The Jakarta Post
In the good times, businesspeople, government officials and even international institutions have slammed Indonesia’s labor legislation, calling it rigid and an obstacle to investment.
The World Bank’s 2020 Ease of Doing Business Report highlighted Indonesia’s rigid employment and minimum wage regulations as among the factors that caused the country’s ranking to stagnate. The World Economic Forum’s 2019 Global Competitiveness Report lowered the labor market score for Indonesia to 57.5 points as the country’s scores for flexibility and hiring and firing practices dropped.
Indonesian businesspeople have also complained repeatedly about low productivity and the high cost and complexity of firing an employee. The government therefore submitted the omnibus bill on job creation in February to create greater labor market flexibility.
The controversial bill lowers the ceilings of severance payment and payments for recognition of service period (UPMK) and scraps the employers’ obligation to pay compensation for rights (UPH) for laid-off workers. It also deletes rigid calculations on rights for severance payments, the UPMK and the UPH, each differentiated based on the layoff reasons as stipulated in the prevailing Labor Law. Thus employers would only have to pay basic severance payments and the UPMK to laid-off workers.
If passed into law, the bill would also relax permits for foreign workers in start-ups and enable outsourcing agencies to hire employees, including freelance and full-time workers, for various tasks.
“Flexible-hours work, as well as easy hiring and easy firing principles will be discussed. The technicalities will be the responsibility of the Manpower Ministry,” Coordinating Economic Minister Airlangga Hartarto, a businessman himself, said on Dec. 30.
Following threats of labor rallies on April 30 despite the quarantine, President Joko “Jokowi” Widodo announced on Friday that the deliberations of labor-related provisions in the bill would be postponed to “provide us with the opportunity to explore substantial issues within the bill and also to accommodate input from stakeholders.”
But does the labor legislation really need to be changed?
During bad times, as in the COVID-19 crisis, the rigid labor legislation has prevented an unemployment spike and saved the government from another economic and social disaster.
So far, Indonesia’s unemployment rate has not shot through the roof as in the United States, for example. Around 2.8 million people have lost their jobs so far, according to the Manpower Ministry and the Workers Social Security Agency (BPJS Ketenagakerjaan), with over half of them furloughed on paid or unpaid leave rather than being laid off. This figure led Indonesia’s unemployment rate to increase to around 7.4 percent from around 5.3 percent of the 133.6 million workforce in last August.
Some 2.9 million to 5.2 million jobs may be lost during the pandemic, Finance Minister Sri Mulyani Indrawati said on April 14. That means Indonesia’s unemployment rate could jump to around 9.2 percent this year, higher than the 7.5 percent projected by the International Monetary Fund in its latest World Economic Outlook report.
The outlook is bleak but still way better than in the US, which has looser labor regulations. Around 26.5 million Americans have sought unemployment benefits since mid-March as unemployment rose to 4.4 percent from a 50-year low of 3.5 percent a month before.
US Treasury Secretary Steven Mnuchin has reportedly warned Republican senators that the unemployment rate could increase to 20 percent if the government does not act fast with Oxford Economics forecasting a 16 percent rate by May, which would be the highest level since 1940.
Indonesia’s labor legislation does indeed stipulate high-cost firing, requiring employers to pay basic severance pay and other compensation, as described above. Such rules ensure the protection of workers’ rights and makes employers think twice before firing a worker.
Labor regulations in Japan and South Korea are also seen as rigid and mass layoffs are frowned upon. Japan’s unemployment rate remained at 2.4 percent in February as the pandemic spread while South Korea’s unemployment rate fell to 3.3 percent.
Bloomberg economist Justin Jimenez said on March 30 that structural labor market rigidities in economies like South Korea and Japan had historically kept increases in unemployment relatively manageable during crises. “Low unemployment could be a factor in helping economies recover somewhat quicker,” he said, as quoted by Bloomberg.
Therefore, the government should accept the fact that rigid labor regulations not only protect a strong workforce during hard times but also benefits the government, which is struggling to keep macroeconomic and social indicators, including unemployment rates, in check. The unemployment rate can be kept as low as possible because businesses will choose to furlough employees instead of dismissing them.
This fact should encourage the government to scrap altogether the labor-related provisions in the omnibus bill on job creation rather than simply delaying their deliberation, and focus on cutting red tape and clearing bottlenecks to ease doing business. Investment is needed to shore up economic growth but it should not be gained at the cost of largely vulnerable citizens. Investment and economic growth must benefit everyone, not just a handful at the top of the pyramid.
Indonesia does not need to loosen its grip on labor regulations, instead it should improve workforce skills and abilities in order to boost productivity, strengthen the social safety net while pushing corporations to improve crisis protocols. Workers help businesses and the country reap economic gains during sunny days, we should not abandon them when the rain comes.