) The political economy of reform: labour after Soeharto, University of Sydney, Sydney.

24

textiles, garments, footwear, electronics, furniture and sporting goods recording roughly

double digit growth rates between the mid-1980s and the mid-1990s.36

Employment expanded rapidly in new factories that were created in industrial processing

zones on Java, particularly on the outskirts of Jakarta and around Bandung. As a result from

the late 1980s an urban industrial workforce began to emerge and there were some attempts

to form independent unions.37

Disputes at the workplace became more regular and intense in

the early 1990s. The Government responded aggressively with several union leaders

imprisoned and police used to break up protests. The brutal rape and murder of young female

union activist in retaliation for leading a strike at her factory attracted international

condemnation of the Government.38

Following a complaint lodged by the International Confederation of Free Trade Unions

(ICFTU) with the ILO in 1994, the Government permitted the establishment of enterprise

trade unions (SPTPs), but because they were not allowed to form federations outside the

official Government sanctioned trade union structure, they remained weak. By 1997 it is

estimated that there were around 1000 of these enterprise level unions operating in

Indonesia.39

In theory these SPTPs could act as representatives of workers in collective

bargaining at the factory level, but it was the prerogative of the employer to recognise, or not

recognise, these factory level unions as their counterpart in the bargaining process.40

Official

Government statistics indicated that around 80% of enterprises with factory level unions had

collective agreements. But these agreements never went beyond the minimum standards

established in laws and regulations. In almost all cases the agreements were drawn up my

management and presented to union officials for signing without any negotiations. The

legacy of these practices linger today, making the balance of power at the enterprise level

very uneven and the prospects of good faith collective bargaining slim.

The Indonesian economy continued to expand rapidly between 1990 and 1997, with real GDP

expanding at annual rates or around 7% to 8 % (Figure 3). In this period the contribution of

manufacturing to total output expanded significantly while the share of agriculture continued

to decline (Figure 4). The share of employment in the agriculture sector fell sharply with

formal sector employment growing rapidly up until the Asian economic crisis (Figure 5).

New job opportunities in the service sector were increasing by around 1.3 percentage points

per year between 1990 and 1997. The construction sector was the main recipient of FDI and

underwent an unsustainable boom in the lead up to the Asian economic crisis, with output

annual growth rates of around 14 % and double-digit job growth rates in the period prior to

1998 (Table 1).

36 Aswicahyono, Hill and Narjoko (2011) Indonesian Industrialization: A latecomer adjusting to crisis, UNU-

Wider working paper No 2011/53, World Institute for Development Economics Research, Helsinki. 37 Hadiz, V. (1997) Workers and the State in New Order in Indonesia, Routledge, London. 38 Quinn, P. (2003) Freedom of Association and Collective Bargaining: A study of Indonesian experience 1998-

2003, International Labour Organization, Geneva. 39 Quinn, P. (2003) Freedom of Association and Collective Bargaining: A study of Indonesian experience 1998-

2003, International Labour Organization, Geneva. 40 Peggy Kelly, op cit, 9 9.

25

Manufacturing was also expanding very rapidly with output and employment recording

annual rates of growth or around 11 % and 6 % respectively prior to the economic and

political crisis (Table 1) with sectors like textiles, clothing and metals doing particularly well.

Compositional shifts in the labour market, resulting from workers moving from agriculture to

the better paying jobs in industry and services sectors, helped reduce aggregate income

inequality and had the effect of boosting average wages up until 1997.

Although labour institutions such as trade unions, collective bargaining and minimum wage

fixing remained heavily constrained throughout the New Order period, the slight

strengthening of these institutions in the last decade of the regime occurred simultaneously

with the emergence of labour intensive manufacturing and very rapid growth in the service

sector. As a result the transfer of labour from low productivity activities in the agriculture

sector to wage employment in the industry and the service sectors accelerated rapidly. This

was reflected in a substantial increase in non-agriculture employment and formal

employment. There was no indication that more rapid wage increases and the slightly more

lenient attitude towards independent union activity and collective bargaining in the decade

prior to 1998 hindered this economic transformation.

Figure 3: GDP growth for Indonesia and the World, 1985-2015 (per cent)

Source : World bank (2015) World development indicators, World Bank, Washington D.C.

26

Figure 4: Share of GDP by economic sector, 1985-2015 (per cent)

Source: World bank (2015) World development indicators, World Bank, Washington D.C.

27

Figure 5: Share of employment by economic sector, 1985-2015 (per cent)

Source: World Bank (2015) World development indicators, World Bank, Washington D.C.

3.2. 1997-99 Asian economic crisis and the return of democracy

In August 1997 the Asian financial crisis hit Indonesia. Rapid capital outflows generated

panic and a massive devaluation of the domestic currency occurred. 41

Major parts of the

banking sector were insolvent, many companies went bankrupt or closed temporarily and

mass layoffs occurred in the industry and the services sectors. In 1998 real GDP declined by

13 % and inflation approached triple digits. Real median wages declined by roughly one third

between 1997 and 1999. The Government turned to the IMF for balance of payments support

in early 1998 and the subsequent loans came with conditions that required harsh austerity

measures. Rapid increases in electricity, fuel and transport costs plus budget cuts led to

widespread public protests. Other conditions included the privatisation of various publically

owned enterprises and public sector job cuts that exacerbated deteriorating social conditions.

Despite depression like conditions some key indicators of the labour market gave the

appearance of normality. For example, the aggregate employment to population ratio

remained virtually constant between 1996 and 1999 and the unemployment rate remained in

the 5% to 6 % range. However these indicators masked major structural changes as job losses

41 The rupiah fell from 2450/US dollar in June 1997 to 14,900/US dollar a year later.

28

were concentrated in industry and service sectors. Many of the labour intensive

manufacturing jobs which had expanded rapidly in the previous decade disappeared. As

normal in a developing country, in the absence of an adequate social safety net, desperate

workers returned to the rural and informal sectors in order to survive. These trends are

evident in Figure 7. The share of agriculture jobs in total employment had been on a

sustained and relatively rapid downward trend between the mid-1980s and 1997. However

between 1998 and 2003 this trend was reversed and the relative importance of agriculture

activities in total employment picks up. Yet from Figure 6 it is apparent that the contribution

of agriculture to total output maintained its long term downward trend, apart from a

temporary upward blip during 1998. The key labour market issue therefore became

underemployment and low productivity.

The economic crisis rapidly turned into a political crisis. The protest movement (Reformasi)

issued political demands for democracy and campaigned for an end to “corruption, collusion

and nepotism”. A number of trade unions broke away from FSPSI to join Reformasi and the

fight for democracy. The ILO supervisory system for International Labour Standards, that has

recently voiced stern criticisms of Indonesian labour practices, played a significant role in

advancing political reforms during this critical period. In November 1997 the ILO’s

Committee on Freedom of Association adopted conclusions calling on the Government to:

eliminate the requirements for union registration which impeded the right to organise; grant

registration to the Indonesian Prosperity Trade Union (SBSI) which had been force to operate

clandestinely up until that time; drop criminal charges against Mr. Pakpahan ( Chair of SBSI)

and release him from goal; institute an independent judicial inquiry into the murder of a trade

unionist; and reinstate trade unionists who had been dismissed for carrying out their duties.

In May 1998, after a 32 year dictatorship, the Suharto regime collapsed. A period of social

instability followed with violent ethnic clashes. The economic and political crisis of 1997 and

1998 was a catalyst for industrial relations reform. One month after the fall of Suharto, the

new Government led by President Habibi recognised the SBSI trade union, released Mr.

Pakpahan from prison and ratified ILO Convention No 87 on Freedom of Association and

Protection of the Right to Organise. In August 1998 the ILO sent a “direct contacts mission”

to Indonesia composed of a group of experts to provide advice to the new Government on the

legal and institutional reforms required to meet its obligations under ILO Convention 87.

During the course of the next year Indonesia ratified several other core Conventions of the

ILO.

3.3. 1999 - 2003 Economic recovery and the foundations of a strong democracy

Economic stabilisation was achieved relatively quickly. Inflation returned to single digits by

1999 and the decline in output was arrested. Between 1999 and 2003 real GDP growth

recovered and averaged 4.7% per year. This was somewhat better than the growth

performance in Thailand and the Philippines, but less impressive than Malaysia. Many of the

manufacturing establishments that had closed in 1997 and 1998 reopened in the next two

29

years. After the economy stabilised in the early 2000s, the manufacturing sector returned to

reasonable, but not spectacular economic growth rates.

However, the employment performance of manufacturing growth deteriorated significantly

for a number of years prompting talk of “deindustrialisation” and raising concerns about

labour market flexibility. In fact as can be seen from the Table 1, output in manufacturing had

expanded at a very rapid 11% a year in the period prior to the crisis. In the period between

2000 and 2008 manufacturing output growth was back expanding at annual rates above 5 % ,

but the employment picture was far less bright. Employment growth had averaged 6 % a year

prior to the crisis, but between 2000 and 2008 the rate of job growth did not even reach 1% a

year.

This deterioration in the manufacturing employment performance after the Asian economic

crisis continues to feature in much of the important economic literature about Indonesia

today. For example, in late 2015 influential observers of the Indonesian economy were

claiming that “manufacturing has been held back by labour-market policies and low levels of

labour productivity”.42

Consequently this paper focus considerable attention on the historical

job trends in manufacturing and their interaction with changes in labour laws and institutions.

This is why Table 1 contains data from overlapping time periods. Columns three and four in

Table 1 update the information in the first two columns that has strongly influenced policy

debates in the past. The picture that emerges is somewhat mixed. While it is clear that both

economic and employment growth rates in the manufacturing sector never recaptured the

very rapid pace that was evident between 1990 and 1996, the employment intensity of growth

in manufacturing ( or employment elasticity) did get back to pre- crisis levels by around the

mid-2000s.

It is also evident from Table 1 that in parts of the largely non-unionised service sector there

was a similar slowdown in employment growth and decline in the employment elasticity in

the early 2000s. This certainly seems to be the case in the transport, storage and

communication sector and to a lesser degree in the wholesale and retail trade sector. These

developments in the service sector of Indonesia, and similar trends in other parts of South

East Asia, have been studied closely by a number of academics and the decline in the

employment intensity of growth can be attributed largely to technological change and

economies of scale in these industries.43

Table 1: Sector output growth and employment growth, 1990-2014

GDP growth (average % p.a)

1990-

1996

2000-

2008 2005-2009

2010-

2014

Agriculture, Forestry, Hunting and Fishery 3.1 3.9 3.9 4.2

Mining and Quarrying 5.3 1.5 2.2 2.4

Manufacturing 11.2 5.2 3.8 5.2

Electricity, Gas and Water N/A N/A 10.3 6.4

42 Arief Anshory Yusuf and Andy Summer, “Growth, poverty and inequality under Jokowi”, Bulletin of

Indonesian Economic Studies, Vol 51, No. 3, 2015, p 335. 43 Aswicahyono, H., Hill, H. and Narjoko, D. (2012) Industrialization: Patterns, issues and constraints, in Hill,

H., Khan, M and Zhuang, J (eds) Diagnosing the Indonesian economy: Towards inclusive and green growth, Asian Development Bank, Manila.

30

Construction 13.7 6.5 7.9 7.2

Wholesale Trade, Retail Trade, Restaurant and Hotels 8.9 5.8 5.8 6.2

Transportation, Storage and Communication 8.2 10.1 15.2 9.4

Financing, Insurance, Real Estate and Business Services N/A N/A 6.7 7.4

Community, Social, and Personal Services N/A N/A 6.3 5.8

Other activities 6.4 5.8 N/A N/A

Total 7.9 5.3 5.6 5.7

Employment growth ( average % p.a)

1990-

1996

2000-

2008 2005-2009

2010-

2014

Agriculture, Forestry, Hunting and Fishery -1.7 0.2 0.2 -1.6

Mining and Quarrying 6 3.7 6.3 2.7

Manufacturing 6 0.9 1.8 2.0




Transportation, Storage and Communication 9.4 3.9 2.0 -1.9




Total 2.3 1.7 2.8 1.5

Implied Employment Elasticities

1990-

1996

2000-

2008 2005-2009

2010-

2014

Agriculture, Forestry, Hunting and Fishery -0.6 0.1 0.0 -0.4

Mining and Quarrying 1.1 2.6 2.9 1.1

Manufacturing 0.5 0.2 0.5 0.4




Transportation, Storage and Communication 1.1 0.4 0.1 -0.2




Total 0.3 0.3 0.5 0.3

Source: BPS (2015) National Accounts, Badan Pusat Statistik, Jakarta; Aswicahyono, H.,

Hill, H. and Narjoko, D. (2012) Industrialization: Patterns, issues and constraints, in Hill,

H., Khan, M and Zhuang, J (eds) Diagnosing the Indonesian economy: Towards inclusive

and green growth, Asian Development Bank, Manila. Notes: Based on CAGR; 2010-2014

GDP growth based on gross value added; 2011-2014 employed data based on revised

population weights; 2010-2014 GDP at 2010 constant prices; 2000-2009 GDP at 2000

constant prices.

However the failure of Indonesia to recapture the progress that had been evident prior to the

crisis in transferring labour from low productivity agriculture to wage employment in

manufacturing, once the economic recovery was underway, cannot really be explained by

technological change. Difficulties in acquiring land, the industrial zoning of land, inadequate

infrastructure and burdensome licensing requirements are among the many factors that have

hindered manufacturing performance. In addition some academics and institutions focused

attention on the changes to labour laws and institutions in the early 2000s as a possible factor

31

explaining “jobless growth” in manufacturing.44

The main components of the labour reforms

in this period were the:

- Trade Union Act which was passed in 2000;

- Manpower Act, adopted in February 2003; and the

- Industrial Relations Disputes Settlement Act, adopted in 2004.

Each of these major pieces of labour legislation required a number of Government

regulations, Ministerial Decisions and/or Presidential Decrees to spell out the details and

make the legislation operational. As a consequence the new legislative framework was not

really in place until the mid-2000s. It is therefore difficult to attribute economic and labour

market developments between 1999 and 2003 to the new labour legislation, but other labour

related factors may have exerted an influence.

For example, the establishment of new independent trade unions did progress more rapidly.

By February 2003, there were some 66 trade union federations registered nationally and more

than 11,000 enterprise level unions registered locally. New trade union confederations (such

as KSPI and SBSI) also emerged and the old Government controlled trade union

confederation restructured itself in 2002. Despite the rapid proliferation of trade unions, the

impact on trade union density was far less dramatic. Accurate estimates of trade union

membership are often difficult to establish as trade unions have a vested interest in

exaggerating their strength to secure the right to collective bargaining or membership of

committees and organisations that require them to be “representative”. Taking these factors

into account, an ILO report in 2003 suggested that “given the difficult economic

circumstances for much of the past five years, it is perhaps unlikely that overall union

membership is higher than it was before 1998”.45

One labour market institution that did have an unambiguously stronger impact in the

immediate aftermath of the political crisis was the minimum wage fixing machinery. As

mentioned above, the key components of minimum wage fixing system, including the

requirement for adjustments to take into account “minimum physical needs” of a single

worker had existed for several decades. This was changed to “minimum living needs” after

the political crisis and subsequently to “decent living needs”.

The methodology for calculating the “needs” of a single worker in Indonesia has been

relatively scientific compared to the way minimum wages are adjusted in many other

countries. In Indonesia it has involved determining a consumption basket composed of food

and non-food items that are considered essential, and then undertaking a survey to assess

changes in the costs of these items in traditional markets. Throughout the period from the

1950s to 2000, different minimum wage levels existed for each Province, as living costs

varied significantly from region to region. But up until 2000 the final decision regarding the

minimum wage level for each Province was centralised in the hands of the Manpower

44 Manning, C. (2008) The political economy of reform: labour after Soeharto, University of Sydney, Sydney. 45 Quinn, P. (2003) Freedom of Association and Collective Bargaining: A study of Indonesian experience 1998-2003, International Labour Organization, Geneva.

32

Minister. In making this decision, the Minister took into account recommendations from the

Provinces.

As part of a much wider reform to decentralise political power and administrative control to

the regions, the final responsibility for determining minimum wage increases was transferred

to the Provincial level in 2000. For the next 15 years it was the Provincial Governor who

made the final decision, sometimes based on recommendations from the district level

authorities. The decentralisation of decision making, combined with central Government

support for income redistribution after generations of repression and the dramatic real wage

declines in 1998, resulted in some significant minimum wage increases in the early 2000s.

For example, the nominal minimum wage in the Jakarta Province rose by 21 % and 39 % in

2001 and 2002 respectively. The simple average increase for all Provinces was 16 % and 17

% in 2001 and 2002 respectively (see Annex for details). However by 2003 wage moderation

had been restored.

Employment protection legislation was also subjected to some important changes in this

period. In 2000 the Government increased severance payments again and made some further

changes to the rules that curtailed access to these benefits for those workers dismissed after

committing what the legislation terms a “major offense”.46

The combination of rapidly rising

minimum wages, higher severance payments and better enforcement of employment

protection legislation would have had a significant impact on the economic cost of dismissal,

particularly given that severance payments are expressed as multiple of the monthly wage

rate.

As noted above the failure of manufacturing and service sectors to recapture the rapid pace of

employment growth they had exhibited in the pre-crisis period has promoted some observers

to suggest that the new labour laws passed between 2000 and 2004, the rise of independent

trade unions and rapid minimum wage increases retarded investment and discouraged hiring

in the non-agriculture sector. Of these three factors the most significant was probably the

rapid minimum wage increases that were concentrated in 2001 and 2002.

However, attributing the more modest labour market outcomes in the early 2000s to the

strengthening of labour market institutions ignores the political and administrative upheavals

that were taking place in Indonesia through this period. For example, between 1998 and 2004

there were five national Presidents. In this period the role of the Parliament and the civil

service were fundamentally reformed and the power of these institutions vis-a–via the

President were strengthened. On top of this, Provincial and district level government

structures were completely revised and strengthened as the process of decentralisation took

place in an effort to hold the nation together. There was also a significant threat of terrorism,

as the Bali bombing in October 2002 underlined.

The impact of this political transformation on business confidence, foreign direct investment

and the willingness of local entrepreneurs to enter into long term financial commitments must

46 Chris Manning, “Labour Policy and employment creation: An emerging crisis?”, paper prepared for

Bappenas, June 2003, pp 79-84.

33

be taken into account when reviewing the general economic and labour market performance

of the period. Changes in labour laws and institutions were an important aspect of the

transition to democracy, and this transition was neither smooth or without short term

economic consequences. But one could hardly expect any other outcome when the fourth

most populated country in the world moves from autocratic rule to a modern democratic

nation.

3.4. 2004-2016: Robust economic growth and reasonable labour market outcomes

After 2004 the democratic process was strengthened further through popular elections for

heads of Provinces, cities and districts. At national level, President Bambang

SusiloYudhoyono served two full terms without any major political crisis.47

The country was

unified by the tragedy of the 2004 tsunami and efforts to address terrorism. This period of

increased political stability coincided with more robust economic growth, declining poverty

and an expansion of regular wage employment.

International economic developments supported these more positive domestic outcomes.

Back in 2001 China had gained entry to the World Trade Organisation. This was to have a

profound impact on the world economy and particularly the economies that could satisfy the

rapid expansion in Chinese demand for commodities. By late 2003 and early 2004 the

upsurge in world commodity prices was underway. Global prices for coal, crude oil, rubber

and crude palm oil increased roughly three fold between the early 2000s and 2011 (see Figure

6).

47 Edward Aspinall, Marcus Mietzner and Dirk Tomsa ( editors), The Yudhoyono Presidency : Indonesia’s Decade of Stability and Stagnation, Institute of Southeast Asian Studies, 2015.

34

Figure 6: Commodity price index for key Indonesian exports in the world market, 2001-

2016

Source: IMF (2015) International financial statistics, International Monetary Fund,

Washington, D.C.

By 2004 annual GDP growth was back up to 5 % and growth rates remained roughly in the 5

% to 7 % range for the next decade (see Figure 3). Even when the global economic crisis hit

in 2007 and 2008 the impact on Indonesian economic growth was modest. Exports fell

sharply for a period but recovered quickly thanks to robust demand from China. Robust

economic growth throughout the decade from 2004 to 2014 was partly the result of

reinvesting wealth derived from primary industries, such as coal and palm oil, into urban

construction, the expansion of the services sector and domestic consumption.

The increased incomes and wealth generated by the global commodities boom fuelled rising

investment in the non-traded goods sector. Private construction investment in urban centres

boomed. In fact by 2012 building investment accounted for 85 % of total fixed investment.

Moreover, these trends resulted in gross fixed capital formation as a share of GDP increasing

from a low of around 19 % of GDP in the period from 1999 to 2003 up to a peak of around

32 % in the period from 2010 to 2014 (see Figure 7). The contribution of total investment to

GDP in recent years has significantly exceeded the levels reached in the period before the

Asian economic crisis at the end of the 1990s.

35

Clearly there has been no shortage of private investment in recent years. However, legitimate

questions can be asked about whether private investment in the decade up to 2014 was

flowing into the most productive sectors of economy or rather contributing to unsustainable

“bubbles” in the non- traded goods sector. The employment generation effects of these

investment flows was also less than optimal.

As suggested previously the end of the global commodities boom since 2012 has forced

policy makers to be more proactive in trying to direct FDI into manufacturing and in

particular labour intensive manufacturing. These efforts have intensified since mid 2015.

Private investment in these sectors is obviously more sensitive to labour costs and labour

institutions. And while there has been a lot of concern in the last two years about labour

rigidities deterring FDI in labour intensive sectors new investors have continued to establish

factories.

Indeed at least some surveys of private investment intentions rate Indonesia as the country

most likely to attract FDI in the future. For example, a 2014 Economist Intelligence Unit

survey of foreign owned manufactures in South East Asia suggested that the number of

foreign manufacturing plants in Indonesia was expected to increase by some 68 % over the

next 5 years. This was roughly double the rate of expansion in other parts of Southeast Asia. 48

Moreover the most recent “Investment Climate Monitoring Survey” highlighted

macroeconomic instability, logistical costs and regulatory uncertainty as the main obstacles to

doing business.49

Labour issues were relevant but did not feature among the top concerns of

the business community responding to this survey. Interviews by the authors with enterprise

managers in labour intensive manufacturing in July to September 2015 also suggested that

labour costs, skill shortages and labour unrest could potentially influence investment and

employment decisions. But these issues were far less significant than trade policy,

infrastructure and other macroeconomic factors.

48Economist Intelligence Unit, “Re-drawing the ASEAN map. How companies are crafting new strategies in

Southeast Asia”, 2014. 49 LPEM-FEUI (2014) Investment Climate Monitoring Survey, Institute for Economic and Social Research, Faculty of Economics, University of Indonesia, Jakarta.

36

Figure 7: Trends gross fixed capital formation, 1985-2015 (per cent)

Source: World Bank (2014) World development indicators, World Bank, Washington D.C.

Since mid-2015 public investment in critical infrastructure, such as communication networks,

airports, shipping ports and roads has become the overwhelming priority of Government

policy. This commitment is strongly supported by both the general public and those

commenting on economic policy because Indonesia has lagged well behind other middle

income and emerging economies in terms of infrastructure investment. This point was

recognised by the Government when it made a commitment in early 2015 to use much of the

fiscal space generated by cutting fuel subsidies for critical infrastructure investment.

Translating this commitment into practice took time but by late 2015 progress was becoming

evident. In fact higher Government investment in infrastructure was a key factor driving the

5.3 % increase in fixed capital investment in the first six months of 2016.

The other main engine of growth throughout the period from 2004 to 2016 was private

consumption expenditure, reflecting the wealth effects of the commodity boom, rising asset

prices and sharp increases in real wages in particular periods like 2003 and again in 2013.

National accounts data suggest that private consumption has held up well in the last few years

despite increasing economic uncertainty and volatile asset prices. One long term factor

underpinning the private construction boom and rising consumption has been rapid rural-

urban migration. Indeed, Indonesia is leading the world in terms of the expansion of

37

urbanization and it is expected that as much as 68 % of the population may reside in urban

areas by 2035 which greatly exacerbates the public infrastructure deficit.50

The distribution of the benefits of growth have dominated much of the political-economy

debates in the last two decades and particularly since the early 2000s. Increased prosperity

did “trickle down” to the poor during much of this period. At least there was an impressive

reduction in measured poverty levels. Consumption based indicators of poverty declined from

24 % to 12 % between the late 1990s and 2012 (Figure 8). Improvements in poverty

reduction programs, substantial increases in minimum wages between 1998 and 2002 and

less volatility in food prices contributed to this result.

Rising income inequality emerged as a major challenge confronting Indonesia in the 2000s

and continues to feature prominently in both popular discourse and policy discussions.

Interestingly all sides in the economic debate cite rising income inequality as a reason to

support their policy prescriptions. The Gini index, based on consumption expenditure, is a

widely used measure of inequality where a value of 0 represents complete equality and 1

equals complete inequality. In Indonesia this measure was relatively stable for long periods

prior to the Asian economic crisis at the end of the 1990s. During the late 1990s the index fell

because the value of the financial and property assets held by the very wealthy plummeted

while low and middle income groups experienced less dramatic declines in expenditure.

Consequently in 2000 the index was at around 0.3 (Figure 8).

Then as political and economic stability was restored the index rose rapidly, albeit with some

fluctuations, to reach 0.41 in 2011. For income inequality to shoot up by more than one-third

in just over a decade is a dramatic outcome. The increase in inequality in Indonesia through

this period was similar to the experience in China and in stark contrast to a number of other

countries in the region like Malaysia, Thailand and Vietnam which either reduced or

stabilised their inequality levels. In the last five years the Gini indicator for Indonesia would

suggest that inequality has stabilised at a very high level (Figure 8).

The sharp rise in inequality took place after the political reforms in the late 1990s and the

decision to decentralise many aspects of government authority to Provincial and district

authorities. The rapidly widening of the gap between rich and poor was inconsistent with

stated Government policy and the expectations of the general public in the new democratic

Indonesia. Rising inequality not only undermines social justice objectives but can also have

adverse economic consequences.51

This helps explain why in the last few years there is

considerable attention devoted to rising inequality in Indonesia. In late 2015 the World Bank

released an impressive report on the subject and highlighted that economic growth over the

past decade has benefitted the richest 20 % of the population while the remaining 80 % have

50 World Bank (2014) Indonesia Economic Quarterly, March 2014: Investment in flux, World Bank Country

Office for Indonesia, Jakarta. 51 Ostry, J., Berg, A., and Tsangarides, C. (2014) Redistribution, inequality and growth, International Monetary

Fund, Washington, D.C.; ESCAP (2013) The Economic and Social Survey of Asia and the Pacific 2013.

Bangkok: ESCAP; ESCAP (2014) The Economic and Social Survey of Asia and the Pacific 2014. Bangkok: ESCAP.

38

been left behind. The World Bank warned that rising income inequality may lead to slower

growth and an increased risk of conflict. 52

Figure 8: Percentage of people living in poverty and the GINI ratio, 1996-2016

Source: BPS (2015) Poverty statistics, Badan Pusat Statistic, Jakarta.

It is generally recognised that the official data on expenditure based measures of income

inequality in Indonesia (such as that in Figure 8) significantly understate the true gap between

the incomes of the rich and poor. There are several reasons for this including the fact that

many wealthy citizens simply refuse to participate in official Government surveys of

household expenditure because they fear being caught for tax evasion. Figure 9 compares

trends in the Gini coefficient using expenditure data and a measure of inequality based on

primary wage data for all employees. The first point to note is that the primary wage

inequality measure is significantly higher than the standard consumption Gini throughout the

period under review. Second, it is evident that the wage inequality indicator declined

somewhat between 2001 and 2003, but then increased rapidly over the next 6 years, peaking

around 2008. Between 2009 and 2011 this indicator of wage inequality fluctuated and then

remained flat over the last three years. The data on consumption inequality also suggests a

general upward trend after the early 2000s and a more distinct upward jump between 2008

and 2011. Consumption based inequality then stabilises at this high level.

52 World Bank (2015) Indonesia’s Rising Divide: why inequality is rising, why it matters and what can be done. Jakarta: World Bank.

39

Figure 9: Consumption GINI and primary wage inequality for regular employees and

all income earners (2001-2015)53

Source: BPS (2014) SUSENAS and SAKERNAS (selected years), Badan Pusat Statistik,

Jakarta.

During the period from 2003 to 2012 the growth in nominal minimum wages was moderate

and average real wage levels of blue collar workers either declined or remained flat. For

much of this period both measures of inequality suggest that the gap between the rich and the

poor was expanding rapidly. This prolonged period of real wage moderation subsequently led

to pressure for wage “catch-up” and nominal minimum wages jumped sharply between 2012

and 2014, leading to significant real wage increases. In this latter period the upward surge in

inequality plateaued according to both the consumption based Gini and the primary wage

data. There are many factors impinging on income inequality, including the impact of the

commodity boom, tax policy, educational attainment and the degree of gender equality. But

the observed trends are consistent with the view that increases in real minimum wages might

be one way to contain excessive income inequality.

Given relatively robust economic growth in the last decade and a half, one would expect to

see signs that the job market improved over this period. And indeed the economic recovery

was reflected in an improved labour market performance. In particular, the trends in non-

53 All income earners refers to own account workers, regular employees and casual employees, which accounts

for approximately 65% of the labour force. Income data is not available for employers assisted by casual employees and unpaid family workers, employers of permanent employees, and unpaid family workers.

40

agriculture employment and formal sector employment returned to steady growth rates.

Within the formal sector, job growth was concentrated in the services sector (Figure 5). At

the same time, employment in agriculture returned to its long term declining trend, as

workers who had turned to their extended families in rural areas as a survival strategy during

the economic crisis were able to resume their lives in urban communities and re-establish

themselves in more decent jobs.

Between 2004 and 2014, the share of total employment in the agriculture sector declined

from 43 % to 34 %.That is a decline of almost one quarter over the course of a decade.

Nevertheless, the pace at which workers were making the move from agriculture to the

service and manufacturing sectors was less specular than the progress achieved in the early to

mid-1990s. Moreover, with roughly one third of all workers still in the agriculture sector

today, there is still plenty of scope to accelerate the transformation from low productivity

activities to higher productivity and better paid job opportunities in manufacturing and

services.

That said, the strengthening of the labour market since the mid-2000s has received

insufficient attention in the discussions about labour market reforms. Since 2010 Indonesia

has accelerated the expansion of regular wage employment and somewhat reduced reliance

on employment forms that are closely associated with the informal economy, such as own

account workers and unpaid workers (Figure 10). It is notable that these trends have been

maintained in the last two years despite suggestions that labour demand in manufacturing was

starting to soften. In fact, in 2004 there were 25.4 million workers employed as regular

employees, and by 2015 this had increased to 44.4 million. As a result the ratio of regular

employment to total employment has risen in recent years.54

One medium term factor behind the increase in regular wage employment is the structural

transformation of the economy, with wage employment expanding in the manufacturing and

services sectors. More precisely, of the 17.0 million additional regular wage jobs created

between 2004 and 2014, 3.1 million were in the manufacturing sector, 3.2 million were in the

trade, hotels and restaurants sector, and 5.7 million were in the community, social and

personal services sector.

54 Allen, E. (2015) Labour and social trends in Indonesia 2014-2015: Strengthening competitiveness and productivity through decent work, ILO Country Office for Indonesia and Timor-Leste, Jakarta.

41

Figure 10: Status in employment, 2006-2015

Source: BPS (2015) SAKERNAS (selected years), Badan Pusat Statistik, Jakarta.

From Table 1, it can be seen that the growth of output and jobs in the manufacturing sector in

the late 2000s and early 2010s was robust, but not specular. Annual growth in manufacturing

output in the period 2005 to 2009 was 3.8 % and this accelerated to 5.2 % in the period from

2010 to 2014. Thus manufacturing output growth never recaptured the “golden age” that

prevailed prior to the Asian economic crisis when it was roughly double the level achieved

recently.

The more modest growth in manufacturing output in the last decade was not confined to

Indonesia. These trends were either worse or very similar throughout the region, including in

competitor countries like Thailand and Malaysia where trade unions and labour institutions

are less potent. An important explanation for the more modest outcomes in export orientated

Indonesian manufacturing after the early 2000s was the competitive advantage of Chinese

exporters and the impact of currency appreciation in Indonesia as the commodities boom took

hold. It is probably fair to conclude that Indonesia caught a mild dose of the “Dutch disease”

through this period.

However, the employment intensity of growth in the manufacturing sector did improve after

the early 2000s. Between 2005 and 2009, the implied employment elasticity of manufacturing

was back at the level that had existed in the boom period prior to the Asian economic crisis.

Moreover, it remained very close to that level in the period 2010 to 2014 (see Table 1).

42

Table 2 provides more detail on labour market trends in the manufacturing sector. It depicts

trends for regular employment in the labour intensive, resource intensive and capital intensive

industries within the manufacturing sector.55

It is evident that regular wage employment in all

three sub sectors of manufacturing was relatively stable in the period between 2004 and 2009.

However wage employment, in all three sub sectors of manufacturing expanded fairly rapidly

in the period from 2009 to 2014. In fact, over this most recent period wage employment in

labour intensive manufacturing rose by 42 % and wage employment in all manufacturing

jumped by an impressive 49 %.

Again it is interesting, but not necessarily conclusive, to compare these manufacturing

employment trends with minimum wage and average wage developments. For example, in

the mid to late 2000s minimum wages growth was very modest and real wages for employees

in both the manufacturing and service sectors were either flat or declining. This was also a

period in which manufacturing employment levels were stagnant. The more recent rapid

expansion in wage employment in manufacturing between 2009 and 2014 coincided with

fairly rapid minimum wage increases between 2012 and 2014 and a significant hike in real

wages in this sector.

A closer look at trends in labour intensive, resource intensive and capital intensive industries

within the manufacturing sector reveals that wage growth in labour intensive industries has

been more moderate than in the capital and resource intensive industries. Over time wages in

labour intensive manufacturing have hovered close to the minimum wage, while workers in

the capital intensive and resource intensive manufacturing sub sectors have enjoyed a

substantial wage premium. In 2014 the average wage for an employee in capital intensive

manufacturing was roughly 60 % higher than that paid to an employee in labour intensive

manufacturing. The corresponding wage differential in resource intensive manufacturing was

roughly 30 %. These wage differentials make sense given skill requirements and labour

productivity across the sub-sectors.

Overall these results suggest that the “old” minimum wage system was compatible with

robust employment growth across manufacturing in the last half decade and also that the

system of wage differentials across sub sectors of manufacturing was sufficient to encourage

up-skilling and labour mobility from low skilled labour intensive activities to higher skilled

capital intensive industries.

Table 2: Trends for regular wage employees in manufacturing

Manufacturing sub-sector 2004 2009 2014

Number of regular employees (millions)

Labour intensive 3.4 3.1 4.4

Resource intensive 2.8 2.9 3.6

Capital intensive 0.7 0.8 2.1

Total manufacturing employees 6.9 6.8 10.1

Total employees in all sectors 25.4 29.1 42.4

55 Aswicahyono, H., H. Hill and D. Narjoko. (2010) Industrialisation after a Deep Economic Crisis: Indonesia, Journal of Development Studies, 46 (6): 1084–1108.

43

Average wages for regular employees (IDR millions)

Labour intensive 0.7 1.0 1.4

Resource intensive 0.7 1.2 1.8

Capital intensive 0.9 1.4 2.2

Total manufacturing employees 0.7 1.1 1.7

Total employees in all sectors 0.7 1.3 2.0

Simple average minimum wage 0.5 0.8 1.5

Source: BPS (2014) Sakernas (selected years), Badan Pusat Statistik, Jakarta.

Over the last decade manufacturing exports have expanded, largely due to the resource

intensive and labour intensive manufacturing industries. They suffered a setback at the outset

of the global financial crisis but expanded again between 2009 and 2011. In the last few years

slow growth in advanced economies and more recently increasing uncertainty in large

emerging economies has started to weigh on manufacturing exports from Indonesia.

Agricultural exports have been relatively flat, while mining, oil and gas exports have declined

since the end of the commodity boom. In 2015 export performance did weaken due to

declining demand from China, Japan and ASEAN countries. But given there has been no

recent strengthening of labour market institutions or laws this very recent performance should

not be attributed to labour market rigidities. It is however worth emphasizing that there is

tremendous potential for expanding merchandise trade in the future. Indonesia currently only

accounts for 1% of merchandise trade exports and gains are needed to improve the ease of

doing business in order to optimize trade potential.

4. Labour reforms under the Widodo Government

4.1 The process leading to the 2015 wage reforms

There have been many proposals to reform the minimum wage fixing system in the last few

decades but until recently there was never sufficient consensus, or commitment from the

Government, to push through far reaching reforms. This changed with the election of

President Joko “Jokowi” Widodo in 2014. Perhaps in a bid to distinguish itself from the

previous Administration, the new Government rapidly announced reforms to fuel subsidies

that the World Bank and other economic institutions had long championed. The planning of

labour reforms was also initiated in the very early period of the new Administration.

In fact officials from the Coordination Board for National Investment (BKPM) were in

contact with officials from the ILO Jakarta Office in 2014 about potential reforms to the

minimum wage system. BKPM sought ILO cooperation in securing trade union support for

the reforms.56

The ILO subsequently organised a number of workshops for trade union

representatives in the months that followed to explore potential wage reforms. ILO officials

also issued reports, and made presentations that included significant criticisms of the old

minimum wage system.57

But these arguments failed to influence the main independent trade

unions. In fact the union movement was heavily committed to retaining the “KHL” process

56 Based on discussions between the authors and the Director of the ILO Jakarta Office in 2014. 57 ILO, “Indonesia: Trends in productivity and wages”, January 2015

44

described in the Box 3. The only reform the trade union movement supported was an

expansion in the number of items included in the basket of goods used to calculate the KHL

estimate.

Box 3: The “old” minimum wage system in Indonesia prior to Government Regulation

78 of 2015 and ILO criticisms of this system

Indonesia has a long history with minimum wage fixing and a comprehensive system of

Provincial, district and sector level minimum wages. Prior to October 2015 minimum wages

were adjusted annually based on decisions by Provincial Governors. In the old minimum

wage system there was considerable input into the decision making process from district level

wage councils that included representatives of local trade unions, local employers and local

government representatives from the Manpower Office. This tripartite wage council was

responsible for estimating the wage needed for a single worker to achieve a “minimum decent

standard of living” or the “kebutuhan hidup layak” (KHL) in that particular district.

The process of estimating the KHL involved undertaking a price survey of a “basket” of food

and other basic commodities. In the past there were often disputes in the wage council over

the methodology for implementing this survey. Arguments centred on the number of items

required in the “basket”, the quality of the goods and services to be measured as well as the

price movements. Consequently trade unions and employers often undertook separate surveys

and arrived at significantly different estimates of the KHL. They were then required to

engage in dialogue and negotiation designed to reach consensus on an official KHL estimate.

The wage council would then present recommendations to the Governor of the Province, and

the decision on the minimum wage level was ultimately in the hands of this democratically

elected regional politician. In many cases the Governor was presented with competing

estimates from trade unions and employers and also received input from Mayors and district

level leaders. The Governor was thus required to arbitrate between different estimates of the

required minimum wage.

The above process varies somewhat between Provinces. For example in Java different

minimum wage rates apply at the district level whereas in some other Provinces there is one

minimum wage. Minimum wage differentials between districts and Provinces can be very

substantial.

Despite the lack of trade union support for reform the Government decided to move ahead in

planning for a new minimum wage fixing system under the political leadership of the highly

experienced and well respected Vice President, Jusuf Kalla. The Vice President has strong

links to the national and international business community in Indonesia. The technical team

supporting this initiative was composed of senior staff from within the Office of the Vice

President in consultation with officials from the Economic Coordination Ministry (

MENKO), the Planning Ministry (BAPPENAS), the Manpower Ministry, the Coordination

Board for National Investment and a few international economic advisors. The reformers

were thus a mixed group of highly trained economists and a few people with more hands on

experience in the world of work. None of them had strong links to the trade union movement

45

and several had been party to previous failed attempts to reform the labour market. It is

understood that each of these Government institutions were invited to submit proposals about

how the minimum wage system should be reformed. The trade unions also submitted a

proposal in writing, which was to maintain the “old” minimum wage system with an

expanded range of goods used to calculate the KHL.

The internal discussions on the reforms dragged on, and it was not until October 2015 that

Government Regulation 78 of 2015 was made public. Under this regulation, all provincial,

district and municipal minimum wage levels should be adjusted annually to reflect the

percentage increase in the national CPI and the annual percentage increase in GDP.58

This

formula replaced the process described in Box 3, thus making adjustments to the minimum

wage automatic and eliminating the complex tripartite negotiations, and erratic adjustments,

that many have criticised in the past. In addition, for Provinces with minimum wage levels

that are currently below the level deemed adequate to meet “decent living needs”, the new

system provided scope for a further adjustment over the next four years until that threshold is

reached.59

The Government and the main employers’ organisation in Indonesia (APINDO) claimed that

the minimum wage reforms would depoliticise the process, provide greater certainty for

business about future labour cost trends and help eliminate the strikes and protests that have

traditionally accompanied annual minimum wage negotiations. Proponents of the reforms

have emphasised that they would produce a more “fair, simple and reliable” minimum wage

system. The World Bank has given the new minimum wage system a fairly positive review.

After highlighting the large nominal wage adjustments that took place in 2013 the World

Bank described the new approach as “promising”, but also argued that:

“…it fails to address productivity and still allows discretionary adjustments by

provincial Governors, continuing the uncertainty”.60

While most trade unions and employers understand the basic intention of the reforms was to

link annual minimum wage adjustments directly to official government data on national real

economic growth and inflation, there is still considerable confusion about various provisions

in the Regulation that go beyond the formula. For example, the Regulation also contains

provisions concerning wages scales and sector minimum wage levels that have not yet been

clarified in more detailed Ministerial decrees. In theory these provisions offer considerable

58 More precisely Article 44 (2) of Government Regulation 78 of 2015 provides a formula whereby the

minimum wage increase in all Provinces and all districts for 2016 would be based on the percentage increase in

the national CPI over the year to the September quarter of 2015 plus the percentage increase in real national

GDP over the year to the June quarter of 2015. This means that minimum wage decisions, that historically have

been discussed and determined in the latter part of the year and early part of the new year, will take into account

the most recently available date from the national accounts ( for real GDP) and CPI movements. Government

regulation 78 of 2015 envisages that this formula will apply for the next 5 years and thus minimum wages will

be adjusted annually to reflect recorded increases in the national CPI and real national GDP movements. 59 Regulation 78/2015, Chapter 9, Article 63 (a). 60 World Bank, “Indonesia’s Rising Divide: why inequality is rising, why it matters and what can be done”, November 2015, p 31.

46

flexibility, which if utilised carefully, would greatly influence the impact and acceptance of

the minimum wage reforms.

4.2 The impact of reforms on wage levels and economic development

Given the increase in real national GDP over the year to the June quarter of 2015 and CPI

movements over the year to the September quarter of 2015, the formula provided by the

Government would imply that minimum wage levels in most Provinces (those currently with

minimum wage levels above the decent living standard) should have increased by 11.5% in

early 2016. This is substantially less than the minimum wage increases many workers were

expecting prior to the reforms. For example, in Jakarta, during the last few months of 2015

trade unions were campaigning for a nominal minimum wage increase of 22 % for 2016. This

expectation was based on the survey they conducted of price movements in the basket of

goods used for measuring a “decent living standard” (KHL).61

The very large difference

between the official national inflation rate ( as measured by the consumer price index) and

the KHL, which is suppose to be a measure of inflation experienced by working families, can

be partly explained by rapid increases in food prices which make up a high proportion of the

KHL consumption basket.

In reality it seems that strict implementation of the new wage formula was delayed and

compromises were reached in many Provinces. For example, in late October 2015 the

Governor of Jakarta went ahead and announced a minimum wage increase for his Province of

14.8 % for 2016. This falls somewhere between the level suggested by the new minimum

wage formula and the demands from the trade unions. One of the highest increases to the

minimum wage in 2016 was the 17.2% increase in the Province of Gorontalo. The Province

of East Nusa Tenggara (NTT) also announced an increase substantially above that implied by

the formula (the increase was 14.0 %). The Manpower Ministry has reported that 17

Provinces have implemented minimum wage adjustments for 2016 that are not fully in

conformity with the new wage regulations. Part of the explanation for the variation observed

so far is that “decent living standard” surveys and tripartite negotiations over the 2016

minimum wage adjustment were well advanced in the Provincial wage councils prior to the

15 October 2015 announcement. It is therefore difficult to be precise about the impact the

recent reforms will have on minimum wage levels in 2016.

It is therefore easier to look backwards, rather than forwards, in trying to assess the likely

impact of the wage reforms. Figure 11 provides an indication of the impact of the reforms on

wage levels. It depicts actual past minimum wage trends in the Provinces of Jakarta and DI

Yogyakarta, as well as the simple average of minimum wages across all Provinces. These

actual outcomes are compared over the last 6 years with what would have happen to

minimum wages had they been adjusted by the new formula. It can be seen that use of the

formula would have significantly lowered minimum wage levels in Jakarta. The vast bulk of

the gap between the actual minimum wage outcome, and what would have transpired if the

formula had been in place, occurred in 2013. In that year the nominal minimum wage in the

Jakarta Province jumped 44 %. This underscores one important advantage of the new

61 Elyda, C. (2015) Workers stage protest against new wage formula, Jakarta Post, 31/10/2015.

47

formula: it will help smooth out large nominal wage increases that have occurred from time

to time in particular Provinces.

Looking at the simple average of minimum wages across all Provinces it can be seen that

actual outcomes were very slightly below what the formula would have produced between

2010 and 2012. It is only in the last three years that the actual average minimum wage for all

Provinces exceeds what would have occurred if the formula had been applied. Finally, Figure

11 shows that the application of the new minimum wage formula in a traditionally low wage

Province, such as DI Yogyakarta, would have produced minimum wage levels over the last 5

years that are well above the actual outcomes, with the gap expanding gradually over the

period.62

Figure 11: Minimum wage growth trends 2010-2016

Source: Authors calculations based on BPS data.

If we undertake the same exercise but look back over a longer time period it becomes

apparent that the application of the new minimum wage formula could have led to

substantially greater wage-push inflation in most Provinces over the last decade. Figure 12

62 The calculation about the impact that the new minimum wage formula would have had on wage trends over

the last 5 years in DI Yogyakarta does not take into account the provision in Article 63 (a) of Regulation 78

which allows for wage increases beyond what the standard formula would imply in Provinces with minimum

wages below the “decent living standard”. Thus application of the new formula may have pushed up minimum wages in DI Yogyakarta even faster than is suggested in Figures 2 and 3.

48

depicts actual minimum wage levels and compares this to what would have happened if the

formula was applied from 2003 onwards.

The “old” minimum wage fixing system generated very modest adjustments between 2003

and 2012 in most Provinces. This was a period in which real GDP growth was in the 5 % to 7

% range and the average annual increase in the CPI was 7.3%. Consequently, application of

the formula would have generated annual nominal minimum wage increases of between 12 %

and 15 % throughout this decade, and for most of the period the increases would have been at

the higher end of this spectrum. Consequently, as can be seen in Figure 12, even in a high

wage Province like Jakarta, the application of the minimum wage formula would have led to

significantly higher minimum wage levels throughout the entire period from 2004 to 2012. It

is only since 2013 that the actual minimum wage in Jakarta very marginally exceeds what the

formula would have generated. For a low wage Province, like DI Yogykarta, application of

the new formula would have produced a substantially higher minimum wage in every year

from 2004 to 2015. Moreover the gap would have progressively widened over time.

It therefore seems reasonable to conclude that the application of the minimum wage formula

would have led to higher nominal wage levels in most regions and most years during the last

decade compared to what actually occurred. This was a period when the Indonesian

authorities battled to contain inflationary pressures and decided to exercise restraint with both

monetary and fiscal policy to achieve macroeconomic stability. The Indonesian authorities

may have faced a much tougher challenge, and perhaps been inclined to apply even more

restrictive macroeconomic policies, if the minimum wage formula contained in Regulation 78

of 2015 had been operational in this period.

49

Figure 12: Minimum wage growth trends 2003 to 2016

Source: ILO calculations based on BPS data.

The counterfactual information depicted in Figures 11 and 12 should be treated with caution

because it is unlikely that the new formula, linking minimum wage increases to increases in

GDP and the CPI, would not have been supported by policy makers in the 2000s. This was a

period of relatively high inflation and policy makers in the key economic Ministries would

have been concerned about generating a price-wage-price spiral. On the other hand, the

counterfactual evidence does help to demonstrate that the recent minimum wage reforms are

rather generous towards the workers. This is particularly so in regions where wages have

traditionally lagged behind the pace setter Provinces like Jakarta. These low wage Provinces

are where trade union membership is low and unions are politically weak, such as Central

Java, DI Yogyakarta, NTT and NTB.

It is well known that many of the key economic Ministries and Bank Indonesia, would have

preferred a less generous minimum wage formula in 2015. For example, some important

participants in the internal Government debate are known to have favoured linking nominal

minimum wage adjustments to productivity improvements only. Those responsible for

macroeconomic policy are known to have argued that avoiding a link between minimum

wage adjustments and the CPI would have helped eliminate any price-wage-price spiral.

Other participants in the internal debate are known to have argued that an inflation

adjustment was warranted, but that the link to GDP should have been more modest. For

example, there were versions of the formula, that were eventually rejected, that included a

50

coefficient of between 0.2 and 0.6 in front of the GDP variable. These types of argument

would have carried even more weight during the mid to late 2000s when inflation was higher

than today.

It is probably fair to say that the formula adopted in Regulation 78 of 2015 was a compromise

between what the economists favoured and what was considered politically justifiable.

Looking forward, from a purely economic perspective, adjusting all minimum wages

annually by the full value of real GDP plus CPI movements in the previous year - regardless

of general economic circumstances - may be problematic. Particularly if the objective of the

reforms is to promote the international competitiveness of Indonesian labour intensive

manufacturing. As mentioned above many foreign investors in the clothing and footwear

sectors have indicated that they were interested in expanding their factories, or opening new

production facilities in Central Java and other low wage Provinces. This is mainly because

wage levels in these regions are very competitive with countries like Vietnam and Cambodia.

Indeed current wage levels in Central Java are not much higher than Bangladesh (Figure 13)

but this margin will probably increase in the future with the application of the new minimum

wage formula.

Looked at from this perspective, the likely economic impact of the minimum wage reforms

might vary from region to region. While the reforms will help eliminate very large nominal

wage increases in certain years the impact over the medium to longer term could be

inflationary. As mentioned above, the proponents of the minimum wage reforms have

emphasized that a formula based approach will produce more “fair, simple and reliable”

outcomes. Providing enterprises with the ability to make reliable assumptions about future

labour costs is important for encouraging business confidence, investment and job growth.

Thus the formula approach might well be seen as desirable for business providing that the

wage outcomes generated by the formula preserve, or enhance, the international

competitiveness of domestic producers. Of course if the formula being used results in

investors being able to calculate, with a high degree of certainty, that wage costs in Indonesia

will accelerate more rapidly than in competitor countries, this may not be conducive for

business confidence and investment. In short, simplicity and increased certainty about wage

outcomes are desirable, but only if they point in the right direction.

3.3 The role of minimum wages and collective bargaining

The Government has clearly indicated that it will not reopen the debate about the minimum

wage reforms in the short term. However the Government is committed to review the

reforms after 5 years. With this in mind there are many issues to consider when constructing

a sustainable long term wages policy. The role of minimum wages in the overall wage fixing

system in any nation depends to a large degree on what other mechanisms exist for adjusting

wages. If for example, there is a comprehensive system of collective bargaining at enterprise

level that genuinely reflects the principles of “good faith” bargaining over wage levels, and/or

a similar system at industry or multi-employer level, the burden on the minimum wage

system is reduced. But in countries where the system of collective bargaining is

51

underdeveloped, or non-existent, we believe the minimum wage system needs to provide

more than a “floor” to the wage structure.

Not all economists would support this view. In fact many economists see intervention

through minimum wage fixing as a rigidity that interferes with “market forces”. Others might

concede there could be a minor role for minimum wages to set a very basic floor to the wage

structure but beyond this wages should be established without any government or third party

intervention.

There are a number of more structural and industrial relations issues to consider in designing

a desirable wage fixing system. For example, the “old” Indonesian minimum wage system

(that is the system prior to October 2015) has been criticised by the ILO and others because it

generated very large geographical differentials in minimum wages. The ratio of the highest to

lowest Provincial minimum wage in 2014 was around 2.7 to 1. This differential is very high

when compared to other countries with a regional minimum wage fixing system. Some

observers might therefore suggest it would be better to have either a single national minimum

wage or at least more modest minimum wage differences across Provinces.

Other observers argue that the existing minimum wage differentials across Provinces largely

reflect the vast differences in living costs in this diverse country. Price differentials between

cities like Jakarta and locations in Central Java are very substantial despite being

geographically fairly close. One advantage of these large differentials was that the system

provided flexibility to tailor wage levels to the needs of local industry, and the economic

strategy of the region. Heterogeneous minimum wage levels across regions enabled local

government and the social partners the discretion to use wage policy as an instrument of

industry and labour market policy. For example, it allowed the representatives of workers,

employers and local Government in Central Java scope to gear their annual wage increases to

the needs of labour intensive manufacturing. It enabled them to slightly under-cut wage levels

in other countries, like Cambodia and Vietnam, who are very competitive in the low labour

cost clothing and footwear export sector. Figure 13 compares minimum wages in Central

Java with the top 20 middle and low income countries with a substantial clothing export

sector. As can be seen in early 2015, Central Java had a minimum wage below a hundred US

dollars per month. There were only three other countries with a minimum wage below this

threshold. This helps explain why much of labour intensive manufacturing in Indonesia is

moving, or contemplating a move to this part of the country.

Figure 13: Monthly minimum wages for the top 20 apparel-exporting middle and low

income countries (USD, 01 January 2015)

52

Source: ILO (2015) Minimum wages in the global garment industry: Update for 2015, ILO

Regional Office for Asia and the Pacific, Bangkok. Note: Lowest relevant rate applicable to

unskilled garment workers. Figures for Indonesia are those applying in Central Java.

By contrast in a Province such as Jakarta, which has undergone a dramatic transition in the

last twenty years to become the main hub for the financial and trade components of the

service sector, a very different wage policy is required. This is a region where income

differentials in the top half of the income distribution are very substantial. In Jakarta, wage

policy needs to play an active role in containing the income gap between the elite, who

engage in conspicuous consumption, and the vast mass of workers with incomes around or

below the minimum wage. It might therefore be argued that the promotion of social inclusion

and political stability warrant a higher priority, than say international competitiveness, when

determining wage outcomes in places like Jakarta. The resource rich regions, such as Papua

and Sulawesi, also require wage policies that are more tailored to their specific economic

context.

3.4 The impact of the 2015 wage reforms on trade unions and the balance of power at the

workplace

The independent trade union movement in Indonesia has expressed grave concerns about the

new minimum wage system. They would dispute the assertion in this paper that the new

formula based system could be considered generous from a worker perspective. In criticising

the reforms, trade unions have highlighted the importance of social dialogue and the need for

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the stakeholders of the economy to play a role in determining wage policy.63

Leaders of

several large national trade union confederations have set out in writing their reasons for

rejecting the reforms.64

They claimed that provisions of the National Constitution have been

breached in this process because, in their view, the link of the minimum wage to “decent

living standards” has been severed.65

The international trade union movement has strongly

supported the criticisms made by national trade unions in Indonesia.66

Trade unions have also drawn attention to ILO Convention No 131 concerning minimum

wage fixing which states:

“Provision shall be made, in connection with the establishment, operation and

modification of such (minimum wage) machinery, for full consultation with

representative organisations of employers and workers concerned…”

There has been considerable debate about whether “full consultation” with both social

partners took place in Indonesia prior to reforms being announced on 15 October 2015. As

indicated above the Government attempted, in the early stages of the reform process, to use

the ILO as a bridge to the trade unions. But this process was unsuccessful because the trade

unions were not prepared to contemplate a departure from their traditional reliance on market

surveys ( the KHL process) and social dialogue to determine what level of minimum wage

was required to provide a decent living standard.

Also as noted above, debate about the minimum wage reforms did take place over a period of

many months between various Ministries and Government Agencies with the technical

support of international organisations and academics. It is also recognised that the main

employers’ association in Indonesia (APINDO) played a significant role in these discussions.

However for much of this period the mandate for the national tripartite committee had

expired and therefore the official forum for tripartite consultation was not functioning. The

extent to which informal discussions with trade unions took place, and the extent to which

this included all the recognised trade union confederations, remains a moot point. For their

part the independent trade unions deny being invited by the Government to either formal or

informal consultations.

An essential aspect of the wage reforms was limiting the scope for negotiations over the

minimum wage within the wage councils that have existed for this purpose, and curtailing the

scope for regional political figures (Governors, Regents and Mayors) to influence the final

decision about minimum wage adjustments. The Government has suggested that the reforms

related to these two aspects is what will guarantee greater certainty for both business and

63 This approach is in line with Indonesia’s 1990 commitment to ILO Convention Number 144 on Tripartite

Consultation (1976). This Convention requires tripartite consultation in relation to the formulation of labour and

employment policies, including wage formulation. At the time of negotiating the reforms, the mandate for the

national tripartite committee had expired, and therefore an official forum for tripartite consultation on

employment policy was not functioning. 64 The English translation of this document is titled “Reasons Indonesia trade union rejected draft of

Government regulation in minimum wage only based on inflation and economic growth”. 65 http://sp.beritasatu.com/nasional/buruh-desak-pemerintah-tunda-pengesahan-rpp-pengupahan-jadi-pp/98670 66 ITUC press release 16 October 2015, “….”

54

workers about future wage levels. However this approach might be inconsistent with a key

provision in ILO Convention 131 concerning Minimum Wage Fixing. Article 4.3 of

Convention 131 states:

“Wherever it is appropriate to the nature of the minimum wage fixing machinery,

provision shall also be made for the direct participation in its operation of

representatives of organisations of employers and workers concerned…”

The ILO recommends a number of criteria, or indictors, that should be considered when

adjusting minimum wages. ILO Recommendation No. 135 concerning Minimum Wage

Fixing, provides the following list of criteria for this purpose:

- the needs of workers and their families;

- the general level of wages in the country;

- the cost of living and changes there in;

- social security benefits;

- the relative living standards of other social groups, and,

- economic factors including the requirements of economic development, levels of

productivity and the desirability of attaining and maintaining a high level of

employment.

A minimum wage adjustment formula that takes into account both national real GDP and CPI

movements would be consistent with some, but not all, of the above mentioned criteria. In

particular, the formula adopted in Indonesia would seem to provide an inadequate recognition

of the needs of the worker and their families, and also the relative living standards of other

social groups or the general level of wages in the country.

An important issue with the wage reforms is the impact they will have on the balance of

power at the workplace. Trade union leaders have traditionally utilised minimum wage

negotiations to raise their public profile, demonstrate their ability to win wage increases and

recruit members. Key leaders of the independent trade union movement in Indonesia claim

that making the minimum wage process automatic, through the introduction of a formula,

will deprive the unions of a key weapon in their power struggle with employers. This view is

supported by academics that have studied trade unions and industrial relations in Indonesia. A

recent study concluded that:

“First and foremost, it should be noted that minimum wage setting is the only forum

on which Indonesia’s trade unions can actually show what they are doing to defend

their members and the workers in general. Modern industrial relations remain in

their infancy and collective bargaining is weakly developed, not least because unions

willing to bargain meet with a number of serious legal constraints…” 67

67 Tjandra, S. and Klaveren, M. (2015) “Indonesia” in Klaveren, M., Gregory, D. and Schulten, T. (eds) Minimum Wages, Collective Bargaining and Economic Development in Asia and Europe, Palgrave, London.

55

Strong labour market institutions, such as trade unions and minimum wages, are essential in a

country where economic and political power remains highly concentrated. One estimate

suggested that around 60 % of listed corporate assets was controlled by just 10 families in the

mid-1990s.68

Since that time, economic diversification and foreign investment should have

reduced the concentration of ownership. However, a recent review of the data on ownership

patterns concluded that by 2008 the decline in ownership concentration was relatively modest

and in fact “the concentration of ownership by dominant families remained very high”,

although many of the key families are different today from those who controlled big business

in the 1990s.69

Moreover in Indonesia the close nexus between corporate and political power

means that the individual worker faces a massive power imbalance in the factory, on the

construction site or in any of the mega retail outlets that dominate the Jakarta skyline.

There has been some suggestion that a more restricted use of minimum wages, along the lines

of the recent reforms, would allow greater scope for collective bargaining. However, the

notion that free collective bargaining between equal partners would take place if only the

intrusive minimum wage system was curtailed is highly optimistic. There are some examples

of good collective bargaining at the enterprise level particularly in multinational companies

that regularly engage in collective bargaining in other parts of the world. However, the vast

majority of employers in Indonesia remain reluctant to engage in negotiations over wages and

working conditions that go beyond the minimum standards reflected in labour laws and

regulations.70

For example, all minimum wages in Indonesia are only supposed to apply to workers with

less than one year of work experience in an enterprise. For workers with longer tenure the

law has stated for many years that there should be a “wage scale” with rising wages to reflect

greater experience. This is an issue that would have been suitable for industry or enterprise

collective bargaining in the past. However the vast majority of enterprises in Indonesia have

no wage scale or, if they do, it is determined unilaterally by management. This means that in

practice workers with many years of tenure within an enterprise, and those with advanced

skills, receive wage rates around the minimum wage. Trade unions claim that attempts to

initiate collective bargaining on wage scales, or any other issue, often results in dismissal of

the union delegate, or the person being transferred to another function or intimidated in some

other way. Another common response is for trade union members to be denied access to

training programmes, scholarships and other opportunities to support career progression.71

This, combined with very high rates of minimum wage non-compliance, explain why in

Indonesia the ratio of the minimum wage to the average wage is high compared to many

other countries. Some observers focus on the ratio between the minimum and average wage,

68 Claessens, S. and Djankov S. (2000) “The separation of ownership and control in East Asian corporations”,

Journal of Financial Economics, Issue 1-2, pages 81-112. 69 Richard W. Carney and Natasha Hamilton-Hart, “What do changes in corporate ownership in Indonesia tell

us?”, Bulletin of Indonesian economic Studies, Vol 51, No 1, 2015, p 142. 70 Puraka, Y. (2008) Situation of the automotive industry & the role of automotive trade unions representatives

in Indonesia, Friedrich Ebert Stiftung, Indonesia Office, Jakarta. 71 Puraka, Y. (2008) Situation of the automotive industry & the role of automotive trade unions representatives in Indonesia, Friedrich Ebert Stiftung, Indonesia Office, Jakarta.

56

and high rates of non-compliance as evidence of “labour market rigidities” and a reason for

lowering the minimum wage. The reality is that even if official minimum wages were cut

substantially, the relationship between the minimum and average wage is unlikely to change

significantly. Given the existing power imbalances at the workplace, and the absence of

collective bargaining, the average wage would just track the minimum wage down to the

lower level leading to widening income inequality in the top half of the income distribution

and increased poverty.

As we saw in the previous section Indonesia had a long history of trade union repression by

both the police and military throughout the 32 year Suharto regime. Given this history, the

circumstances and attitudes required for good faith bargaining at the enterprise level are not

present in many industries and Provinces throughout Indonesia. At the very least a significant

change in attitudes would be required for effective collective bargaining in the short to

medium term. Studies have suggested that in cases where some collective bargaining does

currently take place at enterprise level, the nature of the collective contracts resulting from

this process suffer from serious limitations.72

In the vast majority of enterprises, collective

contracts tend to merely replicate provisions in labour laws and government regulations,

rather than advancing on these minimum statutory requirements. In many cases the focus of

enterprise collective bargaining is on the extent to which labour laws and employment

regulations will be infringed rather than improved upon (see Section 5.3 for details).

There is however a more positive experience with collective negotiations over minimum

wages at a multi-employer, sector or industry level in some Provinces (see Box 4).

Historically in Indonesia, there has existed scope for establishing a “minimum wage” within a

Province that applies to a group of companies or a sector. For example, in the Province of

Jakarta there is a separate minimum wage for workers in the “automobile, large food and

beverage sector” which is significantly above the basic minimum wage that is applicable to

all workers in the Province.

An examination of these multi-employer /sector/industry level minimum wage provisions

across Indonesia reveals a very diverse pattern of wages. In most Provinces the sector

specific minimum wages are above the general Provincial or district minimum wage, but

there are some examples where the wage levels specified fall below this threshold. In theory

it would be illegal to have sector specific minimum wages below the Provincial minimum

wage, but an examination of minimum wage agreements shows that they do exist.

The new Government wage regulation adopted in October 2015 (Regulation 78 of 2015,

Article 49) makes provision for Governors to establish sector level minimum wages. Most

importantly, the new Government Regulation clearly states that the level of the minimum

wage for the sector should be based on an agreement between an employers’ association and

a trade union from the respective sector. Regulation 78 of 2015 does not restrict the level of

minimum wages for a sector, or specify the factors to be taken into account in adjusting this

level, other than to indicate that sector level minimum wages must be higher than the

72 Puraka, Y. (2008) Situation of the automotive industry & the role of automotive trade unions representatives in Indonesia, Friedrich Ebert Stiftung, Indonesia Office, Jakarta.

57

Provincial minimum wage. The formula approach therefore does not apply at this level and

free collective bargaining is foreseen.

The new minimum wage regulations also state that the Provincial and district wage councils

will have a role in providing the Governor “advice and considerations on the leading sectors”

when sector minimum wages are set. Prima facie, these provisions in the new Government

wage regulation provide considerable flexibility and might be used to establish a more

comprehensive and coordinated sector level collective bargaining system. Article 50 of

Government Regulation 78 states that “further provisions on the provincial, district and

municipal minimum wages are to be set out in Ministerial regulations”. These Ministerial

regulations have not yet been announced. They will be critical to the further evolution of

industrial relations in Indonesia.

Government Regulation 78 of 2015 also makes provision for the development of wage scales

within enterprises. Article 42 (2) states that : “wages for employees with one year of service

or longer shall be negotiated bipartitely between employees and the employer in the company

concerned”. However Article 14 (2) states that “the wage structure and scale…..shall be

prepared by the employer by taking into account category, position, length of employment,

education and competence.” These provisions have generated considerable confusion. The

former refers to negotiations between employees and employers without making reference to

any role for trade unions, while the latter appears to suggest that wage scales will result from

unilateral action by the employer.

At the time of writing the Government is yet to issue the detailed Ministerial decrees that will

spell out more precisely how these provisions in the Government Regulation are to be

implemented. If the Ministerial decrees were to make it clear that trade unions should have a

role in establishing wage scales in those industries and enterprises where they have a

presence, and wherever possible collective bargaining should be used to set wages scales, this

would help overcome some of the trade union concerns with Government Regulation 78.

These issues, and recommendations about a possible way forward, are taken up in Sections

5.1 and 5.2 of this paper.

58

Box 4: Sector and Industry Level Minimum Wages in Indonesia

Sector minimum wages exist in many, but not all, Provinces throughout Indonesia. For

example, Central Java and D.I. Yogyakarta do not have sector minimum wages as yet. The

system for sector minimum wages has largely developed through a bottom up process,

where trade unions in various industries have organized and bargained for wages higher

than the district or Provincial minimum wage over time. For instance, in Tangerang

District sector minimum wages are set 5%, 10% and 15% higher than the district minimum

wage for various industries or groups of industries. As the system of minimum wage

bargaining developed within the context of political decentralization, and with this bottom-

up approach, the structure of sector wages is diverse. For example, in Purwakarta District

the overall district minimum wage was IDR 2.6 million per month in 2015 and five sector

minimum wage levels existed for workers in selected industries that were both above and

below this minimum wage, as follows:

IDR 2.1 million for workers in the clothing, toy, hat and leather goods industries

that have less than 5 years’ work experience or workers employed by enterprises

that have operated for less than 5 years.

IDR 2.3 million for workers with more than 5 years’ experience in the clothing, toy,

hat and leather goods sectors.

IDR 2.9 million for workers in the paint, digital medical equipment, welding

electrodes and injection mouldings sectors.

IDR 3.2 million for workers in the rayon and viscose sector.

IDR 3.4 million for workers in the automotive and large food and beverage sector.

It is interesting that workers in the clothing sector within this district receive a wage that is

well below the district minimum wage. Moreover, there is a clause that specifics that

workers with less than five years of experience in the clothing sector are entitled to a wage

of IDR 2.1 million, while workers with more than five years of experience in the same

industry are entitled to a wage of IDR 2.3 million, both of which are still below the district

minimum wage of IDR 2.6 million. It is evident that the minimum wage is not really used

as a “floor” for wage structure but rather represents a standard wage which is applied to

workers with many years of experience. At the other end of the scale workers in the

automobile, large food and beverage sector were receiving a minimum wage that was

roughly 30 % above the district minimum wage.

In Bekasi District the minimum wage was IDR 2.9 million per month in 2015 and four

sector minimum wage levels existed for workers in selected industries that were both

above and below this minimum wage, as follows:

IDR 2.5 million for workers in the paramedic and health clinic sector.

IDR 3.3 million for workers in the oil and gas, beer, paper, chemical, rubber,

asbestos, machinery and equipment, electronics, automotive, toy and construction

sectors.

IDR 3.1 million for workers food and beverage, textiles, print media, glass, metal,

59

compressors, telephones and cables, and light bulb sectors.

IDR 2.9 million for workers in the milk processing, clothing, leather, and

warehousing sectors.

These sectors are very heterogeneous and the various industries within each sector may

face diverse economic circumstances.

In Bekasi District there is a special exception from the minimum wage made for workers in

the paramedic and health clinic sector, with workers in this sector being entitled to a

minimum wage of IDR 2,470,000 instead of the district minimum wage of IDR 2,925,000.

The 2016 minimum wage negotiations in Bekasi resulted in the district minimum wage

rising in line with the formula provided in Government Regulation 78 of 2015 ( 11.5%

increase). The district retained its four sector level minimum wage levels and the more

capital intensive sectors managed to secure wage adjustments slightly about (1 to 2

percentage points above)the adjustment applied to the district minimum.

The case of Sumedang District is also noteworthy. In Sumedang they have minimum

wages for two sectors as follows:

IDR 2.0 million for workers in sub-districts including Jatinangor, Tanjungsari,

Cimanggung and Pemulihan which have industrial processing zones, as well as for

workers who work for enterprises with their headquarters office situated outside the

district.

IDR 1.3 million for all other workers.

Therefore, in Sumedang sector wages are influenced by industrial zoning.

Generally speaking, the definition of a sector for the purpose of minimum wage fixing has

been very ad hoc in the past. As the above examples demonstrate many of the sectors

combine capital intensive and labour intensive industries. The sectors are often so broad

that they combine enterprises with vastly different levels of labour productivity, skills,

investment levels, employment costs per output and other labour market indicators.

Based on the small sample of sector minimum wages examined by the authors it appears

that sector minimum wages can be up to 30 % higher than the district minimum wage and

up to 15 % lower than the district minimum wage.

5. The impact of key labour institutions and labour laws in the last decade and

recommendations for reform

We know try and assess how the evolution of key labour market institutions impacted on the

economy and the labour market in the last decade. This section includes recommendations

about labour reforms that could be the subject of national level tripartite dialogue in

Indonesia

60

5.1. Minimum wage fixing

Appendix 1 shows minimum wage levels and annual percentage adjustments for all Provinces

and the simple national average for the period from 1997 to 2014. As noted previously the

pace of minimum wage adjustments has historically been very uneven, with rapid real

increase in some years, followed by lengthy periods of real wage restraint. For example, in

DKI Jakarta, which has always been a minimum wage pace setter, the average annual

nominal increase in the minimum wage in the period from 1997 to 2002 was 29 %. However

this was followed by an eight year period, from 2003 to 2010, when the average annual

nominal adjustment was just 8 %. This was less than the national inflation rate for much of

this period.

Given the absence of both collective bargaining and wage scales in most enterprises, the

minimum wage system in Indonesia has always exercised a major impact on the general wage

level and labour costs throughout the economy. Minimum wage restraint in the mid to late

2000s and early 2010s thus led to very moderate increases in average real wages.

Figure 14 shows trends in average real wages for Indonesia as a whole over the period 2005

to 2015. Two different deflators are used: the national CPI and the GDP implicit price

deflator and they provide vastly different outcomes. It is common practice to use the CPI

deflator when estimating the purchasing power of wages, while the GDP deflator is more

relevant when trying to gage labour costs and assessing the implications for economic

competitiveness.

When average nominal wages are deflated by the CPI the result is a fairly steady long term

upward trend from 2005 to 2013 and then a sharp dip in 2014 and 2015. But, most

importantly, the growth in average real wages using this indicator never exceeds the growth

in labour productivity ( broadly measured) at any stage in this period. Real wage increases in

line with productivity improvements should not be considered excessive since this means

workers are merely receiving their fair share of the growth dividend.

When the GDP deflator is used to obtain real average wage trends a very different picture

emerges. It is evident that from Figure 14 that real wages declined sharply between 2006 and

2008 and only regained their 2005 level after 2012. This measure depicts a sharp increase in

real average wages in 2013, but this jump is not nearly sufficient to make up for the

productivity improvements that had taken place in the previous 8 years. Real average wages

then decline somewhat in 2014 and 2015. On this measure the gap between real average

wages and productivity improvements is very significant throughout the entire period 2005 to

2015.

Figure 14 illustrates that the indicator used to gauge inflation is extremely important in

deciphering what has been happening to real wages and labour costs in the last decade. The

common belief that real wages have been growing strongly, and this has threatened the

international competitiveness of Indonesian industry, is not consistent with all the evidence.

One explanation for the dramatic difference in real wage trends using these two deflators is

the impact of food prices. Food price inflation has been significant in the last decade and

61

there are many observers who believe the CPI fails to adequately reflect the impact of food

prices, particularly for the low paid. This is why trade unions have been keen to participate in

the price surveys ( KHL estimates) that were previously used to adjust minimum wages.

Figure 3: Labour productivity and real wages in Indonesia, 2005-2015 (Index, 2005 =

100)

Source: BPS (2014) Labourer situation in Indonesia: August 2014, Badan Pusat Statistik,

Jakarta; ILO staff calculations based on revised population weights and backcast for 2011-

2014. ILO staff calculations based on BPS, National Accounts (February 2015).

To take this analysis further and consider the impact of the minimum wage system on real

wages in labour intensive sectors of the economy, Figure 15 examines real average wage

trends for production workers in manufacturing and non-managerial workers in the hotels

component of the services sector. The deflator used in Figure 15 is the CPI not the GDP

deflator. This indictor shows that in the manufacturing sector real wages for production

workers declined between late 2003 and 2011, and then increased sharply in 2012 and 2013

before dipping again. In the services sector real wages for non-managerial workers declined

slightly between late 2003 and late 2012. They then rose sharply in 2013. If the GDP deflator

62

was used, instead of the CPI, the increases in real wages for these two occupational groups

would be far more moderate throughout this period.

Figure 4: Real average wage trends for production workers in manufacturing and non –

managerial wage workers in hotels, 1996-2014


With real average wages either declining slightly or stagnating for most of the period between

2003 and 2012, this meant that workers did not receive their share of productivity

improvements and real unit labour costs must have declined. During this decade of real wage

restraint up until 2013 the ratio of the minimum wage to the average wages was creeping up (

Figure 16). This was the result of two factors: first, the absence of any real collective

bargaining over wages and the absence of wage scales for workers with more then one year

of tenure; and second, high levels of non-compliance with minimum wage laws. This lengthy

period of real wage restraint eventually led to pressure for wage “catch-up” and the

substantial increases in the minimum wage in 2013. This drove the ratio of the minimum

wage to average wages significantly higher. Figure 16 illustrates that in 2001 the simple

average national minimum wage for Indonesia was 58.5% of the national average wage and

by August 2015 this ratio had increased to 82.9%. The ratio of the minimum wage to the

average wage is now high by international standards. This is often cited as evidence of labour

market “rigidities” in Indonesia. In fact it is evidence that labour market institutions, such as

collective bargaining and labour inspection.

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Real Wage for Production Workers in Manufacturing Below Supervisory Level Real Wage for Production Workers in Hotels Below Supervisory Level

63

Figure 5: Trends in nominal minimum and average wages for Indonesia, 2001-2015

(Rp)

Source: BPS (2015) SAKERNAS, Badan Pusat Statistik, Jakarta.

It is evident from the trends discussed above that the Indonesian minimum wage fixing

system, was able to deliver a period of sustained real wage restraint from 2003 to 2012. This

possibly contributed to the sustained, albeit not spectacular, recovery in the manufacturing

sector after the devastation of the Asian economic crisis. These outcomes are critical to any

assessment about labour reform priorities today.

This extended period of wage restraint was, in part, a consequence of the 2003 Manpower

Act that has been the subject of criticism for injecting “inflexibility” into the labour market

and the complex process of social dialogue that was used to set minimum wage prior to

October 2015.

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Simple average national minimum wage Average net wages per month for employees Percent of minimum wage to average net wages

64

In 2010 the World Bank appears to have reached a similar conclusion, when they stated that:

“ Increases in minimum wages began to level off following the passage of the

Manpower Law (No 13/2003), and since 2005, have grown more slowly than average

wages….. The slow-down may not be entirely related to the introduction of the new

law. Wage councils, instituted already in 2001, possible played a greater role limiting

the growth of real minimum wages by negotiating nominal minimum wage increases

on the basis of price surveys rather than negotiations. In addition, tripartite level

discussions may have benefited from learning through experience, as parties engaged

in more constructive minimum wage negotiations and took economy-wide

considerations into account”. 73

Based the above quote it would seem reasonable to conclude that in 2010 the World Bank

had a favourable opinion of social dialogue, and favoured trade unions and employers having

a hands on role in the minimum wage fixing process.

As noted previously the Government plans to review the new minimum wage fixing system

in 5 years. When this review takes place consideration might be given to reintroducing some

elements of the old minimum wage system. For example, under the “old” minimum wage

system (that is the system prior to October 2015) trade unions and local level employer

representatives in Indonesia had been gaining some basic experience in collective

negotiations and general economic debate precisely because they were engaged in the

complex minimum wage fixing process at Province and district level. Trade unions and local

level employers in Indonesia had been progressively developing important economic skills

and, as the World Bank recognised in 2010, appreciating the need to consider the wider

public interest because of their participation in the wage councils.

As we have seen under this “old” system, the trade unions and employers had to regularly

implement a cost of living survey to get their estimate of what wage increase was required to

achieve, or maintain, a decent living standard ( their so-called KHL estimate). In so doing,

there has often been considerable tripartite discussion about the basket of goods and services

that are necessary to provide a decent living standard. At times this debate has focused on the

number of items that should be included in the basket, and what standard of quality the goods

and services need to meet. In some of the literature on minimum wages in Indonesia,

including reports by the ILO, this debate within the wage council has been portrayed as

undesirable.

Yet similar debates take place in many countries when the social partners are negotiating

what constitutes a “living wage”. This is similar to the requirement in the Indonesian

legislation that the minimum wage should provide a “decent living standard”. In any wage

system with such a requirement, it is necessary to consider at least two key issues. First, is the

base, or starting point, for minimum wage negotiations appropriate? For example, in current

circumstances in Indonesia one would need to ascertain whether or not minimum wage levels

that prevailed in 2015 provided a “decent living standard”. If the answer to that question was

73 World Bank (2010) Indonesian Jobs Report: Towards Better Jobs and security for All, World Bank Jakarta.

65

definitely yes, then the second issue which must be addressed is what level of minimum wage

increase would be required in 2016 to maintain a “decent living standard”.

In some circumstances a formula might be a useful starting point for addressing the second

question. But it would be very difficult to design a formula to help resolve the first question.

The notion of a “decent living standard” or a “living wage” calls for subjective judgements. It

therefore seems strange to criticise a process of social dialogue and collective negotiations for

entering into debates about measurement issues where there is bound to be space for

subjective judgements.

Under the “old” minimum wage system in Indonesia, after establishing an estimate or

competing estimates of the KHL, the social partners were, in theory at least, required to

engage in an economic debate within their local wages councils with officials from the local

Manpower Office, the central statistical office and other government agencies. The actual

practice in these wage councils probably varied from region to region with some taking their

responsibilities more seriously than others. However a forum did exist where the regional

social partners and local government agencies could consider key variables like local

economic growth trends, productivity, investment levels, indicators of enterprise profitability

and various labour market indicators. In all probability the level of economic discourse may

have been less than optimal in many wage councils but, rather than abolishing this process,

thought could have been given to upgrading the technical skills of the participants and

providing them with access to expert advice.

From the above explanation it is evident that the “old” minimum wage system had features

that resemble minimum wage fixing systems found in other countries but it also included a

few unique characteristics. It may be helpful to think of the Indonesian system as a hybrid

that combined minimum wage fixing with aspects that could be found in sector, industry or

regional level collective bargaining systems. On top of this there was an element of

compulsory arbitration. The combination of these elements made the system complex to

outsiders but it does not necessarily make it unfair or, as we have seen, economically

inefficient.

One of the more controversial aspects of the old Indonesian minimum wage fixing model was

that the task of compulsory arbitration was assigned to a democratically elected local

politician, the Provincial Governor. In the recent debate the involvement of this elected

official, to make the final decision on minimum wage levels, has often been portrayed as a

negative factor. This is because in the lead up to local elections, Governors have had at least

one eye on their own popularity and have had a tendency to be generous towards the workers

and award substantial nominal minimum wage adjustments. This helps explain the pattern of

modest real wage increases for several years followed by sharp upward jumps.

But the Indonesian system was not unique. In many minimum wage fixing systems around

the world the final decision about adjustments rest with democratically elected officials,

either the full Government, the President or a Minister, often after receiving advice from a

tripartite or expert body. It might be argued that arbitration by a group of people or a person

who is elected by the entire adult population of a country or region can have a desirable

66

impact on the critical “insider–outside” problem that labour economists are often concerned

about. This is an issue the World Bank in Indonesia has highlighted previously. In 2010 the

World Bank stated that:

“The main issue revolves around who are the winners and losers when minimum

wages increase. While unions and business associations are able to represent their

own interests, poor and informal workers have little political voice and are not

represented in the current debate.”74

It is arguable that the Governor of a Province is in fact well placed to reflect and balance the

interests of employers, those currently in wage employment, plus those in the informal sector

or the agriculture sector who are seeking a move into wage employment in a factory or the

formal service sector. Because the proportion of workers, and voters, in the agriculture sector

and the informal economy will often exceed the number of workers in formal non-agriculture

wage employment, the Governor should give considerable weight to the impact of his or her

arbitrated decision on the employment prospects of the "outsiders". Thus, in theory at least,

there are grounds for thinking that the “old” minimum wage system should have been more

fair, and economically rationale, than an alternative system that merely tries to balance the

interests of organised workers and big capital, or a system that provides for automatic

increases in minimum wages based on a formula that sums GDP and CPI movements without

considering other economic and social variables.

As we have seen there were some features of the old minimum wage fixing system that were

desirable and others that were not. When the five year period expires, and it comes time to

review Regulation 78 of 2015, the Government and social partners in Indonesia might want

to consider trying to incorporate the beneficial features of the old minimum wage system with

greater certainty about future labour costs and less volatile fluctuations in minimum wage

levels that reliance on a formula provides. This could involve providing at least some scope

for social dialogue about local economic and social conditions and ways of gearing wage

outcomes to the specific needs of the region and its main economic activities. For example,

this might involve retaining the current formula whereby minimum wages are increased by

the combined percentage increase in real GDP and the CPI for the previous year as the

starting point. The formula would thus still be an important guide for minimum wage

adjustments in all Provinces and districts. But there could be some discretion, perhaps within

predetermined bounds, for the tripartite wage councils to engage in social dialogue and

modify the minimum wage increase suggested by the formula to reflect local economic

conditions. The adjustment factor resulting from the dialogue could be either positive or

negative and might be limited to say plus or minus 3 percentage points. This would bring

the minimum wage fixing system in Indonesia more into conformity with ILO Convention

131.


67

Box 2: Why is social dialogue desirable?

Social dialogue over key economic and social policies is desirable for many reason. First and

foremost participation by employers and trade unions in defining the rules and policies that

directly imping on profits and the living standards of workers helps establish commitment

from both sides to these norms and outcomes. For example, if trade unions have at least some

input into the process that determines the minimum wage level then workers are more likely

to see the outcome as fair. The same usually applies to employers. Notions of fairness play a

critical role in industrial relations and their absence is likely to lead to disputes and

demonstrations that impinge on economic confidence, investment levels and many key

economic variables. At the firm level, in the absence of social dialogue and a sense of

fairness about how wages and employment conditions have been determined, tensions are

likely to rise and productivity will decline. Ideally space will be provided for employers and

trade unions to have an input into subject matters that go well beyond minimum wages.

Tripartite dialogue over labour laws, social protection, training and employment policies as

well as broader economic policy is desirable.

5.2 Multi-employer or sector level collective bargaining and the impact of trade unions

In the past, both the World Bank and the ILO have strongly recommended that the role of

collective bargaining in influencing wage levels and wage relativities be enhanced. While

there may be a significant number of collective agreements in Indonesia, it is well recognised

that bargaining plays a negligible role in determining wages, other conditions of employment

or worker rights that go beyond the legal minimum. As mentioned above this is a key reason

explaining the high minimum wage to average wage ratio in Indonesia.

To the extent that firm level collective bargaining takes place, it is often about the

implementation of existing rights, or more precisely the extent to which rights will be

infringed. For example, in respect of wages, collective bargaining often takes place about

how long the employer will be allowed to avoid paying the latest minimum wage increase. In

respect of employment protection legislation, collective bargaining often takes place over

what proportion of the legally mandated severance payments will actually be paid.

Bargaining also often takes place over the extent to which the regulations governing working

time and payments for over time will be infringed. In the vast majority of cases the outcomes

of such bargaining will not be reflected in a written collective contact but it will have a

pervasive impact on work practices in the enterprise. A situation in which the main purpose

of collective bargaining is to determine the extent to which labour laws and minimum labour

standards are undermined is highly dysfunctional.

A review of 101 written enterprise level collective contracts recently undertake for the ILO

revealed that only 6 agreements contained any mention of job titles or pay scales.75

Moreover, only 56 % of the collective agreements that were examined contained a clause

75 “Collective agreements in Indonesia”, ILO memo, 2016, unpublished

68

specifying which minimum wage that was to be paid. The majority of clauses in the sample

of collective contracts reviewed related to issues such as overtime payments and premiums

for working on Sunday which are specified in laws and regulations.

The imbalance of power between workers and employers at the enterprise level in the private

sector is an important reason why good faith collective bargaining about wages and

employment conditions, that are above the legal minimum, is largely absent from the

Indonesian industrial relations scene in the private sector. The structure of industry, which is

dominated by myriad small and medium sized enterprises alongside a small number of very

large enterprises, also helps explain the absence of real collective bargaining. For example, in

the manufacturing sector, it is estimated that there are close to 4 million firms, of which 3.7

million are micro and small firms and less than 25,000 are medium and large firms. Given

this context, it is inconceivable that the trade union movement in this vast and diverse country

could ever realistically hope to organise and represented the majority of workers through

plant level negotiations. If collective bargaining is confined to the firm level the best one

could expect are collective contracts covering multinational enterprises and some of the very

large domestically owned companies. The vast majority of workers would remain uncovered

and would have their wages and employment conditions determined unilaterally by

management.

These structural factors and power relationships are what make hopes of spontaneous genuine

good faith enterprise level bargaining, in the wake of recent minimum wage reforms,

completely unrealistic. If the objective is comprehensive collective bargaining coverage than

institutional arrangements will be required that go beyond firm level collective bargaining. In

the past the compulsory requirement for employers’ organisation and regional trade union

centres to participate in wage councils deliberating Provincial and district minimum wage

levels helped compensate for this power imbalance at the workplace. It also helped mitigate

the challenge unions face in representing workers spread between millions of micro and

medium sized firms.

There are also sound economic reasons for developing collective bargaining at a higher level,

such as industry or national level. There is a vast literature devoted to the economic impact

of collective bargaining at different levels. Suffice to say at this stage that international

experience over many decades has suggested that more encompassing and comprehensive

systems of collective bargaining produce general economic and market impacts that are

superior to less encompassing systems.76

Fortunately, Indonesia has some relevant experience and legal scope for developing industry

or multi-employer collective bargaining. In Section 4 of this paper it was suggested that

Indonesian had some positive experience in negotiating sector level minimum wage

agreements in particular Provinces. Box 4 provides details about some of these agreements.

Also, as pointed out previously, Government Regulation Number 78 of 2015, retains scope

for sector level minimum wages and appears to have increased the flexibility inherent in this

system. In the past Government Regulation 1 of 1999 governed sector level minimum wage

76 Susan Hayter, “The role of collective bargaining in the global economy”, ILO, 2011.

69

fixing. Under this regulation sector minimum wages could be established but they could only

be 5 % to 10 % above the Provincial or district minimum wage, but in practice we have

observed that there was much greater flexibility with differentials ranging from 10% below to

30 % above the Provincial minimum wage. This legal limitation on the extent to which sector

minimum wages can exceed the Provincial minimum wage has been abolished, thereby

bringing law and practice into closer conformity.

Importantly, the formula that strictly links Provincial minimum wage adjustments to past

economic growth and price movements does not apply to sector level minimum wages.

Rather, the regulation provides scope for sector level employers’ associations and sector level

trade unions to freely negotiate wage increases at this level. The new regulation states that the

Governor will implement agreements reached through this bi-partite bargaining process.

Regulation 78 of 2015 also makes it clear that the Provincial wage council will have the

authority to determine which industries, groups of industries, or groups of enterprises

constitute a sector for the purpose of bi-partite collective negotiations. Using this authority

wisely will be important. A review of past sector level minimum wage experience reveals

that the sectors, or groups of enterprises were decided in a very ad hoc manner and industries

were combined that had few common economic characteristics. For example, in Box 4

mention is made of a sector minimum wage in Bekasi covering “food and beverage, textiles,

print media, glass, metal, compressors, telephones and cables, and light bulb manufactures”.

This is a very diverse group of manufacturing industries that may have very different profit

and productivity levels as well as vastly different skill levels and capital/labour ratios. When

implementing the new regulations it would be more rational to define the different sectors

more narrowly and precisely, based on their levels of capital intensity and/or the occupations

and skill levels of the core workers within the sector. Wages levels and employment

conditions that emerge from sector level bargaining can then be geared more closely to

economic performance of the industry.

Regulation 78 of 2015 also makes provision for wage scales that could reflect tenure, skills

levels and other appropriate variables. Similar provisions have existed in the legislation

governing wages in the past but were rarely implemented. In fact, for many decades the

minimum wage in Indonesia was supposed to only apply to workers with one year or less

tenure within an enterprise. In theory as workers acquired more experience and skills their

wages were supposed to reflect these attributes. But in reality the vast majority of workers

have remained on, or below, the minimum wage throughout most of their working lives in the

formal economy.

Wage scales could be developed at industry or firm level. But a system that used both levels

may be the best way forward. In would make sense to set the broad parameters for wages

scales at industry level and then allow some flexibility for refinement at enterprise level.

These are issues on which the Government and social partners in Indonesia might wish to

seek detailed technical advice.

The key thing to recognise at this stage is that scope does exist under the new laws for

collective bargaining over wage agreements at the sector level with the only constraint being

70

that the wage levels must be above the Provincial minimum wage. It is possible to envisage

different collective wage agreements for labour intensive, capital intensive and resource

based industries at the Provincial level. Box 6 discusses international trends related to

collective bargaining at the sector level and the economic implications of such agreements.

Box 3: Synchronization of Collective Bargaining and Economic Outcomes

Much of the literature on the economic impact of collective bargaining relates to the

centralisation and coordination of wage bargaining or what several authors referred to as

“corporatism” in a previous era. Other authors have used the term synchronization of

bargaining to convey a related concept that includes the centralisation and coordination of

bargaining plus indicators of union concentration and authority at different levels.

Economists have long been interested in this subject because of the potential for unions and

employers in more synchronized bargaining systems to take into account the wider

implications of agreements they reach and avoid any detrimental economic impact.

It has been suggested that the benefits of synchronized bargaining systems are most clear

cut in countries where the State provides a legal framework that enhances trust between

unions and employers and deters wage drift.77

Ensuring that collective agreements are

legally binding, that enforcement mechanisms are in place including well resourced labour

inspection and labour courts plus the existance of “peace clauses” that prohibit additional

claims or interests disputes while a collective agreement is in force are examples of

institutions that appear important to improve the “governability” of highly sychronized

bargaining systems.

Given that the new wage regulation does not in any way restrict the factors that sector level

unions and employers’ associations should take into account during their negotiations, scope

would exist to incorporate consideration of “decent living needs”, along with other economic

and labour market indicators in the negotiations. Indeed the parties would appear free to

undertake surveys, such as those used in the past to establish a KHL estimate, if they choose

to do so.

An important barrier to implementing the flexibility in the new regulation for sector level

bargaining is the absence of sector level employers’ organisations at the Provincial level. For

example, there are no employers’ organisations at the Provincial level for specific industries

such as the metal industry or electronics industry with experience in collective negotiations.

APINDO could however help establish such organisations and provide technical assistance to

them. Outside assistance might also be sought if there was a genuine desire to develop

comprehensive multi-employer or industry level collective bargaining.

77 Traxler, F. and Kittel, B. “The Bargaining System and Performance: A Comparison of 18 OECD Countries”

Comparative Political Studies, Vol. 33, No. 9, November 2000, pp. 1154-1190.

71

The experience of several European countries and other advanced economies with long

histories in multi-employer or industry level collective bargaining could be drawn upon. In

these systems “extension mechanisms” often play a critical role in ensuring that collective

bargaining coverage is comprehensive. There is also often an important leadership role for

industries in the traded goods sector. Industries that need to remain internationally

competitive are often the “pace setters” with agreements in these exposed sectors establishing

a pattern that is subsequently followed in industries that produce for the domestic market.

Research has demonstrated that these coordinated or centralised collective bargaining

systems generate highly desirable economic outcomes in terms of employment, inflation,

economic growth, income inequality and other critical economic variables.78

If good faith collective bargaining at the sector level was to expand rapidly, and the

Government was seen to be strongly supporting this move through additional legislation if

required and support for new institutions, this may reduce the pressure on the minimum wage

system and ameliorate the industrial relations tensions and strikes. Compromises may be

possible that involve retaining the formula approach to minimum wage setting in return for

the very rapid introduction of comprehensive and coordinated good faith collective

bargaining. Discussion and consensus building on this topic would appear to be in the

interests of all parties.

Given the under-developed nature of collective bargaining it is interesting to ponder why

workers choose to join a trade union and pay union dues out of their low salaries. One reason

for join a union is probably that this provides access to legal advice and support services in

“Interest disputes” with the employer over unfair dismissal, non-payment of minimum wages

and other benefits that are legally mandated.

There is some evidence to support the view that being a union member is be beneficial to the

worker. In a recent labour force survey 22.5% of regular employees reported that they were a

member of a union. This amounts to 8.6% of total employment. Union members were more

likely to have either a permanent or fixed term contract rather than a verbal contract or not to

know what sort of contract they were working under ( Figure 17). Union members were also

more likely to have social security provided by their employer. Over 80 % of union members

have health insurance provided by their employers, while only one third of non-union

members have health insurance provided by their employers.

78International Trade Union Confederation, Frontlines Spring 2013, “Ideology without economic evidence: The troika, trade unions and collective bargaining”.

72

Figure 6: Contract type by union membership for regular employees, February 2016


From Figure 18 it is evident that employees who are organized in unions are concentrated in

the manufacturing, education, and public administration sectors. Within the private sector

union membership is quite limited outside of manufacturing. These trends are relevant to the

discussion that follows on the enforcement of labour rights and the possibility of a more

significant role for trade unions in encouraging compliance with labour laws.

73

Figure 7: Union membership density by sector, February 2016


5.3 Implementation of labour rights

The Indonesian labour force survey provides some data that can be used to monitor

compliance with minimum wage levels, social security programs, and the coverage of

collective contracts.

Minimum wage non-compliance is high in Indonesia and has been increasing over time. In

August 2001 roughly 21 % of regular wage employees received wages that were below the

lowest wage that was permissible by law. By August 2015 the comparable figure was 47 %.

(Figure 19). The very high level of non-compliance means that minimum wage levels in

Indonesia do not really represent a wage floor. Some observers have suggested that high

levels of non-compliance are evidence that minimum wages have increased too rapidly and

that minimum wage levels are excessive. However, as can be seen from the Figure 19, non-

compliance with minimum wages rose sharply between 2003 and 2008 when nominal

minimum wage adjustments were very modest and real wages for wage workers were

declining or stagnating. Non-compliance then dipped somewhat before increasing again after

74

2013. There would appear to be no clear relationship between the rate of increase in the

minimum wage and implementation of the law.

Figure 8: Percentage of regular employees below and above the provincial minimum wage,

2001-2015


In Section 3 of this paper it was noted that the proportion of workers in regular wage

employment was improving over time and the proportion of workers in forms of

employment closely associated with the informal economy had diminished somewhat. But

just because a worker is in regular wage employment is no guarantee that they will receive

the minimum wage or other benefits to which they are legally entitled. Figure 20 compares

trends in regular employment and whether or not these workers were paid above or below the

minimum wage. It can be seen that the number of workers in wage employment has risen

steadily since 2003. But in the period between 2003 and 2009 the increase in wage

employment did not lead to improved compliance with minimum wage levels. Between 2008

and 2013 the data would suggest that minimum wage compliance improved somewhat with at

least a proportion of the workers joining the ranks of regular wage employees receiving the

minimum wage they were legally entitled to benefit from. But after 2013 the situation

deteriorated again.

75

Figure 9: Regular employees paid below and above the provincial minimum wage, 2001-

2015


Indonesia’s labour force survey also collects data on the incomes of own account workers and

casual employees in agriculture and non-agriculture.79

When summed with data on regular

employees in agriculture and non-agriculture, these four types of workers account for 65 % of

total employment. Therefore, examining the earnings trends from this broader group of

workers provides a more comprehensive view of non-compliance with minimum wage laws.

From Figure 21 it can be seen that in 2014 more than 53 % of these workers earned less than

the Provincial minimum wage. This compares with a rate of minimum wage non-compliance

of 46 % among regular employees. The figure also highlights that non-compliance has been

increasing over time. In 2015, the average wage of causal employees in agriculture was

Rp.0.8 million, for casual employees not in agriculture the average wage was Rp.1.3 million

and for own account workers it was Rp.1.4 million. By comparison regular employees earned

Rp.2.1 million a month on average. This means that the average wage of a regular employee

was 2.6 times higher than that of causal employees in agriculture.

79 Unfortunately Indonesia’s labour force survey does not collect earnings data for the remaining three

employment statuses: (2) self-employed assisted by casual/unpaid family worker, (3) employer and (7) unpaid family worker.

76

Figure 10: Percentage of workers earning less than the provincial minimum wage, 2001-

2014


There is also a clear cyclical pattern to minimum wage compliance levels within the year.

Minimum wage non-compliance peaks early in the year and gradually improves during the

course of the year (Figure 22). For example, in February 2015 minimum wage non-

compliance broke all records with 52 % of regular wage employees not receiving the

minimum wage to which they are legally entitled. This is because under the existing laws

employers can make an application to postpone, from early in the new year to later in the

same year, implementation of the annual minimum wage adjustment in their workplace.80

This is a unique feature of minimum wage fixing in Indonesia and helps explain the cyclical

variation with implementation within the year. This cannot however explain the general trend

of extremely high non-compliance over prolonged periods.

80 Regulation 231/103, Article 90.

53.3

45.9

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Pe

r ce

nt

All income earners Regular employees

77

Figure 11: Percentage of employees below and above the provincial minimum wage,

2011-2016


Figure 23 presents trends in minimum wage non-compliance and the primary wage Gini for

regular employees. There would appear tentative grounds for thinking there may be a

relationship between these two variables. Between 2006 and 2009 non-compliance with

minimum wages grew rapidly and wage inequality also expanded sharply. Thereafter

compliance improved somewhat and wage inequality fluctuated before both variables rose

sharply between 2013 and 2014. This would suggest that stronger measures to ensure that

minimum wage laws are respected could help moderate the very high levels of income

inequality observed in Indonesia.

78

Figure 12: Percentage of employees below the provincial minimum wage and the

primary wage GINI, 2006-2015


Indeed, the distribution of earnings is highly skewed in Indonesia. Median wages for regular

employees tend to be substantially lower than average wages for these workers. The average

wage was 1.4 times higher than the median wage for regular employees in August 2015. The

situation is similar for own account workers, but less extreme for casual workers. Further

analysis of the distribution of earnings indicates that the highest paid regular employee earns

3 to 4 times more than the highest paid casual worker (Table 3). Own account workers and

regular employees in the 95th

percentile have earnings that are 24 times higher than those in

the bottom 5th

percentile. However, casual employees in the 95th

percentile have earnings that

are only 8 times higher than those in the bottom 5th

percentile.

79

Table 3: Nominal monthly earnings by status in employment, 2011-2015

Year Status in employment Mean Median Percentile

05

Percentile

25

Percentile

75

Percentile

95

Percentile

99

2011 Own account workers 1,041,926 750,000 105,000 450,000 1,300,000 2,800,000 5,000,000

Regular employees 1,552,456 1,105,000 240,000 665,000 1,890,000 3,890,000 7,825,000

Casual employees in agriculture 547,993 450,000 125,000 300,000 700,000 1,200,000 2,000,000

Casual employees not in agriculture 865,973 800,000 190,000 500,000 1,100,000 1,700,000 2,500,000









2014 Own account workers 1,339,916 1,000,000 350,000 620,000 1,500,000 3,000,000 6,000,000



Casual employees not in agriculture 1,155,689 1,050,000 400,000 750,000 1,500,000 2,100,000 3,000,000

2015 Own account workers 1,451,326 1,000,000 150,000 600,000 1,750,000 3,600,000 8,000,000


Casual employees in agriculture 794,394 650,000 200,000 425,000 1,000,000 1,770,000 2,600,000

Casual employees not in agriculture 1,332,710 1,200,000 300,000 780,000 1,700,000 2,500,000 3,600,000


A simple way of looking further into this issue is by creating a scenario that considers the

reduction in income inequality that could be achieved if minimum wage compliance was

improved. Two scenarios are provided to shed light on this issue: one that considers regular

wage employees only, and one that considers all income earners. The key question is: what

would have happened to the level of wage inequality if the level of minimum wage

compliance reached 100 %.

Figure 24 depicts the scenario for regular wage employment only. Two versions of the Gini

are presented. The first one is the primary wage Gini for regular employees. In the second

one, a new Gini index is calculated assuming that the level of minimum wage compliance

reaches 100 %. For this, the wage levels for those workers receiving less than the Provincial

minimum wage are increased to the legal threshold. Figure 24 shows that in 2014 the wage

inequality Gini would have been reduced from 0.46 to 0.35. This would suggest that wage

inequality could be reduced by nearly one-quarter just by ensuring that all regular wage

employees received the wage to which they were legally entitled. Looking at the longer term

average over the period 2001 to 2014, full minimum wage compliance would have reduced

the primary wage Gini for regular employees by 16 %. If we look at the trend over the period

2007 to 2014, complete minimum wage compliance would flatten the wage inequality graph

at the Gini index of around 0.35.

80

Figure 13: Minimum wage compliance and wage inequality scenario for regular

employees (2001-14)

Source: Calculated from Sakernas and ILO database

The above exercises highlight that improving minimum compliance has considerable

potential to reduce wage and income inequality. By definition improving performance on

compliance would increase the incomes of those at the lower end of income distribution. As

those receiving low wages tend to spend most of their income on locally produced products

and services the policy should provide a stimulus for the domestic economy. On the other

hand, the above exercises assume that there is no negative impact on employment levels

when full compliance with the minimum wage is achieved. If some very low paid workers

become unemployed when minimum wage compliance is enforced this will have a negative

impact on economic activity and income inequality.

While there may be some potential to reduce income inequality through improving outcomes

on minimum wage compliance, a survey of public perception found that in the eyes of the

public the key policy for reducing income inequality was expanding social protection

programs, creating more jobs, providing free education and improving access to credit (Table

4). Increasing the minimum wage was identified by 17% of the survey population as one of

their top 3 programs for reducing income inequality. However, this survey did not explore

public opinion about improving minimum wage compliance as a strategy for reducing

inequality. Evidence presented thus far suggests that improving compliance with existing

labour laws and regulations has the potential to make a significant contribution to more

inclusive and equitable growth.

0.462

0.346

0.30

0.32

0.34

0.36

0.38

0.40

0.42

0.44

0.46

0.48

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

GIN

I Co

eff

icie

nt

Primary wage GINI for regular employees Gini_with 100% min. wage compliance

81

Table 4: Public perception survey of the most important policies for reducing

inequality, 2014

Policy Percentage reporting in their top 3

Social protection programs 49

Creating more jobs 48

Eradicating corruption 37

Free education for all 30

SME credit 27

Free healthcare for all 17

Increasing the minimum wage 17

Infrastructure improvements (roads, power, etc.) 14

More subsidies (e.g., for agriculture, fuel, etc.) 14

Improving schools 10

Source: World Bank (2016) Indonesia Economic Quarterly March 2016. Jakarta: World

Bank, Jakarta.

Hard evidence about levels of compliance with most labour laws and worker rights are

difficult to obtain. But one can speculate that the implementation of many labour laws and

worker rights may be well below acceptable standards. Despite the complex system of

Provincial, district and sector level minimum wages, most workers in Indonesia know the

minimum wage they are entitled to receive. Even workers with limited education follow the

discussions about the annual minimum wage increase very closely. This is understandable

given that these are decisions that will determine the ability of a family to put rice on the

kitchen table and cloth the children. Yet roughly one out of every two wage workers is still

being cheated because they do not receive the minimum wage they are legally required to

receive. In respect of other worker entitlements, where the laws are more detailed and the

information flow is less transparent, compliance levels are probably far worse.

For example, Figure 25 provides some data on the proportion of regular employees receiving

social security benefits that should be universal. It shows that 46.2 % of regular employees

have health insurance provided by their employer, 32.0% have workplace accident insurance,

19.8% have the access to a provident fund (old age savings), 18.7% have a private pension,

19.0% have life insurance, and 21.4% have access to severance pay entitlements.

82

Figure 14: Percentage of regular employees with social security benefits, February 2016


Policies to improve the implementation of labour laws and upgrade minimum wage

compliance are desperately required. This must include strengthening labour market

institutions and ensuring they are transparent and fair. In particularly the system of labour

inspection and the labour courts need upgrading. Indonesia, like many developing and middle

income countries, has invested heavily in improving the tax collection system to enhance

simplicity, remove corruption and improve compliance. Similar investments are required in

the labour inspection and labour courts system.

There should also be a stronger role for trade unions in assisting and defending workers who

have had their legal rights infringed. As we saw in Section 5.2 workers who are trade union

members are more likely to receive the benefits to which they are legally entitled. Providing

trade unions with a legal right to enter and inspect enterprises where a prima facie case is

established involving abuse of workers’ rights would be a step in the right direction. Also

supporting, rather than hindering, the organisation of workers in trade unions would help

promote compliance with labour laws.

83

5.4 Employment protection legislation

In Indonesian debates about labour market flexibility over the last decade the issue that

received the most attention was employment protection legislation (EPL) and, in particular,

the level of severance payments required when dismissing “permanent” employees. In fact in

2010 the World Bank stated that:

“The debate around reform of labour law has been vigorous, focusing largely on the

controversial hiring and firing regulations. Previous government attempts to improve

the flexibility of the labour market by reforming these regulations, once in 2006 and

again in 2007, failed. As, a result, Indonesia’s labour regulations continue to be

among the most rigid in the region. This stalemate is constraining Indonesia’s ability

to accelerate the pace of good job creation.”81

While minimum wage issues have dominated the headlines in recent years, disputes about

severance payments, dismissal laws and the high incidence of non-standard forms of work

have been bubbling just below the surface. Attention has recently been returning to this inter-

linked set of issues that caused considerable controversy in the mid- 2000s.

Dismissals had in fact been tightly regulated even prior to the political reforms in 1998. Law

No 12 of 1964 on Employment Termination required employers to get approval for both

individual and mass dismissals regardless of the reasons for terminating employment. As a

consequence, even in the 1990s, employers regularly complained that dismissal procedures

were overly complicated and time consuming. However, throughout the New Order period

the cost of dismissal to the employer in terms of severance payments was very low, and

enforcement of the law regarding prior approval for dismissal was extremely lax.

Aspects of this situation changed in the late 1990s. Job cuts during and after the Asian

economic crisis, combined with the absence of unemployment insurance scheme, focused

attention on this issue. The new independent trade unions made better employment protection

legislation a priority. In 2000 the Government introduced legislation which included a

complex set of rules about who was entitled to severance payments and different levels of

payment depending on length of service and the reasons for termination. Generally speaking,

for workers with 3 or more years of service the new regulation raised severance payments by

roughly 10 %. A few years later the Manpower Law (No 13/2003) made additional

adjustments to these rules and increased severance payments further for workers with 10 or

more years of service. Other payments were also added.

Pressure from employers, a number of academics and the World Bank after the 2003

Manpower Law went into force resulted in the Manpower Ministry reviewing and making

recommendations for far reaching reforms to severance payments.82

These labour market

reforms were also strongly supported by a number of Economic Ministries and were

incorporated into a larger package of tax, investment and trade reforms being promoted by

81 World Bank (2010) Indonesian Jobs Report: Towards Better Jobs and security for All, World Bank Jakarta. 82 The World Bank co-hosted a major international conference on employment protection legislation with the Indonesian Chamber of Commerce (KADIN) in November 2005.

84

the Coordinating Ministry for Economic Affairs. However, when the recommendations to

weaken employment protection were publicly released in early 2006, the trade union

movement organised a number of mass demonstrations culminating in a protest involving

around 100,000 workers on May 1, 2006 in Jakarta. In response to these vocal and intense

public protests, President Yudhoyono announced that the labour reforms would be

withdrawn. He established a commission of academics to review severance payments and

other ways to promote labour market flexibility. But under the Yudhoyono Government the

findings of this commission were never followed up and controversial labour reforms were

eschewed.

The issue resurfaced in 2010 when the World Bank claimed that severance payments

represented a “hiring tax” equal to roughly one third of a workers’ salary and that no other

country in the Asian region had dismissal costs as high as those in Indonesia.83

Employment protection legislation (EPL) is one of the most controversial labour market

issues is most regions of the world. Over the last few decades much of the analytical work

related to “labour market flexibility” and employment outcomes has focused on EPL or some

aspects of this legislation. Unfortunately this analytical work has been hampered by

inadequate data. Most attempts to code legislation in this domain and give it a numerical

value, which is necessary for quantitative analysis, have suffered from two key defects: first,

most of the data relates only to advanced economies, and second, only some components of

EPL are covered in most databases.

To help rectify these shortcomings the ILO recently established a database on EPL indicators

for 95 countries covering eight subcomponents of laws related to worker termination at the

initiative of the employer.84

These eight categories are based on the issues that are addressed

in ILO Convention No. 158 concerning Termination of Employment. They are also the issues

most commonly addressed in national legislation related to this subject. The eight issues are:

valid grounds for dismissal, prohibited grounds for dismissal, probationary period, procedural

notification requirements for dismissal, notice periods, severance pay, redundancy pay and

avenues for redress when workers wish to contest dismissal.85

Based on the content of the

national legislation the ILO has assigned a value between 0 and 1 to each of the above

mentioned issues with higher values reflecting stronger protection for the worker.

Based on a simple average of these 8 indicators Indonesia does have, in aggregate terms, a

high degree of protection for workers against individual dismissal. A key concern is the cost

to the employer when job separations take place. Article 156 of the Manpower Law Act 2003

states that “termination of the employment relationship gives rise to termination payments

that include severance pay and/or long service pay”. If employers were only required to meet

the severance payments, the financial burden would not be excessive in comparison to other

countries in the region. In fact as can be seen from Figure 26 severance payments in

83 World Bank (2010) Indonesian Jobs Report: Towards Better Jobs and security for All, World Bank Jakarta. 84 ILO EPLex Indicators. See ILo “Employment protection legislation: summary indicators in the area of

terminating regular contracts (individual dismissals)”, 2015. 85 ILO, Inwork Issue Brief No.8, “Employment protection legislation: New approaches to measuring the institution”, 2015.

85

Indonesia are roughly in line with those in Thailand and Viet Nam and only slightly higher

than those applying in Cambodia. For employees with more than 5 years of tenure severance

payments in Indonesia are well below those applicable in China.

Figure 15: Severance pay entitlement by job tenure for selected countries

Source: ILO (2015) Employment protection legislation database, International Labour

Organization, Geneva.

But as mentioned above the law also makes provision for other benefits, including a reward

for length of service. This benefit is often referred to as a “gratuity” in Indonesia and is

shown in the middle column of Table 5. It amounts to one month’s pay for every 3 years of

employment up to a maximum of 10 months wages for 24 years of service. If the severance

payments and long service benefits (the gratuity) are combined, the cost to the employer is

significantly higher than most countries in the region.

Whether or not this “long service benefit” should be considered a severance payment remains

a moot point. Many countries have similar arrangements with workers either receiving a

monetary reward or some other benefit, like extra holidays, as an incentive for long tenure. In

most countries such benefits would be available to the worker after a lengthy period of

continuous employment in the one enterprise, or on termination of their employment and not

just for those who are dismissed at the discretion of the employer. Thus if an employee were

to quit and take up a new job with another employer they should still be entitled to this long

service benefit. This is not the case in Indonesia since workers who resign receive neither the

severance payment nor the long service benefit (Table 6).

0

5

10

15

20

25

Cambodia China Indonesia Thailand Viet Nam

Mo

nth

s

Severance pay entitlements by job tenure

1 year 2 years 5 years 10 years 20 years

86

Table 5: Payments applicable to workers at dismissal

Severance Pay Long service benefit ( gratuity ) Compensation Pay

Years of Services Entitlement Years of Service Entitlement Entitlement

< 1 years 1 x monthly salary 3 - 6 years 2 x monthly salary Compensation for

unused leave 1 - 2 years 2 x monthly salary 6 - 9 years 3 x monthly salary

2 - 3 years 3 x monthly salary 9 - 12 years 4 x monthly salary Relocation

compensation 3 - 4 years 4 x monthly salary 12 - 15 years 5 x monthly salary

4 - 5 years 5 x monthly salary 15 - 18 years 6 x monthly salary Reimbursements of

medical expenses 5 - 6 years 6 x monthly salary 18 - 21 years 7 x monthly salary

6 - 7 years 7 x monthly salary 21 - 24 years 8 x monthly salary Other compensations

stated on workers

contract 7 - 8 years 8 x monthly salary > 24 years 10 x monthly salary

> 8 years 9 x monthly salary

Source: UU No. 13/2003 on Manpower Article 156

In addition, the Manpower Act No. 13/2003 makes provisions for “compensation pay” when

workers are dismissed. Compensation pay depends on the benefits specified in their

employment contract, and as can be seen from Table 5 includes compensation for unused

leave and other benefits. This is standard practice in most countries.

The Manpower Act No. 13/2003 also establishes different benefit levels depending on the

reasons for the dismissal (Table 6). The key point to note is that no benefits are paid if the

worker has reached the end of their contact. This creates a very important distinction between

workers on contacts without limit of time (permanent contacts) and workers on temporary or

fixed term contracts. The law thus creates a major financial incentive for the employer to use

workers on a series of short term contacts and avoid any chance of incurring the significant

costs that should apply if they need to dismiss a worker on a contact without limit of time.

This issue is taken up in the next section.

Table 6: Benefits paid according to reasons for dismissal

Reasons for severance Benefits

Resignation only compensation pay

End of contract No benefit

Fired because of workers errors 1 times of severance pay, 1 times of gratuity, and compensation pay.

Fired because of employers mistakes 2 times of severance pay, 1 times of gratuity, and compensation pay

Lay-offs during company losses 1 times of severance pay, 1 times of gratuity, and compensation pay.

Lay-offs during mergers 1 times of severance pay, 1 times of gratuity, and compensation pay.

Company bangkruptcy 1 times of severance pay, 1 times of gratuity, and compensation pay.

Source: UU No. 13/2003 on Manpower

Under the current system, both the severance pay and the long service payment should be

made available to the dismissed (permanent) worker in a lump sum payment immediately

after termination of the employment contract. In situations of mass dismissal this can present

financial challenges. Provisions in the Statement of Financial Accounting Standard in

Indonesia (PSAK 24) regulate these severance and gratuity (long service) payments and are

supposed to ensure that all enterprises have made sufficient long term provisions to avoid

87

financial difficulties in the case of mass dismissal. However, in the vast majority of

enterprises, no resources are allocated for severance or long service payments in the balance

sheet. This means that the overwhelming majority of enterprises do not have the financial

resources to meet their legal obligations when mass dismissals are required.

High aggregate scores on the ILO-EPL indicators in Indonesia also result from the

specificities of the procedures that employers are expected to go through prior to dismissing a

worker. The legislation states that the employer should engage in a process of mandatory

conciliation about the potential dismissal with the trade union or with the individual worker

(if the worker is not in a union) prior to every dismissal. If negotiations between the parties

fail there is provision for mediation and arbitration by the Industrial Relations Court. The law

limits the time for the prior bipartite negotiations and conciliation/mediation to 30 days each,

and the time for the Industrial Relations Court (IRC) to issue a verdict to 50 days as of the

date of the first court session.

However, these delays may still be perceived as lengthy and time consuming for employers,

especially if they have to be followed for every dismissal at the initiative of the employer.

Unfortunately, there is little information available about how this conciliation process works

in practice, the extent to which it is transparent and clearly understood by all employers, the

actual time it takes to complete a dismissal, and the outcomes the conciliation/mediation

process normally generates. For example, we simply do not know what proportion of

conciliation cases result in the worker being dismissed rather than reinstalled, and the average

time period the cases take. For employers, it is the lack of predictability of the outcome, and

the uncertainty about the process, that represent a particular burden. They have a legitimate

right to expect that any such conciliation process is short, transparent and that the results are

predictable. It is not clear that these conditions currently apply and further research is

required to assess whether this is the case.

Indonesia is one of the rare countries with laws that requires mandatory conciliation

processes prior to dismissal. The usual process in most countries is that the employer can

dismiss an individual worker if there are sufficient valid grounds for doing so, by following

specific procedural requirements prescribed by law or by collective agreements, and,

wherever relevant, paying severance payments. It is only after the dismissal that a worker

who considers that their employment has been unjustifiably terminated can appeal against the

dismissal to a competent body, such as a court, labour tribunal, arbitration committee or

arbitrator. Such a competent body will make an assessment as to whether the dismissal was in

accordance with the law. If it rules in favour of the worker, there is normally provision for

financial compensation or reinstatement, which are usually seen as alternative remedies.

Given that it is unlikely that every separation at the discretion of the employer results in an

appeal by the worker to a competent body, this type of process should be less cumbersome to

the employers than the conciliation process in Indonesia. However, there has been no

comparative research conducted to assess this, and neither to assess to what extent the

Indonesian conciliation process may actually be more protective for workers.

88

From Figure 27 it can be seen that based on the ILO database, Indonesia records the

maximum score of 1.0 in respect of dismissal procedural requirements because of the

specificities of the above mentioned conciliation process. This aspect of the employment

protection legislation de jure provides significantly more protection to the worker in

Indonesia than is the case in other comparable countries in the region.

Figure 16: Procedural requirements for dismissal in selected countries

Source: ILO (2015) Employment protection legislation database, International Labour


The ILO-EPL indicators, like other attempts to quantify EPL, only reflect the de jour level of

protection provided by the legislation. By themselves they tell us nothing about the de facto

level of protection. For example, a number of employers in Indonesia told the authors of this

report that these conciliation procedures are not burden because in reality they are never

applied in the stringent way envisaged in the law. The same employers suggested that their

main concern was the cost of dismissing (permanent) workers rather than the conciliation

procedures.

To provide further insight into the de facto level of protection the ILO has also started

collecting data on coverage of the legislation by reviewing the scope of exemptions.86

ILO

analysis of the Indonesian EPL system would suggest that only 34 % of the labour force are

covered by any aspect of EPL and only about 30 % of the workers who are eligible for

severance payments actually receive them. Moreover previous analysis by the World Bank

86 Aleksynska, M., and Eberlein, F, “Coverage of employment protection legislation”, ILO, 2016.

0

0.2

0.4

0.6

0.8

1

1.2

Cambodia China Indonesia Korea, Republic of Thailand Viet Nam

Proceedural requirements for dismissals indicator

89

suggested that employers very rarely meet their full financial obligations when dismissing

worker and that on average the small number of workers who get severance payments

receive less than 40 % of the total payment they were legally entitled to receive.87

The small ILO survey of employers conducted by the authors in manufacturing

establishments supported this conclusion. Even employers in large multinational companies

explained to the authors of this report that they would not comply with all aspects of the

legislation and would normally enter into negotiations with the dismissed worker with a view

to paying only a proportion of the legally mandated benefits. Clearly in many small and

medium sized enterprises the dismissed worker receives no financial compensation. So in

reality the relatively restrictive de jour laws are not the burden on employers that they

appear.

5.5 Non-standard forms of work and human capital development

Previously it was noted that Indonesia has had considerable success in expanding wage

employment. In fact by February 2016 roughly 38 % of all employed persons were classified

as regular wage employees. This trend is a clear sign of economic development and reflects

the relative advance of formal non-agriculture sector activities. Most observers would agree

that this trend needs to accelerate further.

However, it would be misleading to assume that all wage employment is homogenous, or that

all wage employment is “decent”. Within the broad general category of wage employment

there are a number of sub-sets. First, this includes a relatively small number of jobs that come

with employment contracts without limit of time. These are often referred to as “permanent”

jobs in Indonesia. These “permanent” jobs in factories or the service sector are what most

Indonesian workers, with low or moderate levels of education aspire to. Employment

contracts without limit of time tend to be better paid and come with a range of employment

benefits compared to other manual or low skilled jobs. As we saw in the previous section

these so-called “permanent” jobs also benefit from legal protection against dismissal

including access to severance payments and the long service benefit. Workers with contracts

without limit of time are likely to be less intimidated by management and more likely to join

a trade union or engage in strikes and other forms of industrial action. They are also more

likely to take legal action if they do not receive the minimum wage they are entitled to

receive or have other worker rights infringed.

Second, a large proportion of wage employment is composed of workers on fixed term

contracts. According to the law these workers should benefit from wage levels and

employment benefits that are comparable to those received by “permanent” employees they

work alongside in the factory or enterprise. By law the big difference between a “permanent”

and a fixed term worker centres on employment security. As we will see below in reality the

type of contact also has an important impact on wage rates and various other employment

conditions (Figure 28). But there are other less tangible but critical differences between these

two categories of workers. For example, the pressure on the worker with a short or fixed term

87 World Bank, Enterprise survey in Indonesia, 2015.

90

contact to secure an extension of their tenure within the enterprise is likely to have

important implications for work intensity, discipline at the workplace and trade union

membership. In addition workers who cycle through a series of fixed term contacts, mixed

with periods of casual day labour in the agriculture sector or informal economy when fixed

term contracts are not forthcoming, are less likely to take legal or industrial action when they

are not paid the minimum wage or are forced to work extremely long hours without

compensation for overtime, or have some other rights infringed.

Figure 17: Percentage of regular wage employees with social security benefits by

contract type, February 2016


Finally, there is a very significant proportion of wage employment and non-wage

employment that is commonly referred to as “outsourced” workers in Indonesia. In fact there

are two very different types of worker covered by the broad term “outsourcing” in Indonesia.

This term often refers to the outsourcing of tasks that are performed in informal enterprises or

by workers in their own homes on behalf of enterprises in the formal sector. These tasks are

normally performed on a piece-rate basis and the worker normally receives a very low

income and no employment benefits. The vast majority of workers in this situation are

female. These workers are often part of the supply chain producing inputs for large Indonesia,

or even multinational firms, yet they receive wages and conditions that are far inferior to

91

these enjoyed by either permanent or fixed term workers within the parent company. The law

in Indonesia would classify most workers in this situation as self-employed and not covered

by the protection of labour law or entitled to social benefits that are associated with an

employment relationship. However, in many cases these workers are economically dependent

on the parent company distributing the work. Thus it could be argued that these workers are

in a form of “disguised” employment relationship and should be granted the benefits that

apply to wage employees in the parent company. Many countries around the world have

altered the tests that they apply to establish the existence of an employment relationship

placing greater emphasis on economic dependency and less emphasis on control or

subordination of the worker by management.88

There is a strong case for a similar review and

revision to the test applied to establish an employment relationship in Indonesia.

In Indonesia the term “outsourced worker” is also commonly used to refer to workers who

undertake their activities within a formal enterprise but who are engaged through private

employment agencies or labour supply firms. These workers are in a triangular employment

relationship and often receive lower wages and inferior employment benefits compared to the

permanent and contract workers who are engaged directly by the parent enterprise. Their

precarious employment situation will also have important implications for their relationship

with management, trade union membership and ability to secure their legal entitlements.

Many countries are revising their labour legislation, or are using case law, to ensure that

workers in this type of triangular relationship can legally seek compensation from the parent

company if the private employment agency (or labour supply firm) fails to provide the wages

and benefits to which the employee is legally entitled.89

There are strong grounds for similar

reforms in Indonesia.

The high incidence of fixed term contracts and “outsourcing” has been a very controversial

issue in Indonesia for many years. Not surprising trade unions have campaigned vigorously

against the expansion of all forms of precarious work over the last two decades, while

employers argue that these forms of work are necessary to provide the flexibility to meet

fluctuations in demand and the required degree of discipline at the workplace.

The BPS recently started collecting data that should help monitor trends in precarious work in

the future. According to the latest labour force survey, as of February 2016, 20 % of regular

wage employees claimed they had written work contracts without limit of time ( these would

be classified as “permanent” workers in Indonesia), 30 % claimed they were on were on fixed

term contracts, and the remaining 50 % told the BPS they either had no contract (agreement),

a verbal contract ( agreement) or they did not know what type of employment contract they

held (Figure 29). The 50 % of wage workers that are neither permanent nor on fixed term

contacts would include most of the “outsourced” workers. As is evident from Figure 28 wage

88 Janine Berg, ILO, forthcoming major report on non-standard for of work. See in particular Chapter 6 on

“Addressing decent work deficits in non-standard forms of work”.

89 Ibid.

92

employees who are neither permanent nor have a fixed term contact are very unlikely to

receive health insurance, provident fund, pensions or other benefits.

Workers on fixed term contracts, outsourced workers and those without a formal contact are

examples of non-standard forms of work that have become prevalent in most countries.90

This

data would suggest that up to 80 % of all wage workers in Indonesia are in non-standard

forms of work. Recalling that wage employment represents less than 40 % of total

employment and the vast majority of those not in wage employment are engaged in the

informal economy or work in agriculture it is apparent that, despite recent progress, their

remain major decent work deficits.

Figure 18: Contract types for wage employees, February 2016 (millions)


There have been some important attempts to regulate and limit the spread of non-standard

forms of work in Indonesia. For example, legislation concerning fixed term contracts usually

covers at least three aspects: the maximum duration of a fixed term; the possibility for

renewal; and regulations about the type of work that is permitted under a fixed term contract.

In order to curb the growing number of temporary contracts, the Manpower Act of 2003

90 “Non-standard forms of employment” is an ILO term that refers to (1) temporary employment; (2) contractual

arrangements involving multiple parties, including temporary agency work; (3) ambiguous employment

relationships, including dependent self-employment and disguised employment relationships; and (4) part-time employment. For further details see Janine Berg, ILO, forthcoming.

93

reduced from 5 years to 3 years the time limit on fixed term contracts. More specifically the

law provided for fixed term contracts of 2 years with the possibility of one extension for

another 12 month period.

However, the 2003 reforms failed to reduce the ratio of fixed term contracts to total

employment, because employers merely replaced workers when the 3 year time limit expired

and re-hired them at a later date on another fixed term contract rather than granting them a

contact without limit of time. In general, experience in other countries also suggests that

when the use of fixed-term contracts is wide-spread, legal reforms that reduce time limits

may have limited capacity to reduce their use by merely reducing the time limits. This is

because many employers have already adopted their production structures and processes to

meet the requirements of workers on fixed-term contracts.

The Indonesian legislation also contains provisions concerning the type of work that is

permitted under fixed term contracts. But the wording of these provisions is rather vague and

includes, among other permitted reasons, any work “which is temporary in nature”. Quite

likely, this provision has encouraged a wide interpretation about the scope for fixed term

contracts and hence further facilitated their use.

As a result, since the 2003 reforms were introduced, the ratio of employees with contracts of

3 years duration or less has remained high, with close to 40 % of all regular employees

having a job tenure of 36 months or less. In some sectors like wholesale and retail trade the

proportion of wage employees on fixed term contracts was around 54% in 2015 (Figure

30).91

91 36 months is the maximum contract duration that can be offered to a regular employee on a short term contract.

94

Figure 19: Regular employees with less than 36 months of job tenure by sector, 2011-

2015


While the law may allow fixed terms of up to 3 years it would be incorrect to assume that this

is the standard length of a contract. In February 2016 14.9% of regular employees (6.9

million people) had job tenure which was 12 months or less (Figure 31). As we will see

below the heavily reliance on short term contacts is one factor inhibiting human capital

development in Indonesia.

95

Figure 20: Employed people with less than 12 months of job tenure by status in

employment, February 2016


There have been some efforts to limit the “outsourcing” of activities by restricting the type of

work and the types of jobs that enterprises can legally sub-contract to another enterprise.

Under the existing law, the contracting out of activities is limited to non-core functions of the

primary enterprise. More specifically according to Regulation No. 19/2012, the

subcontracting of work must meet the following requirements:

The management and the implementation of the outsourced work must be

conducted separately from the main activities of the company providing the work;

The work must be performed by direct order or indirect order from the user

company for the purpose of providing clarity on how to perform the work so that

it is consistent with the standards of the user company;

The work must be a supporting activity, i.e. the work is necessary to support and

facilitate the implementation of the main activities according to the flow chart of

the work implementation process stipulated by the relevant sectorial business

association; and,

The work must not directly hinder the production process, i.e. the work must be an

additional activity and if not performed the production process will still continue

as normal.

96

All these conditions are cumulative, so if one of them is not fulfilled, the concerned activity

cannot be outsourced. According to the law outsourcing is only permitted to formally

registered companies, however, in reality work that is outsourced is often undertaken by

entities in the informal economy or by homeworkers.

The Indonesian authorities have also attempted to regulate the scope of triangular

employment relationships to a few non-core jobs. Regulation No. 19/2012 allows enterprises

to “outsource” the following five activities to employment agencies or labour hire companies:

1. Cleaning services;

2. Catering services for employees;

3. Security services;

4. Support services in the mining and oil sector; and

5. Transportation services for employees.

The regulations require that the labour supply or employment services companies are

formally registered. According to the law workers who have a permanent contract with a

labour hire company or employment service are entitled to severance payments, health

insurance, pensions, and annual leave. However, this rarely applies in practice and the wages

actually received by workers engaged through these triangular relationships are often very

low because the employment agency deducts fees from the worker rather than charging the

employer.

Breaches of the laws regulating fixed term contracts and outsourcing are extremely common

and workers engaged in these non- standard forms of work have legitimate grievances

because they are frequently the workers who do not get the minimum wage or other benefits

they are legally entitled to receive. This is a major cause of friction and conflict in the labour

market.

An excessive reliance on non-standard forms of work also can have a negative impact on

efficiency and productivity because it discourages investment in new skills and human capital

development. For employers who hire workers on fixed term contracts, the time horizon is

often not sufficient for the firm to accrue a rate of return that off-sets the cost of training.

Figure 32 illustrates this point. Employees with a permanent contract are more likely to have

participated in certified workplace training than employees on fixed or informal contracts.

Because the vast majority of enterprises throughout the formal sector in Indonesia face this

same incentive structure, the outcome is a chronic under investment by management in

training.

A similar dysfunctional incentive structure exists for the worker. Because a very large

proportion of workers do not expect to remain in the same enterprise for lengthy periods, the

incentive to acquire firm specific skills is diminished.

97

Figure 21: Participation in certified workplace training by contract formality for all

employees, February 2016


The high concentration of precarious forms of work and the absence of income protection for

the unemployed leads to excessive levels of labour market “churning” in Indonesia. In the

absence of unemployment insurance, or any State provided benefits, unemployed workers –

particularly those with lower levels of education attainment - tend to shift between formal

sector fixed term contracts, work in the agricultural informal economy and then, if they are

lucky, they return to the formal sector for another fixed term job. For example a recent ILO

survey of production workers in manufacturing, found that over a 12 month period only 65%

of the sample were still working as production workers. The other 35 % had been forced to

take up employment as an agricultural labourer or had left the labour force (Figure 33). It was

rare for these workers to climb the career ladder and graduate into more highly skilled

occupations.

98

Figure 22: Transition rates for production workers across occupations by education

attainment over 12 months


There are therefore both equity and efficiency grounds for examining the incentive structures

and regulations that encourage an excessive reliance on fixed term contracts and other non-

standard forms of work. The legislation that might be relevant in any such review are the

regulations governing dismissal procedures that do appear cumbersome for the employer

and the complex set of rules related to severance and long service payments. The regulations

that have been introduced to limit fixed term contacts and outsourcing have not been

effective. In the absence of a major reforms to the labour inspection system and the labour

courts system it is unlikely that further legal restrictions on the use of fixed term contracts

and outsourcing will have the desired impact. It may be more effective to adjust financial

incentives rather than tightening these laws.

In 2010 the World Bank proposed a “grand bargain” for Indonesia that involved lowering

severance payments in exchange for introducing unemployment benefits.92

Based on the

above analysis an effective bargain might need to cover a broader range of issues. This could

involve revising the existing legislation concerning the procedures prior to individual

dismissal ( the conciliation process) with the aim of making this process more transparent,

clearly understood, faster and predictable. This might involve a move away from conciliation


99

prior to dismissal and towards greater reliance on the right of workers to contest, before a

tribunal, whether the dismissal was fair after termination. It might also involve revisiting the

provisions related to long service payments ( or gratuity) that, based on the current

legislation, are only applicable to workers who are dismissed at the discretion of the

employer. In reviewing these provisions careful attention should be paid to the evidence on

the de facto level of benefits paid and not just the de jour levels specified in legislation.

The quid pro quo for such changes could be an increase in the remuneration received by

regular wage employees who do not have a contact without limit of time. All wage

employees on fixed term contacts or workers supplied through a labour supply companies or

employment agencies could be paid a premium on the minimum wage. For example, workers

with contacts of this nature might be eligible to receive 15 % above the provincial, district or

sector minimum wage that would be applicable at the parent enterprise where they work. A

simple rule like this might be more effective than trying to further tighten the complicated

regulations that attempt to curtail the time limits, occupations or other characteristics of non-

standard work contracts.

It would also be essential to strengthen enforcement mechanisms as to ensure that any

revised legislation is properly implemented. The details of the reforms and the trade-offs

between the different aspects should be the subject of detailed tripartite discussions. In

addition, further efforts and incentive systems may be needed from the government to drive

shifts in the culture of workplace training in Indonesia. This will be further explored in the

following section.

5.6 Vocational training, apprenticeships and skill development

Long run labour productivity trends, broadly defined as GDP per person employed, show that

Indonesia is not currently on the path to convergence with global norms (Figure 33). Back in

1991 Indonesian labour productivity was 54 % of global labour productivity. By 2012 the

comparable figure was just 60 %. That represents a six percentage point improvement over a

23 year period in which Indonesia joined the ranks of middle income countries. One factor

retarding more rapid convergence with productivity levels in high income countries is the

quality of human capital in Indonesia.

100

Figure 23: GDP per person employed (constant 2011 PPP $) for Indonesia and the

World

Source: World Bank (2015) World Development Indicators, World Bank, Washington D.C.

The structural transformation of the Indonesian economy, that has accompanied sustained

economic growth over the past decade, has had a profound impact on the labour market.

Workers with advanced levels of education and skill are in high demand and can command

significant rewards. Rapidly widening wage premiums for university graduates is often cited

as indirect evidence of a skill shortage problem in Indonesia. Indeed, analysis of job flows by

the level of educational attainment between 2012 and 2014 highlights that once workers with

university degrees become employees they rarely become unemployed again. These trends

are expected to accelerate over the next two decades. An important question is to what extent,

and how rapidly, the Indonesian education and training systems can respond to these changes

and equip the existing workforce, and youth who will enter the labour market, with the

required combination of hard and soft skills.

There is always a significant time lag between the changes in the demand for new skills and

adaption of education and training programmes to meet these new trends. In the meanwhile a

skills mismatch emerges in the labour market. Data compiled by the ILO would suggest that

roughly 44 % of youth in Indonesia are under qualified for the work that is available ( Figure

101

34). This ratio is significantly higher than the comparable figure for the Philippines and even

exceeds the level in Cambodia. In Indonesia low education attainment and poor career

guidance, mean that nearly half the young people leaving school, enter the workforce with

qualifications that do not match the needs of employers. With an under qualified workforce,

the productivity performance of Indonesia is unlikely to make the leap required for economic

convergence and the pace of structural transition to higher value added activities will remain

restrained.

Figure 24: Qualification mismatch of employed youth, (per cent)93

ILO (2015) Asia Pacific Labour Market Updates, October 2015, ILO Regional Office,

Bangkok.

Reducing the lead time that education and training institutions take to meet the changing

demand of the labour market is the solution. But this is easier said than done. Assessing the

current skills gap and anticipating future skills need, revising the existing or designing new

education and training courses, re-training teachers and instructors, building necessary

93 This metric of qualification mismatch is based upon aligning educational attainment levels according to the

International Standard Classification of Education (ISCED) with occupational groups according to the

International Standard Classification of Occupations (ISCO). ISCO occupational groups 1, 2, and 3 are

considered high-skill and align with ISCED-97 levels 5 and 6. ISCO groups 4, 5, 6, 7 and 8 are considered

medium-skill occupations and align with ISCED levels 3 and 4. ISCO group 9 of low-skill occupations

correspond with ISCED levels 1 and 2. Following this normative approach, workers whose occupation match

the assigned education attainment level are considered adequately qualified. Those with a higher level of

education are considered overqualified and those with a lower level are classified as underqualified. Together,

the overqualified and underqualified are considered mismatched. That is, their education levels are not in line with job requirements.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Philippines

Pakistan

Indonesia

India

Cambodia

Underqualified Adequately qualified Overqualified

102

facilities and purchasing equipment all requires significant financial resources, technical

capacity and well-coordinated public policy.

While the message is clear - “invest in skills or lose out”94

- it is important to invest in “hard

skills” as well as “soft skills”. In particular, dialogue is needed between employers, workers

and government to ensure that investments in training institutions are the ones that are needed

to drive forward growth. Further development of human resource managerial strategies

within firms is also required. The type of soft skills that workers and employers require

relate to communication, negotiation and team work. Strengthening skills in human resource

management provides a platform for working together better and builds skills to engage in

constructive dialogue for workplace development. This is an important factor in

competitiveness. Evaluations from the ILO Better Work activities in Indonesia confirm that

better human resource source management strategies and increased compliance with labour

laws and international labour standards go hand in hand. 95

The Government of Indonesia has increased its financial commitments to education. The

level of expenditure on education has been rising rapidly for well over a decade. By 2012

public expenditure on education amounted to 18 % of total government expenditure, or 3.6%

of GDP. However because tax levels and public expenditure levels in Indonesia remain low

by international standards, the proportion of GDP devoted to education still remains below

the global average of 4.7% of GDP.

The issue is not just a matter of resources. In fact, the central problem is the lack of clarity

and consistency in public policy towards education and training and a failure to ensure

efficient implementation of public policy in these domains. Overlap and competition between

different Ministries and a lack of coordination between central, regional and local

government are the main challenges hindering the implementation of public policy in the

fields of education, vocational training and skill development.

One possible solution to the aforementioned problem lies in greater collaboration among the

education and labour authorities, companies and trade unions in enhancing the quality and the

relevance of education and training. The Government can play a catalytic role in bringing

education and training providers, employers and workers closer together to create greater

synergies for human capital investment. Dialogue and collaboration among the parties can

lead to better identification of skills needs, enhance the relevance of education and training,

and improve the jobs prospects of the youth.

At present however employers are under investing in their workforce. According to data from

the World Bank in 2009 only a very small proportion of firms (4.7%) offered formal training

to their employees. Over time this ratio may have declined. The Institute for Economic and

Social Research at the University of Indonesia in conjunction with the World Bank and the

Coordinating Ministry for Economic Affairs has been conducting regular investment climate

monitoring surveys in Indonesia. The most recent survey was conducted in 2014 and the

94 http://jakartaglobe.beritasatu.com/news/ilo-warns-indonesia-invest-skilled-labor-lose/ 95 TUFTS (2014) Better Work Indonesia impact assessment: Managers report, ILO Country Office for Indonesia and Timor-Leste, Jakarta.

103

results were released in mid-2015. The survey found that in manufacturing the proportion of

firms that provide “guidance and assistance to enhance the skill of new workers” remained

constant between 2010 and 2014 but in the service sector this ratio declined.96

Workers with low levels of education very rarely participate in certified workplace training

programs. For example, 1 in 4 people with university degrees participated in certified

workplace training, while only 1 in 10 people with high school qualifications and 1 in 100

people with junior high or less qualifications participated in certified workplace training. This

is not an efficient way to develop human capital. Skill shortages and mismatches are well

recognised as a major factor inhibiting faster economic and employment growth in Indonesia.

The development of an extensive high quality apprenticeship system has been proposed by

many observers as an efficient way to ameliorate the skill shortage problem. Apprenticeships

systematize collaboration by combining school-based learning and workplace-based training.

It effectively taps into existing training resources and equips youth with knowledge and skills

for their future occupations. In an apprenticeship model, companies provide practical training

at the enterprise using their equipment, and experienced workers transfer technical know-how

to the youth.

Apprenticeship is a unique form of vocational education, combining on-the-job training and

school-based learning, for specifically defined competencies and work processes. It is

regulated by law and based on a written employment contract with a compensatory payment

and standard social protection coverage. Apprenticeships usually last longer than one year

and in some countries they last four years. The ILO’s approach to quality apprenticeship

emphasizes social dialogue, clear definition of roles and responsibilities, legal framework and

shared-financing arrangement. A quality apprenticeship is a sophisticated learning

mechanism based on mutual trust and collaboration among the stakeholders: youth, labour

and education authorities, employers and workers.97

Promoting the development of the apprenticeship system is timely in Indonesia for two

reasons: facilitating youth in their school-to-work transition and fulfilling G20 policy

consensus. Quality apprenticeship systems have a good track record. Advanced economies

that invested heavily in comprehensive apprenticeship schemes tend to have lower rates of

youth unemployment (Figure 35). For example, in the midst of the global financial and

economic crisis, which saw youth employment outcomes deteriorate, countries with

apprenticeship systems were able to better support the labour market attachment of youth.

This is because apprenticeships bridge school education with the world of work. Noting the

positive impact of apprenticeship in reducing youth unemployment, the G20 Labour and

Employment Ministers took a decision to promote apprenticeships, highlighting the

importance of:

96 Institute for Economic and Social research, 2Final report: Investment Climate Monitoring Survey (2014), 97 ILO (Forthcoming) Quality Apprenticeships: Bridging training to productive and Decent Work, Skills for Employment Policy Brief, International Labour Office, Geneva.

104

"sharing of experience in the design and implementation of apprenticeships

programmes and explore ways to identify common principles across the G20

countries".98

Trade union and businesses leaders in the G20 Member States echoed the importance of

quality apprenticeships in addressing youth unemployment. The G20 Leaders' Summit in

Brisbane, 15-16 November 2014, added further emphasis on apprenticeships affirming that

G20’s “Employment Plans include investments in apprenticeships, education and training”.99

Figure 25: Prevalence of apprenticeship and youth unemployment, 2011

Source: ILO 2012a and ILO KILM 8th edition. Author’s calculation. Note: Countries plotted

in this chart include: Australia, Austria, Canada, Denmark, France, Germany, Ireland, Italy,

Switzerland, United Kingdom and United States

Employers who provide workplace training through apprenticeship systems can recover the

training costs as apprentices become more productive. Employers can also economize on

recruitment costs through participating in apprenticeship systems. Workers gain because

apprenticeship programmes are quality training opportunities. In addition, graduates of

apprenticeship programmes will also be able to access better working conditions thanks to

training that has boosted their productivity.

The Government of Indonesia and the ILO agreed to launch a tripartite discussion on quality

apprenticeship in 2015. Through this dialogue process, stakeholders will exchange views on

the relevance and benefits of improving and scaling up apprenticeship systems in the

98 G20 Labour and Employment Ministers’ Conclusions. Guadalajara, Mexico, 17-18 May 2012. 99 G20 Leaders’ Communiqué, Brisbane Summit, 15-16 November 2014

y = -0.5601x + 31.633R² = 0.6499

0

5

10

15

20

25

30

35

0 5 10 15 20 25 30 35 40 45 50

Yo

uth

un

em

plo

yme

nt

rate

in 2

01

1 (%

)

Apprentices per 1000 employees

Switzerland

Australia

GermanyAustria

CanadaDenmark

Italy

UKUS

France

Ireland

105

countries in the contexts of G20 policy coherence and Indonesia’s manoeuver to avoid

middle-income trap. In Indonesia the Manpower Act (2003, No. 13) provides the legal

framework for apprenticeship (pemagangan) and tasks the central government and local

governments to develop apprenticeships (Article 29).

The Indonesian word “pemagangan” can be translated into English as “internship” or

“apprenticeship”. But these two systems of training are very different. The vast majority of

“pemagangan” schemes in Indonesia equate more closely with internship arrangements rather

than genuine apprenticeship schemes. Most schemes are short term and fail to combine on the

job training with class room based technical education. A major shortcoming of the current

legislation is that it only requires employers to pay certain allowances to young people who

are engaged under the “pemagangan” legal framework. The absence of a proper wage has

been highly criticized by the trade unions and has led to unions describing these schemes as

“slave labour” that is used to undermine existing labour standards. The shortcomings in the

legislation have polarized the debate about apprenticeships in Indonesia and are a major

barrier to creating schemes that can make a real contribution to improving the human capital

stock.

106

Box 4: Industry's initiative to establish a vocational high school (SMK)

Facing recruitment challenges, a group of human resources managers from factories in an

industry park in Cikarang, a suburb of Jakarta, established an SMK in 2011. The school

clearly demonstrates the impact of industry involvement in vocational education in terms of

the relevance of curriculum, workshop equipment and educational outcomes. Companies in

the industry park have donated school buildings and workshop equipment. They also send

their workers to the school as instructors. While following the national guidelines and

regulations, the education programmes of this school reflects the human resource needs of the

companies. In addition to the technical competencies that are developed through this

programme, this system also fosters development of soft skills, such as discipline and a

positive work attitude, that are needed in the workplace.

The school environment of this SMK imitates a real workplace environment. For instance,

passages are marked in green as they are in a factory and admission to the school resembles

recruitment process of a company. The first batch of the students undertook practical

fieldwork or internship (PKL). According to feedback received by the school, the students

performed better than students from other schools. Indeed, many companies have already

expressed their intention of hiring the students upon their graduation. The school

management expects a high employment rate among its graduates, which is particularly

encouraging as in general unemployment tends to be highest among senior high school

graduates.

The school founders feel that the duration of PKL (usually one to three months) should be

longer. A longer PKL would permit students to learn more while building their productivity.

They view that the regulatory framework on vocational education and PKL could leave more

leeway for industry’s involvement in vocational education.

Source: Interview with the school managers on 29 September 2014 by ILO staff.

Box 5: Vocational training in Indonesia

There are several public and private avenues for provision of vocational training in

Indonesia. In particular, the Government offers vocational education under the Ministry of

Education’s senior vocational secondary schools, while the Ministry of Manpower (along

with several other ministries) operates a number of vocational training colleges that

provide competence based training programmes as well as apprenticeship programmes that

combine classroom learning with on-the-job training. Several large companies in the

private sector have also developed their own training centres for meeting their specialized

training needs.

The Indonesian apprenticeship system has had a chequered history and was severely

impacted by the Asian Financial Crisis as well as processes associated with democratic

107

transition. In recent years there has been a reinvigoration of the apprenticeship system.

However, the current framework for apprenticeships is closer to a traineeship model and

there are several conceptual issues associated with the concept in Indonesia. For example,

the Indonesian term “pemagangan” covers a range of terms including “traineeship”,

“learnership”, “internship” and “apprenticeship”, despite the conceptual differences in the

various training programmes. It is generally acknowledged that an apprentice requires

several years of training, work experience and mentoring in order to consolidate their skills

base. While the word “apprentice” is sometimes used to describe a “beginner” it should not

be misconstrued in its actual meaning within the context of skills and trades. It usually

encompasses a thorough understanding and ability to perform the multiple tasks required in

a trade. In Indonesia apprenticeships are often only 3 to 6 months in duration and by law a

maximum of 12 months for apprenticeships, as per the regulations provided by the

Ministry of Manpower.100

The Minister of Manpower has the mandate for regulation of apprenticeships in Indonesia,

however, there are many barriers to its effective operation. For example, several ministries

operate their own programmes in absence of an adequate equivalency certification

framework to support skills recognition. In addition, there are several companies in the

private sector that have established their own training centres, however, certification from

such training programmes is often not recognized beyond the immediate employer. These

challenges raise issues on skills portability, with the lack of coordination potentially

impacting upon the mobility of trained workers through increasing retention and reducing

competition for skilled workers.

6. Conclusions

The model that delivered robust economic growth and social cohesion since the removal of

President Suharto and the Asian economic crisis in 1997-98 has been under threat from a mix

of external and internal forces in the last few years. In particular, the economic slowdown in

China and the end of the commodities “super-cycle” has damaged the profitability of

Indonesian plantations and the extractive sector. More recently, as in other emerging

economies, investor and consumer confidence are being tested. The currency experienced

heightened volatility in mid 2015 but has been more stable in recent months.101

Despite these head winds in the global economy, Indonesia has maintained annual real

economic growth rates around the 5 % mark. The labour market situation also remains

reasonable compared to trends in other emerging economies. On the plus side there are signs

100 In 2005 the Minister for Manpower issued Ministerial Regulation No.21/MEN/X/2005 on the

implementation of the apprenticeship program, and in in 2007, the government issued Government Regulation

No.31/2006 in an attempt to support renewal of the program by laying the groundwork for the National

Apprenticeship System (SISLATKERNAS). The current system is known as the Enterprise based

Apprenticeship System and consists of apprenticeships of 3-6 months duration, based on a contract between the

apprentice and employer. The maximum time allowed for an apprenticeship is 12 months. 101 Based on data from Bank Indonesia on the foreign exchange rate reference from the Jakarta interbank, where USD 1 = IDR 12,188 on 01 Oct 2014 and USD 1 = IDR 14,654 01 Oct 2015.

108

that the quality of jobs may have improved somewhat given that the proportion of workers in

wage employment continues to rise and now constitutes slightly less than 40 % of all jobs,

although not all wage employment can be considered decent.

This is not the time for panic or rash decision making. Economic growth rates and labour

market indicators of this magnitude would delight policy makers in most other economies

that depend heavily on the export of commodities. The Government has taken a range of

measures to reinforce macroeconomic stability and encourage structural change. In the period

ahead the real test will be whether the manufacturing sector can expand while improving

productivity performance and moving up the “value chain”. Similarly, the services sector also

needs to show rapid gains in employment quality to absorb the youthful and more educated

labour force of the future.

There is broad consensus that a stronger, and more diversified, manufacturing sector should

play a more prominent role in driving growth in Indonesia. Debate continues about the right

mix of policies to achieve this goal. Indonesian has considerable experience, and comparative

advantage, in various labour intensive manufacturing activities. These parts of the economy

have performed much better than is commonly believed in recent years. In terms of output

growth, productivity and employment, the record of labour intensive manufacturing has been

robust. Low labour costs, a diligent and reasonably well trained workforce, particularly in

Central Java, has increasingly made this Province of Indonesia a destination of choice in the

Asian region for foreign investors and multinational companies in the clothing, footwear and

related industries. The fact that Indonesia had a sound record on freedom of association and

respect for fundamental International Labour Standards after 1998 has reinforced foreign

investor decisions and encouraged high profile multinational companies, who jealousy guard

the reputation of their supply chain, to source from Indonesia.

Nevertheless there remains scope to significantly expand employment in the manufacturing

and high end service sectors. Moving more workers from low productivity activities in the

agriculture and informal economy into better paying and higher productivity jobs in

manufacturing and services is a sensible and realistic objective.

Public policy also needs to support capital and resource intensive manufacturing activities. So

far Indonesia has failed to capture its fair share of foreign direct investment in capital

intensive manufacturing. Given the size of the domestic market, very competitive labour

costs and the geographical location of Indonesia, one would expect far greater integration in

global supply chains centred on capital intensive manufacturing. On the plus side there have

been indications that large multinational firms in the automobile and electronics industries are

looking favourable at expanding production in Indonesia. Policies already adopted by the

Government to improve infrastructure and reduce the bureaucratic burdens that investors

face will help to secure such foreign direct investments.

The Government can do more to encourage high end manufacturing and better quality

services by improving the quality of existing public investment on skills and training. There

is broad consensus that Indonesia faces a significant skills deficit, but public policy in this

domain is constrained by the lack of coordination across Government Departments and

109

Provincial authorities. Private investment in skills and training is discouraged due to an

underdeveloped apprenticeship system, the heavy reliance on fixed term contract workers and

other forms of precarious work and possible some aspects of the existing employment

protection legislation.

In any economy the wage system can be used to complement industry policy in an attempt to

bring about structural change. It is usually difficult to design a wage fixing system that

simultaneously supports industries that want to complete with low wage clothing and

footwear producers and high tech manufacturing products. However, the Indonesian system

of Provincial and district level minimum wages, with differentials of 270 % between the

highest and lowest Provincial minimum wages, does provide scope to support a very

diversified economic structure.

The collapse in global commodity prices and recent moderation in domestic economic growth

rates has reignited old policy debates about labour market institutions and laws. It was used to

justify controversial reforms to the minimum wage fixing system in mid-October 2015. The

economic rationale for these reforms remains unclear. Protagonists of the new “formula”

approach to minimum wage fixing, which eliminates any social dialogue and reduces the

emphasis on “decent living needs”, claim this new approach is “fair, simple and reliable”.

The new system is supposed to result in all minimum wages being adjusted annually to

reflect the combined value of real GDP growth and the percentage increase in the national

CPI in the previous year.

This system is simpler than the old system, which involved detailed surveys of changes in

living costs and rigorous economic debate at the Provincial level between government

officials, employers and trade unions. This Report has however raised questions about the

likely medium to longer term impact of the reforms on wage levels, inflation and eventually

macroeconomic policy. The “old” minimum wage system delivered a prolonged period of

real wage restraint between 2003 and 2012. While it lacked the reliability of the formula,

analysis presented in Section 4 of this Report demonstrated that wage costs would have been

lower in most Provinces, and in most years since 2003, with the “old” minimum wage system

than with the new formula approach.

It is also true that the “old” minimum wage fixing system generated substantial nominal

minimum wage increases immediately before, and again after, the “great wage moderation”.

When we put minimum wage trends aside, we see that average real wages have not kept pace

with productivity improvements over the long term, inflation has declined, the proportion of

good jobs in the labour market has grown and Indonesian manufactured goods remain

competitive in international markets.

The impact of recent reforms on social cohesion is a reason for concern. Since October 2015

Indonesia has witnessed an upsurge in strikes and demonstrations against the minimum wage

reforms. Moreover, during 2016 industrial tensions have intensified. In June 2016 the ILO

Committee on the Application of Standards issued far reaching recommendations for reforms

to both laws and industrial relations practices in Indonesia. The Committee composed of

employers, governments and trade unions from around the world decided that the situation

110

was sufficient grave to send a “direct contacts missions”, which is a team of international

legal experts, to Indonesia to assist the Government revise its laws and practices. The last

time this happened in Indonesia was in 1998.

If industrial relations continue to deteriorate in Indonesia this will deter both foreign and local

investors at a time when Indonesia needs to attract investors leaving China in search of new

competitive locations. As things stand, Indonesia has a comparative advantage in low labour

costs over many other key competitors in Asia. What it lacks is the required reliability of

production, an efficient logistics system, a sufficient skill base and sound industrial relations.

The smart strategy would be to tackle the areas in deficit without sacrificing the advantages

that currently exist. Indonesia has worked hard to establish a good reputation on Freedom of

Association and related human rights since 1998. This should not be sacrificed at this time.

While it may be tempting for some to dress debates about minimum wage fixing in

sophisticated economic arguments, this is really a fight about the balance of power in the

workplace. No one denies that the former minimum wage fixing system was politicised and

could result in sudden upward jumps in labour costs, which in an ideal world, would be

smoothed out over time. Nor can it be ignored that observed differences in minimum wage

rates between Provinces and districts may at times be inconsistent with economic

fundamentals. But these arguments ignore the fact that trade unions in Indonesia have used

the minimum wage fixing system as a powerful organising tool. Campaigns around the

minimum wage are simple, easy to communicate and widely supported. Workers, without

distinction whatsoever, know and care about their minimum wage despite the complexities

and inconsistencies in the system. Workers have joined unions in large numbers because

union leaders are identified with high profile campaigns that have had a tangible impact on

living standards.

The unions realise that reforming the minimum wage fixing system in accordance with

Government Regulation 78 of 2015, to make adjustments automatic and in line with past CPI

and GDP movements, will rob them of their most prized organising weapon. Why would any

worker join a trade union if their wages are regularly adjusted according to a mathematical

formula?

That is unless the trade unions have an alternative and equally powerful organising tool. That

tool cannot be enterprise collective bargaining. Given the structure of the economy no union

can adequately service and bargain on behalf of workers in the multitude of micro

enterprises. However, industry level collective bargaining might be feasible in key sectors

and may be sufficiently attractive to tempt the trade union movement to reconsider their

objections to the recent minimum wage reforms. Article 49 of the new wage regulation

concerns sector level “minimum wages”. This Article would appear to provide the necessary

flexibility to at least start a constructive tripartite dialogue about industry level collective

bargaining. It may be feasible to establish, over time, a comprehensive industry level

collective bargaining system in which the trade goods sector is a “pacesetter” for wage

adjustments. In which case there would be a high probability that international

competitiveness would be maintained and there would exist sufficient incentives for

111

employers in the manufacturing sector to reinvest in the capital required to move up the value

chain.

The World Bank has previously proposed a grand bargain of labour reforms. This idea has

merit. In addition to minimum wages and collective bargaining there are a range of other

labour laws and institutions that should be reviewed in a high level tripartite forum. For

example, although reforms to employment protection legislation remain controversial, a

focus on this topic may be desirable. Section 5.4 of this Report has suggested that the

conciliation process required prior to an individual dismissal in Indonesia is unusual by

international standards and time consuming for employers. It was also suggested that the

complex combination of benefits that a dismissed worker is legally entitled to receive ( which

includes severance payments, long service benefits and some additional compensation for

accrued rights) should be reviewed. In so doing two considerations are highly relevant: first,

long service benefits should not be confused with severance payments and should be

available to all workers after a suitable period of tenure; and second, the payments specified

in laws for severance, long service and related benefits are very rarely paid. In the best of

circumstances workers receive a proportion of their legal entitlements. Bring the laws and

actual practice into closer accord through a combination of adjustments to the laws and

improved enforcement would enhance both equity and efficiency.

In Indonesia the rules governing the maximum length and grounds for using fixed term

contacts and the regulations governing the outsourcing of work are very rarely enforced.

This explains the high incidence of nonstandard forms of work. Past attempts to legally

curtail the incidence of fixed term contracts and outsourcing have not been successful. In the

absence of fundamental improvements in the labour inspection system and the labour courts

further tightening of the laws governing non-standard forms of work are unlikely to have any

significant impact. It may therefore make more sense to maintain the existing laws and

gradually improve enforcement, while making an immediate adjustment to the financial

incentives facing entrepreneurs when they make decisions about their labour inputs.

Employers argue that they need the flexibility that non-standard forms of work provide to

meet fluctuations in demand for their output. But it is also evident that workers in a

precarious employment relationship are less likely to join a union or demand their legal

rights. A high concentration of fixed term contracts and outsourcing thus contributes to the

imbalance of power at the workplace. As things stand at the moment, by using a high

proportion of fixed term and outsourced workers, employers have shifted much of the risk

that results from the normal business cycle and other unanticipated fluctuations in demand

from themselves to their workers. There is therefore an argument for adjusting this equation

by requiring employers to compensate workers in precarious situations for the insecurity they

face. For example, consideration might be given to applying a wage premium, of say 15 %, to

all workers who do not enjoy a contract without limit of time. A simple rule like this might

stand a better chance of being enforced then additional complex rules that define either the

length of fixed term contracts or the type of work that can be outsourced.

112

By reducing the financial incentives for an excessive concentration of fixed term contract

work and encouraging longer job tenure, it becomes more economically viable for firms to

invest in skills development. Reforms that would encourage large firms to invest in genuine

long term vocational training programmes that combine on-the- job training with structured

courses in state of the art vocational training facilities would make good sense.

Young employees benefiting from such schemes also need to make a contribution and be

prepared to accept wage rates below those paid to fully qualified trades people. Apprentices

that follow structured training and receive quality mentoring are very likely to improve their

employability and future earning capacity. Therefore participating in such a program can be

seen as an investment in longer term prosperity. But these young workers should not be

treated as slave labour, which is the current trade union perception of apprenticeship and

internship schemes in Indonesia.

Finally, the issue of compliance with minimum wages, social security programmes, and

labour laws needs to be urgently addressed. Indonesia has a very poor record at enforcing the

minimum wage with roughly one in two workers not receiving the wage to which they are

legally entitled. The record with enforcement of other norms and labour laws is equally poor

or worse. Indonesia requires a system of labour inspection and labour courts that are well

resourced and transparent. Greater cooperation between tax and labour law enforcement

would be highly desirable.

Going forward, the Government and social partners in Indonesia need to genuinely accept

that compromises and trade-offs are required to make the labour market more equitable and

efficient. All parties should commit to the adoption of a comprehensive and balanced package

of labour market reforms that will serve the interests of the majority. This package would

include measure to enhance skills, the enforcement of minimum wages and labour rights,

adjustments to employment protection legislation and the pay rates of non-permanent wage

employees, as well as the changes to minimum wage adjustment process and the promotion

of sector level collective bargaining through the provisions contained in Government

Regulation 78 of 2015.

113

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Annex: Minimum wages by province, 1997-2014

Province 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Aceh 115,283 170,482 230,824 307,603 300,000 330,000 425,000 550,000 620,000 820,000 850,000 1,000,000 1,200,000 1,300,000 1,350,000 1,400,000 1,550,000 1,750,000

Sumatera Utara 132,557 194,315 227,675 261,000 340,500 464,000 505,000 537,000 600,000 737,794 761,000 822,205 905,000 965,000 1,035,500 1,200,000 1,375,000 1,505,850

Sumatera Barat 114,372 165,442 203,554 251,712 250,000 385,000 435,000 480,000 540,000 650,000 725,000 800,000 880,000 940,000 1,055,000 1,150,000 1,350,000 1,490,000

Riau 156,893 222,430 235,330 251,000 329,000 394,000 437,500 476,875 551,500 637,000 710,000 800,000 901,600 1,016,000 1,120,000 1,238,000 1,400,000 1,700,000

Jambi 130,180 191,566 242,463 215,463 245,000 304,000 390,000 425,000 485,000 563,000 658,000 724,000 800,000 900,000 1,028,000 1,142,500 1,300,000 1,502,230

Sumatera Selatan 135,626 191,167 239,595 251,575 255,000 331,500 403,500 460,000 503,700 604,000 662,000 743,000 824,730 927,825 1,048,440 1,195,220 1,630,000 1,825,600

Bengkulu 132,377 191,379 194,400 210,162 240,000 295,000 330,000 363,000 430,000 516,000 644,838 690,000 735,000 780,000 815,000 930,000 1,200,000 1,350,000

Lampung 132,395 187,824 190,400 220,500 240,000 310,000 350,000 377,500 405,000 505,000 555,000 617,000 691,000 767,500 855,000 975,000 1,150,000 1,399,037

Kepulauan Bangka Belitung - - - - - 345,000 379,500 447,923 560,000 640,000 720,000 813,000 850,000 910,000 1,024,000 1,110,000 1,265,000 1,640,000

Kepulauan Riau - - - - - - - - 557,000 760,000 805,000 833,000 892,000 925,000 975,000 1,015,000 1,365,087 1,665,000

DKI Jakarta 173,349 254,251 340,630 351,263 426,250 591,266 631,554 671,550 711,843 819,100 900,560 972,604 1,069,865 1,118,009 1,290,000 1,529,150 2,200,000 2,441,000

Jawa Barat 142,695 206,317 242,329 244,475 245,000 280,779 320,000 366,500 408,260 447,654 516,840 568,193 628,191 671,500 732,000 780,000 850,000 1,000,000

Jawa Tengah 123,115 173,776 217,000 235,750 245,000 314,500 340,400 365,000 390,000 450,000 500,000 547,000 575,000 660,000 675,000 765,000 830,000 910,000

DIYogyakarta 119,281 172,767 227,901 227,064 237,500 321,750 360,000 365,000 400,000 460,000 500,000 586,000 700,000 745,694 808,000 892,660 947,114 988,500

Jawa Timur 120,235 172,951 229,055 202,748 220,000 245,000 274,000 310,000 340,000 390,000 448,500 500,000 570,000 630,000 705,000 745,000 866,250 1,000,000

Banten - - - - - 360,000 475,000 515,000 585,000 661,613 746,500 837,000 917,500 955,300 1,000,000 1,042,000 1,170,000 1,325,000

Bali 141,381 204,701 286,075 288,000 309,750 341,000 410,000 425,000 447,500 510,000 622,000 682,650 760,000 829,316 890,000 967,500 1,181,000 1,542,600

Nusa Tenggara Barat 108,654 160,679 192,413 257,150 240,000 320,000 375,000 412,500 475,000 550,000 645,000 730,000 832,500 890,775 950,000 1,000,000 1,100,000 1,210,000

Nusa Tengggara Timur 134,741 186,926 200,707 237,425 275,000 330,000 350,000 400,000 450,000 550,000 600,000 650,000 725,000 800,000 850,000 925,000 1,010,000 1,150,000

Kalimantan Barat 137,618 202,604 257,178 255,707 304,500 380,000 400,000 420,000 445,200 512,000 560,000 645,000 705,000 741,000 802,500 900,000 1,060,000 1,380,000

Kalimantan Tengah 162,202 231,354 283,430 355,442 362,000 362,000 425,000 482,250 523,698 634,260 665,973 765,868 873,089 986,590 1,134,580 1,327,459 1,553,127 1,723,970

Kalimantan Selatan 118,538 175,295 270,000 233,721 295,000 377,500 425,000 482,212 536,300 629,000 745,000 825,000 930,000 1,024,500 1,126,000 1,225,000 1,337,500 1,620,000

KalimantanTimur 162,717 234,278 312,199 317,704 300,000 500,000 540,000 572,652 600,000 701,640 766,500 889,654 955,000 1,002,000 1,084,000 1,177,000 1,752,073 1,886,315

Sulawesi Utara 126,455 182,155 282,144 248,706 372,000 438,000 495,000 545,000 600,000 713,500 750,000 845,000 929,500 1,000,000 1,050,000 1,250,000 1,550,000 1,900,000

Sulawesi Tengah 123,659 181,172 263,291 240,000 245,000 350,000 410,000 450,000 490,000 575,000 615,000 670,000 720,000 777,500 827,500 885,000 995,000 1,250,000

Sulawesi Selatan 129,291 190,083 267,122 257,035 300,000 375,000 415,000 455,000 510,000 612,000 673,200 740,520 905,000 1,000,000 1,100,000 1,200,000 1,440,000 1,800,000

Sulawesi Tenggara 130,644 192,407 260,291 254,250 275,000 325,000 390,000 470,000 498,600 573,400 640,000 700,000 770,000 860,000 930,000 1,032,300 1,125,207 1,400,000

Gorontalo - - - - - 375,000 410,000 430,000 435,000 527,000 560,000 600,000 675,000 710,000 762,500 837,500 1,175,000 1,325,000

Sulawesi Barat - - - - - - - - - 612,000 691,464 760,500 909,400 944,200 1,006,000 1,127,000 1,165,000 1,400,000

Maluku 154,259 223,968 230,000 230,000 230,000 285,000 370,000 450,000 500,000 575,000 635,000 700,000 775,000 840,000 900,000 975,000 1,275,000 1,415,000

Maluku Utara - - - - 230,000 322,000 370,000 400,000 440,000 528,000 660,000 700,000 770,000 847,000 889,350 960,498 1,200,622 1,440,746

Papua Barat - - - - - - - - - 822,500 987,000 1,105,500 1,180,000 1,210,000 1,410,000 1,450,000 1,720,000 1,870,000

Papua 193,789 286,186 237,756 331,579 400,000 530,000 600,000 650,000 700,000 822,500 987,000 1,105,500 1,216,100 1,316,500 1,403,000 1,585,000 1,710,000 2,040,000

Average 141,953 205,112 252,996 265,721 308,460 362,743 414,715 458,499 507,697 602,702 672,480 745,709 841,530 908,824 988,829 1,088,903 1,296,908 1,584,391

119

Annex: Nominal growth rates for minimum wages by province, 1997-2014

Province 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Aceh

47.9% 35.4% 33.3% -2.5% 10.0% 28.8% 29.4% 12.7% 32.3% 3.7% 17.6% 20.0% 8.3% 3.8% 3.7% 10.7% 12.9%

Sumatera Utara

46.6% 17.2% 14.6% 30.5% 36.3% 8.8% 6.3% 11.7% 23.0% 3.1% 8.0% 10.1% 6.6% 7.3% 15.9% 14.6% 9.5%

Sumatera Barat

44.7% 23.0% 23.7% -0.7% 54.0% 13.0% 10.3% 12.5% 20.4% 11.5% 10.3% 10.0% 6.8% 12.2% 9.0% 17.4% 10.4%

Riau

41.8% 5.8% 6.7% 31.1% 19.8% 11.0% 9.0% 15.6% 15.5% 11.5% 12.7% 12.7% 12.7% 10.2% 10.5% 13.1% 21.4%

Jambi

47.2% 26.6% -11.1% 13.7% 24.1% 28.3% 9.0% 14.1% 16.1% 16.9% 10.0% 10.5% 12.5% 14.2% 11.1% 13.8% 15.6%

Sumatera Selatan

41.0% 25.3% 5.0% 1.4% 30.0% 21.7% 14.0% 9.5% 19.9% 9.6% 12.2% 11.0% 12.5% 13.0% 14.0% 36.4% 12.0%

Bengkulu

44.6% 1.6% 8.1% 14.2% 22.9% 11.9% 10.0% 18.5% 20.0% 25.0% 7.0% 6.5% 6.1% 4.5% 14.1% 29.0% 12.5%

Lampung

41.9% 1.4% 15.8% 8.8% 29.2% 12.9% 7.9% 7.3% 24.7% 9.9% 11.2% 12.0% 11.1% 11.4% 14.0% 17.9% 21.7%

Kepulauan Bangka Belitung

10.0% 18.0% 25.0% 14.3% 12.5% 12.9% 4.6% 7.1% 12.5% 8.4% 14.0% 29.6%

Kepulauan Riau

36.4% 5.9% 3.5% 7.1% 3.7% 5.4% 4.1% 34.5% 22.0%

DKI Jakarta

46.7% 34.0% 3.1% 21.3% 38.7% 6.8% 6.3% 6.0% 15.1% 9.9% 8.0% 10.0% 4.5% 15.4% 18.5% 43.9% 11.0%

Jawa Barat

44.6% 17.5% 0.9% 0.2% 14.6% 14.0% 14.5% 11.4% 9.6% 15.5% 9.9% 10.6% 6.9% 9.0% 6.6% 9.0% 17.6%

Jawa Tengah

41.1% 24.9% 8.6% 3.9% 28.4% 8.2% 7.2% 6.8% 15.4% 11.1% 9.4% 5.1% 14.8% 2.3% 13.3% 8.5% 9.6%

DIYogyakarta

44.8% 31.9% -0.4% 4.6% 35.5% 11.9% 1.4% 9.6% 15.0% 8.7% 17.2% 19.5% 6.5% 8.4% 10.5% 6.1% 4.4%

Jawa Timur

43.8% 32.4% -11.5% 8.5% 11.4% 11.8% 13.1% 9.7% 14.7% 15.0% 11.5% 14.0% 10.5% 11.9% 5.7% 16.3% 15.4%

Banten

31.9% 8.4% 13.6% 13.1% 12.8% 12.1% 9.6% 4.1% 4.7% 4.2% 12.3% 13.2%

Bali

44.8% 39.8% 0.7% 7.6% 10.1% 20.2% 3.7% 5.3% 14.0% 22.0% 9.8% 11.3% 9.1% 7.3% 8.7% 22.1% 30.6%

Nusa Tenggara Barat

47.9% 19.7% 33.6% -6.7% 33.3% 17.2% 10.0% 15.2% 15.8% 17.3% 13.2% 14.0% 7.0% 6.6% 5.3% 10.0% 10.0%

Nusa Tengggara Timur

38.7% 7.4% 18.3% 15.8% 20.0% 6.1% 14.3% 12.5% 22.2% 9.1% 8.3% 11.5% 10.3% 6.3% 8.8% 9.2% 13.9%

Kalimantan Barat

47.2% 26.9% -0.6% 19.1% 24.8% 5.3% 5.0% 6.0% 15.0% 9.4% 15.2% 9.3% 5.1% 8.3% 12.1% 17.8% 30.2%

Kalimantan Tengah

42.6% 22.5% 25.4% 1.8% 0.0% 17.4% 13.5% 8.6% 21.1% 5.0% 15.0% 14.0% 13.0% 15.0% 17.0% 17.0% 11.0%

Kalimantan Selatan

47.9% 54.0% -13.4% 26.2% 28.0% 12.6% 13.5% 11.2% 17.3% 18.4% 10.7% 12.7% 10.2% 9.9% 8.8% 9.2% 21.1%

KalimantanTimur

44.0% 33.3% 1.8% -5.6% 66.7% 8.0% 6.0% 4.8% 16.9% 9.2% 16.1% 7.3% 4.9% 8.2% 8.6% 48.9% 7.7%

Sulawesi Utara

44.0% 54.9% -11.9% 49.6% 17.7% 13.0% 10.1% 10.1% 18.9% 5.1% 12.7% 10.0% 7.6% 5.0% 19.0% 24.0% 22.6%

Sulawesi Tengah

46.5% 45.3% -8.8% 2.1% 42.9% 17.1% 9.8% 8.9% 17.3% 7.0% 8.9% 7.5% 8.0% 6.4% 6.9% 12.4% 25.6%

Sulawesi Selatan

47.0% 40.5% -3.8% 16.7% 25.0% 10.7% 9.6% 12.1% 20.0% 10.0% 10.0% 22.2% 10.5% 10.0% 9.1% 20.0% 25.0%

Sulawesi Tenggara

47.3% 35.3% -2.3% 8.2% 18.2% 20.0% 20.5% 6.1% 15.0% 11.6% 9.4% 10.0% 11.7% 8.1% 11.0% 9.0% 24.4%

Gorontalo

9.3% 4.9% 1.2% 21.1% 6.3% 7.1% 12.5% 5.2% 7.4% 9.8% 40.3% 12.8%

Sulawesi Barat

13.0% 10.0% 19.6% 3.8% 6.5% 12.0% 3.4% 20.2%

Maluku

45.2% 2.7% 0.0% 0.0% 23.9% 29.8% 21.6% 11.1% 15.0% 10.4% 10.2% 10.7% 8.4% 7.1% 8.3% 30.8% 11.0%

Maluku Utara

40.0% 14.9% 8.1% 10.0% 20.0% 25.0% 6.1% 10.0% 10.0% 5.0% 8.0% 25.0% 20.0%

Papua Barat

20.0% 12.0% 6.7% 2.5% 16.5% 2.8% 18.6% 8.7%

Papua

47.7% -16.9% 39.5% 20.6% 32.5% 13.2% 8.3% 7.7% 17.5% 20.0% 12.0% 10.0% 8.3% 6.6% 13.0% 7.9% 19.3%

Average

44.5% 23.3% 5.0% 16.1% 17.6% 14.3% 10.6% 10.7% 18.7% 11.6% 10.9% 12.8% 8.0% 8.8% 10.1% 19.1% 22.2%

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Annex II: Freedom of Association Case

labour reforms in indonesia: an agenda for greater … labour reforms in indonesia: an agenda for...

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