COUNTRY REPORT INDONESIA WAGES POLICY AND DEVELOPMENT OF THE POLICY By Markus S Sidauruk (K-SBSI)

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1 COUNTRY REPORT INDONESIA WAGES POLICY AND DEVELOPMENT OF THE POLICY By Markus S Sidauruk (K-SBSI) I. Structure & Condition of Labor Market As the biggest population number 5 th of the world, Indonesia has been characterized by dualistic structure of employment and economics, that are a large tradisional sector (informal economy) and small modern sector (formal economy), If formal employment is represented by labourers/employees, while informal employment is represented by other employment status, thus the trend of formal employment it seems just going back to situation before the crisis 97.(Figure 1). 100% 50% 0% Gambar 1. Perkembangan Lapangan Pekerjaan dalam Sektor Formal & Informal 64,5% 72,8% 35,5% 27,2% 36,36% % Formal % Informal Beside those, the Indonesia labor market has also signed by existing excessive labor supply and lowest quality of labor force which dominated by unskilled labour (figured 2). Thus practice, wages became central issues on industrial relationship II. Wages Policy In Indonesia. 63,64% 100% 77,70% 74,90% 66,90% Basically, Wages Policy in Indonesia is consist of two biggest policy; (1) Wages Policy related to fixing mechanism of wages in labor market and (2) wages policy that which protects labors at work place. Systematically, the fixing mechanism of wages policy in labor market is consist of (Act No 13/2003) ; a) Fixing Minimum wages (Article 88) b) Determint wages through negotiation (Article 91) c) Applying wages structure & scale (Article 92 sub section 1). d) Peninjauan Upah Secara Berkala (Article 92 sub section 2). Mean while, the wages policy that protects labors shall include (Axt No 13/2003 article 88 sub section 3); a. Minimum wages; b. Overtime pay; c. Paid-wages during the absence; d. Paidwages because of activities outside of his job that he has to carry out; e. Wages payable because he uses his right to take a rest; f. The form and method of the payment of wages; g. Fines and deductions from wages; h. Other matters that can be calculated with wages; i. Proportional wages structure and scale; j. Wages for the payment of severance pay; and k. Wages for calculating income tax. Fixing Minimum Wages Level MW stipulated for single worker that has experience less than one year. The Fising of MW is done either at province or district/city, by governor based on recommendation of wages council. Beside the MW, Governor has also determine 50% 0% Gambar 2. Tingkat Pendidikan Tenaga Kerja Di Indonesia SMP SMU/SMK Univ/Dipl.

2 Provincial Sector MW (PS-MW) and District/City Sector MW (D/CS-MW) which are set based on agreement between the entrepreneurs and the trade union. So, the minimum wages can consist of; Prov MW, District/City MW, PS-MW, and D/CS-MW Wages Agreement (Wages Negotiation) Beside MW setting which conducted by the government based on acts, wages can also be set/fixing through agreement. Determine of wages through the agreement usually be done for workers who have experiences above 1 years. Wages agreement can be made at industry or company level. The wages agreement at industry level usually be conducted between a certain sector union and a sector employers association. This agreement is rarely be content in CBA (generally the agreement at this level is given to governor for set become sector minimum wages and stipulated as minimum wage). While wages agreement at company level is divided two form: a) Individually; between professional workers and management/employer which is contend in working agreement. b) Collectively; between trade union and employers which is contend in CBA Collective negotiation is possible admitted if a company has established trade union and it s membership more than 50% (50% + 1) or the trade union get supporting above 50% of existing total workers of the company. Wages Structure & Scale Beside wages agreement, other mechanism of wages setting can also be conducted through appliying wages structure and scale. The entrepreneur shall establish a structure and scale of wages for determining the wages of workers/ laborers in the enterprise. 1 On this case, employers should make an occupational analysis, occupational description and occupational evalution. 2 The establishment of wages structure is conducted by establish lowest wages structures till highest wages with considerate few things as following: 3 a. Organizational structure [of the enterprise]; b. The differential ratio in the weight of interoccupational jobs; c. The ability of the enterprise; d. The entire labor costs; e. Minimum wages; f. Market conditions. A wage scale can be established as: a single scale or double scale. Under the single scale, the same wage is assigned to each occupation that falls under the same occupational group. Under the double scale, a wage of the lowest nominal value and a wage of the highest nominal value are present in each occupational group. 4 The Structure and scale of wages has not compulsory yet, thus practice only few private companies have already applied, particular corporates. 1 Pasal 2 Kepmenakertrans No 49 Tahun 2004 tentang Ketentuan Penyusunan Struktur dan Skala Upah 2 Pasal 3 Kepmenakertrans No 49 Tahun 2004 tentang Ketentuan Penyusunan Struktur dan Skala Upah 3 Pasal 7 Kepmenakertrans No 49 Tahun 2004 tentang Ketentuan Penyusunan Struktur dan Skala Upah 4 Pasal 8 Kepmenakertrans No 49 Tahun 2004 tentang Ketentuan Penyusunan Struktur dan Skala Upah

3 Reviewing Wages Periodically Other mechanism in setting wages is through reviewing wages periodically. This is arragement under Act No 13/2003 article 92 (subsection 2): Entrepreneurs shall review their workers/labourers wages periodically by taking into account their enterprise s financial ability and productivity. Reviewing wages periodic should be done by companies, beside to keep purchasing power of wages excepted by their employees, and beside it s also to keep their qualified human resources are not moving to other companies. III. PROBLEMS ABOVE THE WAGES POLICIES Trade union account on MW Setting mechanism to increase labor wages and prosperity; from Provincial MW setting to District MW setting and then to sectorial MW. The MW continuous increasingly every year as increasing nominal wages, but not able arising real wages significantly. That so, the trend of wages in labor market is around MW, particular on labor intensive industry. However, Labor still complain (groaming) that their wages is not enough for their living, since the MW became an effective wages both for them who single, family and have already ecperiences above 1 year. On the other side, employer complain that MW continuous increasing every years and push increasing wages on general (incremental wages). The increasing have already over of productivity rate, thus made decreasing competitiveness and company ability to pay. Averages of labor nominal wages on intensive industries increase as increasingly MW. Averages of wages on intensive industries like agriculture, manufacturing, construction & building; and trading tend to be around the MW and under of Averages of labor wages at national level (figure 3, histogram). Figure 3. Averages of Labor Wages on Labor Intensive and capital intensive Industries The Same situation with capital intensive industries; averages of wages increase as increasingly MW. The labor wages on the capital intensive are being above of the Provincial MW and national averages of labor wages (figure 3, line). However, nominal wages increase are not in line with increasing real wages (Figure 4, 5, 6, 7).

4 32,6 29, ,2 37,7 38,2 44,6 43,7 39,8 35,2 37,9 37,3 40,8 35,2 67,4 70, ,8 62,3 61,8 55,4 56,3 60,2 64,8 62,1 62,7 59,2 64,8 Figure 4. The Trend of Labour Wages on Manufacturing industry Figure 5. The Trend of Labour Wages on Hotel Industry (Million Rp) Figure 6. The Trend of Labour Wages on Mining Industry Gambar 7. The Trend of Labour Wages On Transport & Communication industry On the other side the level noncompliance on implementation of MW is still highest. Percentage labor who get wages under MW seems being increase from 29,4% on August 2006 become 35,2% on August The non compliance level reach the top around 44,6% on February Figure 8. Percentage of Labour Who Get Wages Under and Above Provincial Min. Wages Feb Agt Feb Agt Feb Agt Feb Agt Feb Agt Feb Agt Feb Agt Under Prov MW Above Prov-MW This Situation led to; (a) Labors can not enjoy MW increase (real wages), since MW Setting is known abroad society (determined by Governoor). (b) Employers have also did not feel the benefits of the minimum wage increase beside Labor Costs addition (c) Pushing/Urging skilled workers out of the formal sector to the informal sector, due to the trend of wages in labour market is around MW. This is reinforced by the World Bank report (2010) that stated the increasing MW around 10% will urge skilled workers by 1% and unskilled workers 0.5 percent to agriculture sector..

5 Thus the concequences of those, the formal sector is less developing, because, part of companies should closed (bankruptcy or relocation to other places or countries), while other part are newcomer. On the other side, the impact of clossing companies (bankruptcy or relocation) make a number of plant level union decreasing as declining trade union membership (see tabel 1). TABEL 1. UNION FEDERATION & MEMBERSHIP YEAR National Centre Number Union Number of Enterprise Membership Federation Federation Federation Federation ,5 Million Federation Federation Federation Source:: Ditjen PHI & Jamsos IV. WAGES POLICY IN THE FUTURE (PROPOSAL) The Goal; Fair & Proper Wages For Labour and Their Family and also the quarantee of business development and sustainability The Objectives 1) To fullfill the needs live of the workers and their families & Made Trade union Strongest 2) Creating a conducive working environment for development and sustainability of business. 3) The creation and expansion of employment opportunities in the formal economic. PROPOSAL OF THE POLICY IMPROVEMENT No CURRENT MECHANISM PROPOSAL MINIMUM WAGES; P-MW, PS-MW D/C-MW, DS/CS-MW Every 1 year WAGES NEGOTIATION (CBA) STRUCTURE & SCALE OF WAGES (Mandatory) MINIMUM WAGES; D/C-MW & DS/CS-MW Every 2 to 3 Years*) STRUCTURE & SCALE OF WAGES (Compulsory) WAGES NEGOTIATION (CBA) 4 REVIEWING WAGES PERIODICALLY REVIEWING WAGES PERIODICALLY Note: *) Adjustmen on Inflation every year at company level