Jens Dyring Christensen, Jakarta
The current row over the proposed revision to the 2003 labor law highlights the ongoing debate about private firms' contribution to the greater good of society. One extreme view is that firms are just engines of profit maximization for owners who exploit workers for own benefit.
Private sector activities therefore need to be tightly regulated. Another extreme view is that firms should be free to set their own labor regulations, wage structures and hire and fire at will to stay competitive.
Most people, including most business owners, have a position somewhere on the continuum between these polar views. Private firms are the engines of growth and poverty reduction and contribute greatly to social goals, but this should not exclude them from specific responsibilities towards their workforce.
The exchange of labor between firms and individuals need basic regulation that protects workers while enabling firms to do business and expand and create more employment opportunities.
The essence of the current debate is therefore not about ""de-regulation"" where protection measures are scrapped, but more about ""re-regulation"". This means ""better regulation"" that protects formally employed workers, but equally important allows workers to escape hazardous and unprotected work in the informal economy where the majority of Indonesians find a living.
The fundamental challenge for the Indonesian government, labor unions and employers' in the coming years is to find a way to sustain economic growth. Economic growth creates employment. A job secures an income and is a way out of poverty. It gives people self-esteem and dignity.
Evidence from developed economies shows that economic growth is best achieved by creating an investment climate that opens up opportunities and incentives for foreign and domestic firms to invest whether these are micro or large, rural or urban based, formal or informal firms.
In the context of the current wrangle over the labor law the challenge is to find the right regulatory balance that leads to a favorable investment climate opening up opportunities for firms to grow and create jobs while at the same time ensuring adequate protection of workers.
Indonesian firms and employer's argue that the current labor law favors the protection of workers and deter new investment. The labor unions argue why tangle with workers protection when in fact labor regulations should not be the most important worry of firms.
There is some truth in both arguments. The labor regulation regime in Indonesia is only one aspect of the investment climate. Businesses also suffer under lengthy and costly procedures for starting a business, dealing with licenses and registering and titling property. Corporate tax rates and the enforcement of contracts are also major deterrents to investments.
These onerous regulations prevent many smaller businesses from entering the formal economy and from growing and creating jobs. They also place a heavier tax burden on existing formal firms.
Employers', however, still see current hiring and firing regulations including costly severance pay as important factors that reduce incentives for firms to adjust their workforce when pressed by competition or when technology upgrading requires more skilled workers.
The long-term result may be that individual Indonesian firms fail to innovate and stay competitive and sectors will go into a decline having to shed workers anyway. The paradox is that labor regulations, which have been crafted to protect workers, may actually result in pushing more workers into the informal sector with no social protection.
Indonesian firms may therefore be inclined to argue: ""what is best for Indonesian firms is also best for Indonesian workers"". Recent evidence from across the globe suggests there might be some truth in that.
In many economies entrepreneurship and competition is encouraged through low barriers to entering the formal economy as well as easy exit procedures when businesses are no longer profitable. Whereas firms naturally prefer less competition it is now clear that competition is a key factor for growth.
It ensures that competitive and productive firms remain and inefficient firms exit the market. Strong firms that stand the market pressure not only create better remunerated, more protected jobs with more productive workers; they also invest more in skills improvement of their employees, and they are better tax payers.
This ""creative destruction"" of firms as the Austrian economist Joseph Schumpeter argued almost a century ago is part of the natural cycle of business. Firms are born, firms die and scarce resources are reallocated to more efficient and productive firms in the economy.
In the process economic growth is created and industries stay competitive. The concern of labor unions and workers is that with high numbers of firms starting and going out of business job turnover is also high. The question is if this is such a bad thing? Yes, jobs are destroyed, but new jobs are also created.
In industrialized countries where labor market regulations are less stringent (but protection better) job creation over the past decade has been higher than job destruction. This has forced governments to put higher emphasis on adult education and re-skilling schemes for workers.
A flexible labor market where workers go in and out of jobs is also an incentive for a worker to invest in her own social capital and lifelong learning in the competition for a better job. In the long term firms, workers and society as a whole benefit from a flexible labor market.
This may however be of little consolation to the Indonesian worker and her family. The prospect of being out of a job and a secure income is chilling for most Indonesians who struggle to make ends meet. The question is if Indonesian workers have enough faith in market mechanisms being able to create more and better jobs over time if the final labor law makes it easier for Indonesian firms to ""hire and fire"" (clearly the most contentious issue in the debate).
No matter what the outcome of the tussle over the labor law, the Indonesian government, workers and employers need to find a common solution that will keep Indonesian firms competitive. That, however, will take a lot more than just easing labor regulations.
The writer is a specialist in private sector development at the International Labor Organization in Indonesia.
