Labor Conditions In Indonesia

August 1996 Does improving the conditions of workers in Indonesia require government interventions? Indonesia's rapid, broadly based pattern of growth has led to a spectacular reduction in poverty in the past 25 years. The model of development Indonesia adopted -- market-led growth combined with investments in physical and social infrastructure -- has proved to be the one most successful in alleviating poverty and benefiting workers in developing countries. The government's development efforts focused on agriculture (especially rice), education, and transport infrastructure. It emphasized providing opportunities for productive employment and gradually improving the quality of labor through education and training. The rates at which wages, employment, and incomes grew were left largely to market forces. Indonesian workers have been major beneficiaries of growth, but although the rapid growth of labor-intensive manufacturing has led to more jobs and higher wages, workers employed in these industries have expressed growing dissatisfaction. They complain about problems of child labor, the denial of centrally mandated wages and benefits to workers, poor working conditions, and the abuse of young female workers, who make up the bulk of the workforce. The government has tried to improve workers' wages and working conditions by centrally mandating higher labor standards, relying principally on minimum wages as a tool for doing so. Since 1989, minimum wages have tripled nominally and doubled in real terms. Enforcement has improved and, despite low compliance, at those higher levels minimum wages are beginning to bite. Indonesians are debating whether they need these labor-intensive industries and whether it is a mistake to base Indonesia's growth on cheap labor, because industries that exploit cheap labor could move to other countries. They argue that if labor is more expensive, manufacturers have no choice but to substitute some capital for labor, and to develop more sophisticated industries. However, Indonesia still has an abundant supply of labor and if labor-intensive industries are rejected, the capacity of the economy to absorb plentiful workers will be reduced. The main alternatives are to push up wages now (and risk the premature death of labor intensive industries) or to let wages be determined by market forces (in which case wages will rise slowly for the time being but industry's capacity to absorb labor will be higher) but strengthen institutions that could improve working conditions, such as labor unions. Agrawal recommends maintaining flexible labor markets and allowing market forces to set the pace of change, while strengthening labor unions. This paper -- a product of the Indonesia Policy and Operations Division, East Asia and Pacific, Country Department III -- is part of a larger effort in the department to develop a comprehensive labor market strategy for Indonesia. It was presented at a joint Ministry of Manpower-World Bank workshop, Indonesian Workers in the 21st Century, in Jakarta, April 2-4, 1996.

As part of a continuing effort to assess wage and employment conditions in Indonesia, this report focuses on labour market conditions. The population has grown at a faster than expected rate which means that the labour force will grow faster than expected as well. In addition, output growth over the eighties is not expected to be as fast as in the past. The implications for employment and labour incomes of these factors vary according to alternative workings of the labour markets. Therefore, alternative views on how labour markets work have important and different implications for policy. A primary objective of this report is to point out these implications and to promote further study of labour markets in Indonesia. It differs from the previous view, suggesting that quality of labour does not explain wage differentials, that the problem of underutilization of young people is too great to be explained by models highlighting transitional job searching, and that social forces and economic forces which do not lead to the clearing of the labour market play a large role in the determination of wages. These factors have important consequences for policy, including the need to consider employment creation as a separate objective.

Introduction -- Factors affecting labor -- Manpower and employment -- Labor standards -- Wages, hours, prices, level of living -- Labor organizations -- Employer organizations -- Labor-management relations -- Appendixes: A. Glossary of Indonesian names and abbreviations -- B. Principal officers of the Indonesian Department of Labor, January 1963.

August 1996 Personnel management and incentive systems help firms establish a comparative advantage. Pay scales and hiring, firing and promotion decisions are central to competitive strategy. Ideally, labor regulations should facilitate voluntary agreements between employers and workers, helping reduce transaction costs. Since the mid-1980s, deregulation has proceeded rapidly in Indonesia. Employment opportunities, the capacity to generate income, and the opportunity to negotiate better working conditions have all expanded. Still, many Indonesians have voiced concern that workers have not shared enough in the benefits of economic development. Many hold the view that increasing the minimum wage would bring the bottom wages up and reduce wage differentials. Additionally, international agencies such as the International Labour Organisation and representatives of the U.S. government have criticized Indonesia for violations of labor standards. In response, the Indonesian government increased workers' statutory rights and removed obstacles to collective bargaining. Real minimum wages doubled between 1988 and 1995. Enforcement of regulations toughened. While in earlier periods statutory rights applied to a minority in the public sector, the expansion of manufacturing employment has broadened the coverage of these statutes, requiring the Ministry of Manpower to perform the nearly impossible task of enforcing them. Now the government should close the gap between statutory rights and voluntarily agreed-on working conditions. This means correcting the legal standards and reducing government intervention in labor disputes. Current labor regulations in Indonesia inhibit constructive discourse between workers and employers in three areas: dismissals, dispute resolution mechanisms, and contributions to social security. More appropriate legislative action, which also takes into account the role of other agencies is needed in two areas: job safety and child labor. Personnel management and incentive structures help firms establish a comparative advantage. Pay scales and hiring, firing and promotion decisions are central to performance evaluation and competitive strategy. Individual and collective bargaining is at the heart of labor-management relations in modern enterprises, and industrial action (or the real threat of it) is generally part of negotiation strategy. Inviting public intervention rather than allowing such mechanisms as strikes and lockouts to operate isolates negotiations from market conditions. Ideally, labor regulations should facilitate voluntary agreements between employers and workers, helping reduce transaction costs. They often do the opposite -- and also discourage the creation of jobs. Keeping Indonesia's economy competitive requires a system of industrial relations that relies on voluntary negotiations of wages and working conditions. The tasks workers perform and the employers for whom they perform them must be subject to change. This process is a normal feature of healthy labor markets. This paper -- a product of the Poverty and Social Policy Department -- is part of a larger study of the labor market in Indonesia undertaken by East Asia and Pacific, Country Department III. It was presented at a joint Ministry of Manpower-World Bank workshop, Indonesian Workers in the 21st Century, Jakarta, April 2-4, 1996.