26 September 2016 ~ 0 Comments

Negative Impacts of Drastic Minimum Salary Rise to Indonesia Economy

“Negative Impacts of Drastic Minimum Salary Rise to Indonesia Econom”

In late 2012, minimum worker salary for 2013 has become an important and concerning issue. This was caused by drastic increase set by the local governments across Indonesia. In Jakarta, for instance, wages have increased by 44% compared to last year. The Bogor government also has implemented strong increases, where the minimum wage climbs up 70% from 2012.

Although the rise is intended to improve welfare of workers and enhance their living standards, but the huge percentage will bring negative impacts for the Indonesian economy, particularly decreasing foreign investment, slowing down economic development and creating huge number of unemployment. First, this drastic rise will decrease foreign investment in Indonesia. Before investing their capital, foreign companies must make sure the ratio of productivity to labor cost beneficial for them.

With this drastic wages rise, the production cost will grow significantly. If initially labor cost takes 30% from total production cost, with 70% of increment, production cost will escalate about 21%. Not to mention payment of work insurance (10. 89% from minimum salary), religion holiday allowance (minimal 1x minimum monthly salary) and overtime work cost which is also adjusted to minimum salary. Meanwhile, productivity and efficiency of Indonesian workers is still low.

According to World Economy Forum Global Competitiveness Report 2012-2013, Indonesia is ranked 120 from 144 countries for labor efficiency. Low productivity accompanied by drastic increment in production cost will create uncomfortable environment for foreign investors. This condition can push massive relocation of foreign investments to other countries with lower labor cost. The relocation will cause huge loss in economy since foreign investment can motorize economic development and creates millions of jobs.

Not only will number of foreign investment decrease, the drastic rise also will slow down Indonesian economic development. As mentioned earlier, rise of worker wages will increase the production cost. Consequently, companies have to change higher price to consumers. Product price escalation in the market will result in inclined inflation rate and decreased buying power. Next, the rise also creates economic problem for informal sector workers and people who get fixed income.

Covering 60 % of national labor force, this group includes small business entrepreneurs, farmers, trishaw riders, housemaids, street merchants, civil servants, pensioners and other informal jobs. Since their income is not going to climb according to this regulation, inflation rate increment and product price rise will decrease their money value and buying power, thus burdening their financial and creating poverty. Last, increasing labor cost will also weaken the competitiveness of local products against foreign competitors.

Except in several sectors, Indonesian products are currently outmatched by goods from other countries in both local and international markets. Rather than Indonesian products, people choose similar products from China, Korea, Japan or Thailand due to better quality or cheaper price. Added with the ASEAN and Indonesia-China free trade zone policy which will open the gate for free trade between Indonesia with ASEAN countries and China within few years, this increase in product price resulted by this regulation will weaken national products further.

Judging from these effects, this drastic salary rise will burden Indonesia’s economic development. In addition, the drastic rise of worker minimum wage will also create higher unemployment. To cope with the increased cost, companies have to improve efficiency and productivity in their production. One of the ways to do that is to decrease the number of workers. This happened in Bintan where the minimum wages rise from IDR 1. 225. 000 to IDR 1. 900. 000, companies already laid off total 336 of their workers.

Other method for companies to do saving is to enhance productivity of employees by raising standard of the labor. For example, president director of Alfamart, one of the biggest retail companies in Indonesia, already stated that his company will increase employee minimum education standard to college/university. As the result, workers with education of high school or lower will be replaced by university graduates. If this happen then there will be about 60. 000 workers losing their job at Alfamart. Not to mention other companies that also plan to apply the same policy.

Last, large businesses that have enough resources will invest in latest technology such as robots and automated machineries to replace their workers. Compared to human, machines and robots are much more efficient, fast, and automatic. Although the early investment in hardware and systems is high, with these technologies companies will be able to multiple their production rates and cut production cost significantly. If there is no prevention or action from government, this salary policy will generate millions of unemployment across Indonesia.

In brief, this new wages regulation certainly going to threat Indonesia economy. With this drastic rate, the rise can creates uncomfortable environment for foreign companies, burdens economy development and makes millions of people unemployed. Without any intervention from government, this labor policy will become a boomerang that flies back to hit Indonesia economy. The government must take action by giving subsidies to business, delay the application of this regulation or a decrease in the rate of the rise in salaries to protect business and economy.”

Source: http://usconcerts.net/

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