Labor Unrest in Indonesia: An Overview

Government, unions and employers are at loggerheads over labor relations and economic growth. We look at the issues.

By Yvonne Chen
Wednesday, July 10, 2013

Last year's national strike, which effectively shut down Jakarta for three days and cost the economy a small fortune, brought simmering tensions between government, unions and employers to the fore.

While the government, it seems, wants everyone to get along and work together to drive economic growth, labor issues have become a major concern.

Unions want better protection of workers’ rights through a fair minimum wage, social security and health benefits, and effective policing of labor laws.

Employers want higher productivity, lower costs and increased protection from union actions, strikes and disputes.

As Finance Minister Chatib Basri said last year when he was head of Indonesia's Investment Coordinating Board (BKPM): “The major complaint by investors today is not the minimum wage but security. Investors are concerned about violent [labor] acts.”

What follows is a look at each point of view.

1. What are the issues for labor unions?

Outsourcing. Unions are concerned about the “casualization” of labor through the widespread use of contract workers, what is referred to in Indonesia as outsourcing. The practice weakens the unions' bargaining position and creates job insecurity because outsourced workers are not regular employees. Employers avoid legal obligations such as paying severance pay to dismissed workers. Outsourcing discourages workers from joining or forming a union, and wages are mostly lower than those paid to permanent workers.

Between 2001 and 2006, outsourced work rose from 18.6 percent of all wage workers to 28.3 percent. Today some 40 percent of Indonesia’s 41 million workers are believed to be outsourced.

Minimum wage. Passed as a ministerial regulation in 1971, the minimum wage in Indonesia acts as a social policy that relates wages to the economic needs of a worker. But it has not operated as a wage floor, which means that Indonesian workers are very much dependent upon legislation or decrees to raise their pay by increasing the minimum wage. In turn, the wage gap in society is widening. Workers earning the lowest wage in a plant rank at the 25-30th percentile.

The unions are demanding that the minimum wage be at least 100 percent of a person's decent living needs (as suggested in Article 89 of the Manpower Act). While the legal basis for this exists, the unions lack the power to enforce their right, especially in the regions.

Health insurance and social security. The government will implement a new National Social Security Program (Sistem Jaminan Sosial Nasional or SJSN) over the next four years and it will cover all Indonesians. Unlike other ASEAN nations it will include both formal and informal sector workers. Universal health insurance is also coming in 2014. Both have been key demands of unions

Working conditions. Although rights on working conditions, labor relations, occupational safety and health are guaranteed in the Manpower Act of 2003, they have not been fully and effectively enforced, with a lack of inspection and implementation by manpower offices.

Inspectors seldom take action to prevent disputes, and the government has said that there are insufficient inspectors to monitor all registered companies. Plus, due to the regional autonomy law, it is very difficult to ensure coordination between central and regional governments.

2. What do employers care about?

Mass actions and security. A new union strategy, after falling short in achieving the desired implementation of labor rights through legitimate political action, has been to force employers to concede to their demands through mass actions.

In pursuit of this kind of direct action, workers have forcefully closed industrial centers and access to strategic toll road gates in the Greater Jakarta area to paralyze transport. In other cases, the entrances to main ports have been blocked and “sweeps” of factories have been carried out to call on fellow workers to join rallies.

There have been accusations that some mass actions are part of a “political agenda” to gain public sympathy and that large numbers of workers have been forced to join protests.

Sofjan Wanandi, chairman of the Indonesian Employers Association (APINDO), has stressed that many recent mass actions were triggered by “unknown elements” not connected to official trade unions, claiming that some 292 of his member companies had experienced ”sweeping” or other acts of intimidation.

He said that in 2012, at least ten companies stopped operations due to prolonged labor disputes.

Labor unrest could also be a potential source of political risk. “If a strike turns into a riot, Indonesia could lose investors and the country once again be trapped in crisis,” Sofjan said.

A number of investors in the shoe-making sector backed out of plans to invest in Indonesia following the recent wave of labor demonstrations at a major industrial estate, according to officials of the Indonesian Footwear Association.

Severance pay. Indonesia has one of the most expensive severance package regimes in the world. As the country lacks a social security system, the government drafted Manpower Act 13/2003, mandating that employers pay a comparatively large amount of money to dismissed employees. Indonesian labor law also attempts to ensure that workers receive severance payments for company restructuring, bankruptcy and mass layoffs. Although this is meant to protect recently unemployed workers and limit excessive dismissals, the cost and timeliness of procedures required to fire people has undermined efficiency.

Labor matching. Indonesia is finding it increasingly difficult to respond to the demand for skilled workers for a variety of reasons, from the migration of skilled workers to an aging workforce and the lack of capacity to provide training. For example, the STEM skills  science, technology, engineering and math  are especially important, as much imported foreign labor has technical expertise in these areas. However, only about 20 percent of college graduates have STEM degrees. If Indonesia wants to provide meaningful jobs for its people and develop its industrial sector – as other Asian countries have done – it will have to improve its education system to reflect the skills the market needs.

Labor productivity. Employers find it difficult to operate in an environment of rapid wage hikes and frequent labor disputes, and worker productivity is undoubtedly affected. Unskilled labor-intensive industries in particular have seen a decline in productivity and employment levels.

A recent labor productivity study by The Support for Economic Analysis Development in Indonesia(SEADI) program and USAID of 28 firms in Bandung found that labor management systems often do not support productivity.

Because of tight government regulations covering labor standards, companies have tended to adopt labor management systems that maximize labor market flexibility rather than improvements in human capital and skill upgrading in order to cope with potentially high “quasi fixed” labor costs.

3. What does the government care about?

The informal economy and unemployment. Within the context of a growing economy, economic development should reduce or eliminate unemployment, poverty and inequality.

While the informal economy is sometimes cited as an engine of economic growth, its ability to absorb labor is limited. Informal workers have no labor rights or protection, and the presence of a significant informal sector implies that large segments of business are unregulated, unaccountable and largely untaxed by the government.

The government feels that the power of trade unions to force minimum wage increases to artificially high levels (higher than those that would result from supply and demand) does not solve widespread unemployment.

From the perspective of a government that wants to grow the modern sector of its economy, the “distorted” price of labor created by an artificially high minimum wage limits the growth of the modern sector and harms the poor.

Prudent legislation and enforcing labor laws. The government’s role is to create both a friendly business environment and to ensure that companies comply with labor regulations. However, it can fail to create policies that work for both parties by not executing its duties to protect companies and workers.

For instance, a recent SEADI-USAID study found that local government failure to support non-wage instruments was an impediment to increasing worker productivity. Non-wage instruments, in the form of social benefit packages for workers, are an incentive to increase worker performance and thus productivity.

Conclusion

The differing points of view between employers, government and unions can be summed up by the fact that workers complain about companies not complying with labor regulations, while employers complain about the inability of the police and government to protect them from violent labor sweeps. And both complain that the government is not doing enough to protect their rights.

These are disputes that will play out over time but Indonesia’s ability to move up the ladder as a player in the global economy will depend on how labor issues are managed.  

Further Coverage

Newsmaker Interview: Andi Gani Nena Wea

Labor Issues: New Outsourcing Rules

Newsmaker Interview: Mudhofir

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