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age increases are an almost never ending battle in Indonesian industrial relations. Workers appeal for higher wages every year and businesses fight to defend lower costs and profit maximization.

Government, as a regulator, finds itself in a conundrum of having to please both sides while ensuring that the wage policy it sets will attract investment and bring prosperity to the workers at the same time.

The unveiling of the fourth economic policy package earlier in October reiterated the government'€™s focus on creating jobs to boost the country'€™s weak economy.

One key item in the package was a fixed formula for setting the annual regional minimum wages starting in 2016, which takes into account both the region'€™s inflation rate and rate of economic growth.

To many, the fixed formula can be viewed as the ideal equilibrium: ensuring higher wages for workers every year, while providing business with more certainty about the increases in labor costs that they will have to bear.

Focus group discussions that the Center for Public Policy Transformation (Transformasi) has conducted with manufacturing companies and business associations revealed that uncertainty surrounding minimum wage hikes and a lack of clarity in the methods used to determine the wages were often cited by multinational companies as reasons to relocate.

Minimum wage hikes have always been a contentious issue between workers and employers. Negotiations at the level of enterprises or sectors are negligible, and employers tend to link workers'€™ wages to the minimum wage. This inadvertently led unions to maximize all wage gains by lobbying regional governments prior to the annual minimum-wage setting.

However, the '€˜wage wars'€™ that took place during negotiations on minimum wage increases almost always led to protests or strikes, disrupting business and negatively affecting worker productivity.

In September 2014, labor demonstrations made national headlines for demanding at least a 30 percent minimum wage increase, and requesting the addition of items such as '€œperfume'€ and '€œholiday to Bali'€ to be incorporated into the revised basic cost of living regulations, to the ire of many industry players.

As such, the recently announced fixed formula should be lauded for several reasons:

Indonesia'€™s labor costs were higher, but the efficiency was lower compared to their Vietnamese counterparts.

First, having a definitive formula provides clarity about future wage hikes, thereby reducing the politicizing of minimum wage policy by local authorities. Second, the new wage formula gives more certainty to businesses in approximating the labor costs they will be exposed to in the coming years.

But while the fixed formula has provided some clarity and certainty in the labor market, particularly about concerns surrounding minimum wages, it certainly should not be considered as a solution to all the employment problems in the country.

Labor productivity, for example, remains an issue. A 2015 report published by the International Labour Organization (ILO) and the Asian Development Bank (ADB) stipulated that there was a link between wage growth and productivity growth.

As countries progress by adopting new technology, investing in their infrastructure and improving the skills of their workforce, labor productivity will increase.

But according to data shared by a multinational furniture manufacturer with production facilities in Indonesia and Vietnam, there was a mismatch in labor costs vis-à-vis productivity. As of 2015, Indonesia'€™s labor costs were higher by 32.68 percent, but the efficiency was 20 percent lower compared to their Vietnamese counterparts.

Productivity is not the only workplace problem. Transformasi'€™s research also shows that between 2008 and 2014, there was a 115 percent increase in the country'€™s average minimum wage.

Unfortunately, only a small proportion '€” 20 percent '€” of Indonesia'€™s 118 million workers managed to enjoy the increase. Most of these workers belonged to big industries. On the contrary, data shows that the wages of the remaining 80 percent of workers have gone down, particularly those working in the agricultural and informal sectors.

The widening gap between different segments of the population was indicated by the increase in the country'€™s GINI coefficient, a ratio that measures income inequality, from 0.35 in 2008 to 0.41 in 2013. This phenomenon raises concerns over widening income disparity in Indonesia, feared to harm economic growth and trigger social unrest.

To conclude, there are three main recommendations that the government may wish to consider to further support the new minimum wage policy.

First is the provision of an extensive social security program for workers, something that is still relatively limited in Indonesia.

The same 2015 report by ILO and ADB also showed that Indonesia only spent approximately 2.6 percent of its GDP on public social security expenditure, much lower than its Southeast Asian counterparts Vietnam (6.2 percent) and Thailand (7.2 percent).

Social security protection in the form of medical care and welfare benefits is especially important for informal and agricultural workers, who are most vulnerable to inflation and food price shocks.

Agricultural workers, in particular, are exposed to the unpredictable periods of economic and natural catastrophe. Such workers often have no other income if crops fail.

Second is the development of government-supported, industry-provided training programs aimed at increasing labor productivity.

Like it or not, guaranteed annual minimum wage hikes will reduce Indonesia'€™s cost-competitiveness in the global labor market in the long term. This emphasizes the need to increase labor productivity and to upgrade workers'€™ skills by improving the country'€™s vocational and technical education system.

One example that the government could learn from is Vietnam'€™s 1998-2008 Vocational and Technical Education (VTE) project. Deemed a success, the US$86.29 million project trained a total 108,000 skilled workers and production technicians by 2008, and achieved a total 210,060 graduates from all courses in key schools from 2001 to 2007.

Last but not least is the strict implementation and supervision of the minimum wage structure. Moving forward, the government will need to ensure that the remaining segment of the labor market outside of the big industries is also covered by the minimum wage. It is also pertinent for the government to create another formula for workers in agricultural and informal sectors to protect them from inflation and unforeseen price shocks.

In recent news, some worker unions have complained that the new minimum wage policy effectively diminished their bargaining power in wage negotiations. This suggests that the government should also take these demands into account when it decides to draft a better formula. Reconciling wages with productivity and reducing the income gap require a tripartite dialogue. Only then can the tension over '€œwage wars'€ be abated.