T

he Investment Coordinating Board (BKPM) last Thursday conveyed a rather grim message to workers who are set to celebrate Labor Day tomorrow, saying that most new investors over the past three years shunned labor-intensive businesses, preferring instead capital-intensive ventures.

BKPM chief Mahendra Siregar, who briefed the media on the latest developments in realized domestic and foreign investment, said that though the amount of new investments continued to increase, the trend was not great for jobseekers because of investor preferences for capital-intensive industries.

Realized investment in the first quarter rose to Rp 106.60 trillion (US$9.3 billion) from Rp 93 trillion in the same period last year but the number of jobs created by the new investments decreased to 260,156 from 361,930. This means that the low-wage, labor intensive manufacturing sectors in Indonesia such as the garment, shoe, toy, electronics and electronic appliances industries have become increasingly less competitive compared to those in other Asian countries, notably Vietnam, Pakistan and Bangladesh.

This trend should serve as a wake-up call to trade unions that have fought by way of violent street rallies and strikes to get hefty wage increases every year.

Businesses always cite the uncertainty about the mechanism for negotiating minimum wages and the increasing radicalization of trade unions, which have also grown in number, in demanding annual wage rises. The uncertainty renders investors unable to project their production costs within the medium-term because trade unions tend to demand wage increases that counter the inflation-indexed reference set by the government.

Even without steep wage rises every year, most labor-intensive manufacturing companies are at a disadvantage due to higher interest rates and higher logistics costs compared to those in other Asian countries.

The rupiah'€™s sharp depreciation since last June has further eroded the competitiveness of labor-intensive manufacturing firms, which depend largely on imported resources, components or intermediate materials.

A study by the Centre for Strategic and International Studies (CSIS) last year 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.

The CSIS has warned that if the minimum wage continues to rise at such a steep rate, many labor-intensive industries will price themselves out of the international market and new investment will tend to focus on capital-intensive industries.

There is nothing wrong with wage increases 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.