W

hile executives have complained that recently approved wage hikes smell of populism and capitulation to unions, several economists say that the increases reflect a needed update of the cheap labor policy of previous decades.

Cheap wages are no longer suitable with global standards, according to economist Payaman Simanjuntak, a professor at Krisnadwipayana University in Jakarta.

Indonesia, one of a few countries recording growth of 6 percent or more, must meet industrial and labor standards set by the International Labor Organization (ILO) and other world financial institutions to maintain its economic performance and to compete with other developing countries, Simanjuntak said.

“Decent work and decent pay are prerequisites, because its economic performance will be considered unreal if ISO standards in management and human resources development are not fulfilled,” Simanjuntak said.

Indonesia’s neighbors are also being pressured to pay workers higher, including Vietnam, which employers often refer to as a more competitive place to invest compared to Indonesia. In early December, its government agreed to an increase by 16 to 18 percent, or between US$79 to $113 a month.

The ILO and institutions such as the International Monetary Fund (IMF), the World Bank and the Asian Development Bank (ADB), will continue to watch the details of the nation’s economic development, he told The Jakarta Post recently. Among other things, the ADB has warned Asian nations of the need to reduce growing income gaps to avoid social and political troubles.

Simanjuntak, who also served as director general of industrial relations and labor standards at the Manpower Ministry from 1993 to 1995, hailed the local decisions to raise the minimum wage as significant.

He said the increases were a starting point for ending the nation’s cheap labor policy and to implement ILO Convention No. 131/1970 on the minimum wage and other basic conventions, such as those covering overtime compensation, equal treatment, decent work and pay.

Simanjuntak said the cheap labor policy was inherited from the New Order, when Soeharto and his authoritarian regime attempted to court foreign investment to speed development and ease
unemployment.

“In a fierce competition with China, South Korea, Vietnam, Thailand and Malaysia, the New Order government offered investors various facilities such as tax incentives, tax holidays and cheap labor,” Simanjuntak said. To implement the pro-investment policy, the manpower minister was given full authority to set the minimum wage across regions and investors were allowed to call on the military and police to “settle” industrial disputes and strikes, leading to many protests from national and international labor and human rights bodies.

“During the 32-year New Order era, foreign investment generated millions of job opportunities and domestic investors also enjoyed a pro-investment development policy,” Simanjuntak said. However, the global community is currently more sensitive to human rights and democratization, he added.

Simanjuntak acknowledged that regents, mayors and governors have used the minimum wage issue for their personal political gains, with some resorting to setting much higher levels for the minimum wage for 2013 than was recommended by local commissions comprised of workers and business representatives that were tasked with advising the leaders.

Under the New Order, Soeharto also set sectoral minimum wages to support workers employed in growing sectors, such as mining, manufacturing and services.

Irianto Simbolon, the director general of industrial relations and social security affairs at the Manpower and Transmigration Ministry, said that the minimum wage, first implemented in 1963 under Sukarno, was aimed at providing a social safety net. It was necessary to avoid abuse, with too many unemployed people ready to fill the jobs of complaining workers.

“In the reform era, the government can no longer continue to spoil investors by maintaining its cheap labor policy and giving away various facilities and incentives.”