T

he phenomenon of the influx of foreign labor into Indonesia has led to a debate among political parties, corporate interests and the public at large. The focus of the debate revolves around the newly issued Presidential Regulation No. 20/2018 on foreign workers. Some see the regulation as solely facilitating a greater influx of foreigners at a time when Indonesia is grappling with unemployment. President Joko “Jokowi” Widodo has countered this view by asserting that the regulation focuses on the much needed modernization of bureaucratic procedures for foreign workers and the issuance of work permits.

Vice President Jusuf Kalla backed the regulation, emphasizing the potential for increasing foreign investment by streamlining administrative requirements for investors. He stressed that foreign workers are important for boosting investment, capital inflows and the potential transfer of knowledge and skills that might raise the quality of local human capital. The vice president illustrated how Thailand exports more than Indonesia while hosting ten times more foreign workers in relative terms.

Worker mobility is by no means a uniquely Indonesian or Asian phenomena. Worker migration happens daily on a global scale. South Africa, for example, is host to over a million Zimbabweans, with mines and industries attracting foreign workers from Europe and Southern Africa since the 1860s. We also see United States-Mexico worker mobility as part of the North American Free Trade Agreement (NAFTA). Moreover, the free movement of people is a cornerstone of the European Union. These examples show that there are substantial benefits from having international worker mobility both in economic terms and for the individuals seeking work.

Worker movements follow several patterns. For instance from the global South to North and from East to West. Similarly, worker movement between high income countries takes place. For example, Danish and Swedish workers often migrate to Norway as a result of the booming Norwegian economy, coupled with a demand for workers and better wages. Thus, demand and supply plays a key role meaning that people move for better job opportunities and salaries.

If we look further into the pattern of mobility by measuring relative wages, countries with the highest rates of emigration have real wages around 30 percent lower than the EU average, whereas countries receiving workers offer real wages that are 130 to 220 percent higher than the average EU salary. Therefore, from a market perspective, the pattern of migration is logical and reflects a traditional supply and demand paradigm, where people seek a better life by migrating to places where demand and real wages are relatively higher than where they come from.

Thus, a lesson learned from the EU is that when workers move from countries with low demand and high supply to countries with high demand but low supply, there is limited market distortion. In fact, when local worker regulations are complied with, it will have a positive effect on international competitiveness and economic growth by limiting upward pressure on wages and inflation.

In other words, worker mobility is justified as long two requirements are met. First, the influx fills a gap in the labor market and second, migrant workers are treated and paid according to national standards and do not undercut nor inflate local wages.

Unfortunately, the recent report by the Indonesian Ombudsman astonishingly indicates that these two requirements do not apply to the case of Indonesia’s foreign worker influx. The report is based on an investigation between June and December 2017 in Jakarta, West Java, Banten, Southeast Sulawesi, West Papua, North Sumatra and Riau Islands.

Chief among the findings is that the majority of foreign workers from certain countries are essentially filling low or unskilled jobs. They also find breaches in visa requirements where some foreigners who pretend to be tourists are allowed to work. Moreover, it is also found that some foreign workers are paid substantially higher than locals for the same skills.

Furthermore, for private sector investments, both foreign and national, investors may hire staff of any nationality as long as it is based on local regulations, and thus neither discriminates nor offers preferential treatment to employees from a certain gender, race or nationality.

Based on the Indonesian Ombudsman report, there are two potential issues. First, the higher salary of foreign workers will create an upward pressure on wages and potentially contribute to inflation, especially if increased salaries are not accompanied by similar increases in productivity. Second, if foreign workers are paid more than Indonesian workers for public investments funded through the national budget, it will mean that Indonesia’s tax payers get less value for money. Thus, if the verdict of the Indonesian Ombudsman holds true, Indonesians will be forced to pay above the market rate for the same service.

Why should this be of concern? In a globalized economy, the requirement for a country to be competitive depends on the quality of its human capital. Renowned Harvard economist, Frederic Scherer stresses that amid increasingly intense competition between countries in the era of globalization, a country should prepare is the quality of its human capital.

But in our case, if basic employment problems are not solved, improving the quality of human capital might be a long way off.

Toward the end of 2017, the Central Statistics Agency reported that 121 million of the total 128 million workers in Indonesia were employed.

However, of the 7 million workers not in full time employment, 7.55 percent were underemployed and 20.4 percent were working part-time, with the rest seeking full-time employment.

In short, the government should take a holistic view of regulations, including the development of the country’s human capital and the current demographic dividend while ensuring that foreign workers complement the Indonesian labor market rather than distorting it.
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