Demographic Bonuses, Minimum Wages and the Omnibus Law

Two labor issues have become hot topics of discussion lately: the setting of minimum wages and the plan to submit an omnibus law on expanding employment opportunities.

Many people do not realize that the two issues are related to the demographic bonus, which is to reach its peak in 2020-2024. In that period, the ratio of those at a productive age will reach its largest number compared to other periods, so employment issues will become very important to take into account. In 2019, the workforce was estimated at around 137 million and it is projected that by 2024 the number will increase to around 152 million people.

With our open unemployment rate at slightly above 5 percent per year, there are around 6.5 million Indonesians who want to work but do not get a job, either because the jobs are not what they hoped for or because nobody will hire them. Meanwhile, every year around 2.2 million people enter the job market and need jobs. Many of them are young people who are entering the labor market for the first time.

Minimum wages

Provincial governments set low wages, provided by companies to workers as compensation. The minimum wages and open unemployment relationship in Indonesia is a bit complex. In general, provincial minimum wages always increase. However, the open unemployment rate does not show a fixed trend. The unemployment rate in the provinces of Java increased until the mid-2000s, but has since continued to decline.

Various studies have also shown conflicting results: some have a negative impact (an increase in the minimum wages followed by an increase in the unemployment rate), some are positive (an increase in the minimum wages followed by a reduction in the unemployment rate) or neutral. This shows that unemployment may not only be affected by wages, but also by other things.

The average time to look for work for them is more than five months, showing their ability to get by better than many workers, who can only get by for a maximum of 2-3 months if they lose their jobs.

In Indonesia, some of the unemployed are those who have enough resources to be able to live unemployed. Data on the characteristics of jobseekers support this: around two thirds of job seekers at least graduate from high schools or vocational schools. Moreover, the higher the level of education achievement of the unemployed, the longer the period of finding a job. The average time to look for work for them is more than five months, showing their ability to get by better than many workers, who can only get by for a maximum of 2-3 months if they lose their jobs.

Therefore, the unemployment rate does not fully reflect the life difficulties of the workforce because most unemployed people actually have the resources to live. They only want to work if the reward received reaches a certain value, which in economics is called a reservation wage. For unemployed people from this group, an increase in the minimum wage might even make them enter the labor market. If this group is quite large, an increase in the minimum wage reduces the unemployment rate.

Meanwhile, research that shows the negative impact of the minimum wage provides a different picture for the young and old workforce. When the minimum wage increases, young people are simply not recruited/employed, while older people are more likely to experience layoffs. This is supported by Statistics Indonesia (BPS) data, which shows that young workers are more likely to lose their jobs due to issues originating from within themselves (for example, inadequate incomes or expertise that does not fit into the job), while older workers are more likely due to issues from outside (such as layoffs).

Options for companies

The unclear impact of minimum wage on unemployment does not mean the minimum wage has no impact at all. If the company\'s cost structure is tight, to maintain profits, they must increase efficiency. Therefore, the company has options: reduce the workforce being employed (through layoffs or reduced working hours), reallocate business to areas that have more competitive wages, or, if access to technology allows, automation. The first option, layoffs, is not easy to do formally.

Regulations require various things that must be met if a company wants to lay off for efficiency reasons; for example, the company must lose money for a long time and is obliged to give a large amount of severance pay. This makes companies, especially those with tight financial conditions, think twice before laying off.

The second option, business relocation, is more likely. The company will move its business to a region with a lower wage structure. Companies can choose which areas are best for them by considering wages, distance and the quality of labor. Areas with a low minimum wage and quality workers who at least meet the basic skills requirements of the company will benefit. Some data indicate this has happened.

An increase in the minimum wage could affect their decision to stay in Indonesia or move.

Of course, relocating is not limited to moving to another province, as it is also possible to move to other countries where labor conditions (including wages) are more attractive. Many large companies in manufacturing that pay wages in Indonesia are foreign investment companies. An increase in the minimum wage could affect their decision to stay in Indonesia or move.

Compared to other countries in Southeast Asia, the minimum wage in Indonesia is average. The minimum wages in Malaysia and Thailand are higher than us (Singapore does not have one general minimum wage policy). In Cambodia, Laos, Myanmar and Vietnam, the minimum wages are on average lower. Only the Philippines is more or less equal with us. Of course, low wage rates must also be accompanied by productivity. Recent experiences can be a clue. When 33 companies left China due to the trade war with the US, none moved to Indonesia and 23 moved to Vietnam.

The third option, automation, is made possible by advancing technology that enables efficiency. Companies that take this option do not have to reduce the number of their current workers. They only need to transfer existing workers to other jobs within the same company. However, they also will not recruit new workers, thereby narrowing the employment opportunities of young workers. This is supported by research that shows that young workers are receiving the biggest negative impact from the minimum wage.

In the medium and long term, companies will slowly start to use technology more and more to do jobs that were previously done by humans. Some estimates indicate that around 60 percent of Indonesian workers have the potential to be impacted by automation in the future. All of them happen without the company violating applicable labor regulations.

Faced with such a condition, how do we create employment? First of all, keep in mind that although minimum wage regulations are legally binding at all companies, in reality minimum wages are more strictly adhered to by formal companies, and are applied more to those who work as workers, laborers or employees. It means an increase in the minimum wage will not be enjoyed by most workers in Indonesia. Workers\' wages in the agricultural sector, for example, will not be affected by an increase in the minimum wage. Therefore, to increase employment opportunities, we need to see not only those who are directly affected by the minimum wage but those who are in fact not directly affected.

It is hoped that, with reduced costs, companies will be able to accommodate the annual increase in minimum wages.

For those who are directly affected, as the minimum wage continues to rise, companies need to be given other ways to absorb the annual increase and not be forced to resort to counterproductive options to expand employment. The way to do this is by providing tax incentives and reducing costs associated with bureaucracy. Referring to the aspects contained in the ease of doing business of the World Bank, an economist takes into account three costs related to bureaucracy that need to be immediately lowered: costs to start a business, licensing fees for construction, and the costs of property registration. In all of the three aspects, Indonesia received the lowest score in the 2020 report. It is hoped that, with reduced costs, companies will be able to accommodate the annual increase in minimum wages.

For those who are not directly affected by the minimum wage because they work in micro, small and medium enterprises (MSMEs) or types of businesses that tend to be informal, there is a need for them to be empowered by providing appropriate training. According to the Economic Census, the number of MSMEs in Indonesia is at around 26 million or 98.7 percent of all businesses, with 59.3 million workers or 75 percent of all workers. Meanwhile, the 349,000 medium and large businesses employ 19.4 million people or a quarter of all workers in Indonesia. From this data, it is clear that the expansion of employment opportunities cannot be separated from the empowerment of MSMEs.

The problem is that not everyone has the talent or ability to be a successful entrepreneur. Research shows that successful entrepreneurs have special characteristics, both in skills and psychologically; for example, this applies to those who are more adaptive to changes or those who are more resilient. To support MSMEs, appropriate training needs to be given at various institutions such as training centers (BLKs) or those managed by the private sector/NGOs. Therefore, they need the ability to identify which trainee candidates are more appropriate for entrepreneurship. It is hoped that, with appropriate training, MSMEs can be sustainable.

The two of them need to be part of the omnibus law on expanding employment opportunities if we do not want the demographic bonus to turn into a demographic disaster.

It seems that in general the government has thought about this. At the end of last October, through his Twitter account, President Jokowi invited the House of Representatives to complete two seemingly separate but highly related laws: the Law on Employment Creation and the Law on Empowerment of Micro and Small and Medium Enterprises. The two of them need to be part of the omnibus law on expanding employment opportunities if we do not want the demographic bonus to turn into a demographic disaster.

KOMPAS/KOMPAS/ERIKA KURNIA

Turro S Wongkaren

Turro S Wongkaren, Head of the Demographic Institute, School of Economy and Business, University of Indonesia