T

he minimum wage in Indonesia has remained one of the most controversial policies in both public discourse and labor economics even though the policy is needed to protect the interests of workers whose bargaining position is weak, especially as unemployment and under-employment are very high.

Employers want profits, trade unions want a better life for workers and the government wants to maintain a conducive climate for investment. These objectives are interdependent as businesses are only sustainable when they remain reasonably profitable.

Industrial peace can only be maintained if companies take good care of their workers. The government also has an important role to play in maintaining industrial peace and in ensuring fairness through a mixture of persuasion and legislation. Tripartism involving employers, workers and the government, therefore, has been pursued as the fairest mechanism to make labor policies.

 The recent instruction by President Susilo Bambang Yudhoyono, which caps the increase in the provincial minimum wages next year at 5 percent on top of inflation for labor-intensive industries and 10 percent for other industries, has brought the wage issue to the fore, again.

The government considered a strong framework, such as this, necessary to establish certainty for negotiating new minimum wages next year. Employers seem to be comfortable with the new corridors for minimum wage negotiations, especially because they are now facing much higher credit interest rates caused by Bank Indonesia'€™s (BI) money tightening to defend the rupiah and fight inflation.

Worse still, since most labor-intensive manufacturing companies as those in the production of textiles and garments, shoes and toys, electronics and electric appliances depend largely on imports, intermediate materials and parts and components, the steep fall in the rupiah against the American dollar last month, consequently increased their production costs.

On the other plane of the tripartite forum, workers have seen their purchasing power deeply eroded by inflation, which, according to the central bank'€™s forecast, could reach 9.5 percent this year.

Several union leaders have, therefore, demanded that the minimum wage rises by as much as 50 percent. An increase that, most labor-intensive businesses argue, could cause many companies to close their plants.

But too high an increase would more likely impact employment dynamics and reduce net job growth.

A recent study by the Centre for Strategic International Studies (CSIS) concluded that the average minimum wage in Indonesia increased by 30 percent between 2010 and 2013, compared to 14.20 percent in Thailand; 8.4 percent in China; 6.7 percent in Vietnam; 5.2 percent in Cambodia; 3.3 percent in Malaysia; and 3.1 percent in the Philippines.

If the minimum wage (now $200 monthly in Jakarta) continues to rise steeply, many labor-intensive industries would price themselves out of the international market.

Even more damaging is that new investment will tend to focus on capital-intensive industries.

CK Song, chairman of the Korean Chamber of Commerce and Industry in Indonesia, revealed at a labor conference last week that over the past few years Korean firms had laid off 78,000 workers due to the unreasonably high rises in minimum wages.

There is nothing wrong with rising wages as long as they are justified by higher productivity because, in the long run, increases in wages that are not supported by a corresponding rise in productivity will lead to higher unemployment as factories reduce payrolls or investors shun labor-intensive industries.

The dilemma seems to be that there has never been any correlation between a rise in wages and the level of productivity because trade unions claim that the minimum wages across the country have always been way below the basic costs of decent living.

It is understandable that to some extent the unions sometimes doubt the effectiveness of social, tripartite dialogue due to their perceived unequal position in facing the government and employers in collective bargaining.

As such it is no wonder that trade unions have of late tended to resort to strikes and street demonstrations, as thousands of workers did in Jakarta and several other cities last week, to push their wage demands.

The problem, however, is that wage increases are not sustainable if revenues do not rise either by the higher productivity of human capital and more efficient physical infrastructure or larger market sales.

We should also remember there are still around eight million unemployed and more than 35 million underemployed.

 Moreover, more than 70 percent of our 120 million labor force remains trapped in the informal sector, meaning they do not get any benefit from labor regulations and the minimum wages.

Our concern is that the tripartite wage councils would eventually lose its credibility if workers too often got their demand fulfilled through strikes or demonstrations, rather than through meaningful negotiations under the councils.

The three parties represented in the councils should always share the basic principles that economic growth and job creation are common goals and they can only be achieved if there is industrial peace and if the gains from growth are fairly distributed. The economy will not grow if employers and unions are constantly at loggerheads with each other.

We fully support the workers'€™ demand that the mandatory minimum wages should meet at least the basic cost of living to sustain decent livelihood.

But we also understand the disadvantages encountered by our manufacturing companies as their logistics costs and local lending rates are much higher than those in other ASEAN countries.

The solution, therefore, needs a balancing act.

The writer is senior editor at The Jakarta Post.