T

he May Day rallies in Indonesia this year were mostly peaceful, large and colorful. Why shouldn'€™t they be? The previous year'€™s 2012 campaign for higher wages was spectacularly successful.

Besides very large (close to 50 percent) minimum wage increases for the districts in and around the Greater Jakarta, the government also announced a ban on labor outsourcing in all but five ancillary activities. In regard to minimum wages (MW), the manpower minister encouraged Governor Joko Widodo to accept a compromise between ambit union wage claims and more conservative recommendations of employers. The outcome, a Rp 2.2 million (US$224.38) MW increase, was big by any standards and well above the recommendations of the Provincial Wages Council in Jakarta.

Not all governors followed Jakarta'€™s lead in ratifying large increases in MWs for Jan. 1, 2013. Thus minimum wages are only half the Jakarta level in most regions in Central Java. But the 2012 Jakarta ruling set a new standard of national significance.

The increases are not only important for current wages but also for severance pay. The latter is based on the current level of wages and was thus also raised by nearly 50 percent in one year.

With this victory under their belt, it seems that unions are gearing up for another active campaign in 2013. The magnetic chairman of the Confederation of Indonesian Labor Unions (KSPI), Said Iqbal, recently explained that the MW standard was still too low in the national capital region (The Jakarta Post, May 4). He argued that it needed to be increased significantly to improve both welfare and productivity.

One argument is that the workers'€™ cost of living index or the KHL is still incomplete. The KHL is calculated annually in each region to judge the adequacy of the MW. Generally, the '€œbasket'€ of specific items (food and non-food) on which of the KHL is calculated is the same from year to year.

Annual increases in the KHL should thus reflect price increases of the same basket of goods and services consumed by workers. In 2012, the number of items was increased from 46 to 60 by the Manpower and Transmigration Ministry, thus contributing to a much higher KHL than in the previous year.

Despite this, some unionists argue that the number of items which make up the KHL should be increased again this year to an expanded 84 items or more. Such a change alone could raise the MW by as much as 15-20 percent next year, even before the rate of inflation is taken into account.

Why not raise the bar? Minimum wages of even double the current Jakarta standard are still dreadfully low by most world standards. Nevertheless, despite this, the interests of all working people may not be best served by steep increases in minimum wages. In fact, the working class as a whole, including employees in small firms and the informal sector, may actually be worse off.

One key question therefore is how much will the government listen to the advocacy unions in forthcoming negotiations? What are the public interest issues that the central government could and perhaps should consider '€” besides its own interest in harnessing political support from the growing urban, industrial work force?

At least two matters of public interest are worth consideration. First, the job impact of MWs. Most economists no longer adhere to the neoclassical mantra that increases in MW always reduce jobs in a competitive labor market. Many studies in Indonesia and internationally show that the impact of smaller real MW increases (after adjusting for inflation) in the range of 5-10 percent per annum don'€™t necessarily harm employment. Some authors, for example, point to the productivity gains from higher wages, which sometimes offset the effect of cost increases, and their jobs impact.

Nevertheless, most would argue that a 44 percent increase in one year, as in Jakarta in 2013, will cause at least some (and probably a lot) of job losses, as well as postpone some hiring of new workers. The impacts can be predicted to be big in labor-intensive industries where wages are a larger a share of value added.

The second set of public interest issues is more subtle. It relates to the wage gap between the larger, capital-intensive and smaller firms. This tends to widen with a strong MW policy, and creates several tensions. There is a greater probability of larger firms paying the MW than smaller ones. The more conspicuous, larger, firms are more likely to be monitored by unions whereas MW are less closely supervised in smaller firms.

Big MW increases reinforce a wage gap that occurs naturally in resource-rich countries like Indonesia. Mining and capital intensive companies can afford to pay high wages, and do so to retain a committed work force, and as part of the quid pro quo for investment rights.

Thus this wage gap is large in Indonesia. For example, the National Labor Force data indicate that 30 percent of all (blue collar) production workers, outside agriculture, earned less than Rp 800,000 a month in August 2012.

In contrast, just under 25 percent of these workers earned Rp 1.5 million or more.

If this wage gap is large, it typically contributes to high rates of non-compliance with the regulations as well as to queuing for the higher wage jobs, and hence urban unemployment. A large wage gap moreover encourages cheating in regard to the regulations (for example, the outsourcing of labor recruitment at wages below the MW). Surveys suggest that such practices are common among larger manufacturing firms in Indonesia.

In 2012, the government also adopted the unions'€™ rhetoric and promised a move away from a '€œcheap labor'€ policy. What exactly comprises this '€œcheap labor'€ policy is unclear (remember that minimum wages in Jakarta increased by 19 percent in January 2012 and 15 percent in January 2011). It implies that the government is willing to let the larger scale, labor-intensive firms under close union scrutiny to disappear over time, as it promotes a move to toward higher value-added industries such as automotives, chemicals and steel.

Alternatively, perhaps the government is prepared to live with the tensions created by MW that are well above prevailing rates in many small firms. In effect, this means implementing the MW policy selectively and turning a blind eye to cheating.

Whatever the new policy stance means, we can expect fierce advocacy by the unions for large MW increases in 2013-14, and similarly strong resistance from the employers, both arguing in the interests of their members.

The choice for the government would appear twofold: Continue to support the large wage claims for the benefit of perhaps around 20-30 percent of modern sector workers, or alternatively to push for wage restraint in the interests of a larger but less vocal worker constituency.

The second option of wage restraint is especially tricky given that elections are looming in 2014. It would mean facing up to the reality that MW increases in 2013 overshot by a long way in and around Jakarta. Modest increases in the MW for January 2014 are also likely to be more in line with labor market realities and in the interest of the majority workers.

While the MW would continue to act as a social safety net, other strategies to improve worker welfare in areas such as education and health could be promoted as one form of compensation. This would counterbalance high worker expectations in regard to MW revisions this year.

Given that unions seem to have captured the high moral ground, strong proactive efforts would be needed to convince the public that the latter option is in the public interest. Will it be a bridge too far?

The writer is adjunct fellow at Indonesia Project, Australian National University and SEADI (Support for Economic Analysis and Development in Indonesia).