Labour Intensive Minimum Wage: Executive Discretion on Regulated Labour (Part II)

The Raise of Labour-Intensive Minimum Wage

The discourse of labour-intensive minimum wage sprung right after the drastic increment of minimum wage in Jakarta and several cities in West Java in 2013.  The monthly minimum wage of 2013 surged between 40% to 70% in areas such as DKI Jakarta, Bogor and Bekasi, areas where garment industry mostly concentrated. The extreme increase creates high cost production that in the case of garment export would only be absorb by the industry and push profit margin. [1] After 2013, the erratic trend of minimum wage growth pushes garment, and many industries, to the edge. With no option to transfer the cost to the customer, the easiest way out, is to significantly push down labour cost by moving business to cheaper area or country and, on the extreme, closing the business. This reasoning by all means very one dimensional. Although labour cost matters the most to labour intensive industry such as garment, the low labour cost or else jargon turn a blind eye to other economic and socio-political components in the production of goods such as energy price, raw materials price, currencies movement, country fiscal strategy, buying power index, and not to say the least fundamental changes in garment market model that push greater price reduction.

In early November 2015, after a long negotiation deadlock between the employer association and trade union seating in the Wage Council, the Bogor Regent submit the 2016 special garment minimum wage recommendation to the West Java Governor.[2] The propose amount of the special minimum wage at IDR 2,590,000 is significantly less than the regency minimum wage of IDR 2,975,000. The proposal is approved by the Governor with slight revision to IDR 2,655,000 per month.[3] Thus, this is the applicable minimum wage for garment and leather-based industries in Bogor regency in 2016. The reasoning behind the decision is likely to lighten the financial burden of garment manufacturers and maintain employment rate in the area. The rising production costs since 2013 when minimum wages rose by 70% hit the garment industry in Bogor district very hard. Also, minimum wage increases in 2014 and 2015 ranging from 12-15% could not reduce the burden of already excessive production costs so that many companies in the area are reportedly out of business and so unemployment rate spiked.

In 2015, the Government issued Presidential Regulation[4] No. 78 Tahun 2015. It was intended as regulatory relieve for the irregular trends of the minimum wage since 2013 that may perhaps influence primarily by political interests more than economic interests. Nonetheless, the Regulation in question likely provides regulatory relieve for export oriented garment industry as they claim that they could not keep business going even with the statutory limits on minimum wage increases.

In early 2017, Garment sector (employer) association proposes a special minimum wage that is lower than the 2017 minimum wage and /or textile industry minimum wage to the Government. There is no further information whether the proposal was previously negotiated and agreed by relevant trade union/s. It is also unclear that the West Java Governor in 2016 acceding special minimum wage for garment sector in Bogor district become legal precedent which is used as example by the garment industry to propose labor-intensive garment industry minimum wage.

At the beginning, the Government seemed to be reluctant to consider the proposal. In particular, in view of the Head of the West Java Province Manpower Office statement in May 2017 after consulting with the Ministry of Manpower that assert that there is no legal basis to the employer association proposal of labour-intensive minimum wage that amount less than the prevailing minimum wage.[5] Approving minimum wage proposal which amount less than the minimum wage, apply for certain sector (and thus could be identified as sector-based minimum wage), propose outside the statutory minimum wage negotiation schedule, and likely without adequate discussion with trade union/s, at that point of time, creates regulatory risks that at the end of the day such decision could be quashed.

Nevertheless, as in other liberal markets corporation interests often proved more persuasive compare to social welfare rationale. The employer association approaches the central government when the provincial administration rebuff the proposal. On 13 July 2017, a meeting was held in the Vice President office. This meeting was led by the Vice President of Republic Indonesia and attended by the Indonesian Employers Association (Apindo), the Minister of Manpower, the Governor of West Java, the Mayor and the Regent of West Java, the Investment Coordinating Board (BKPM), and trade union representatives. [6] The meeting agreed on labor-intensive wages that applies in Bogor District, Purwakarta District, Depok City and Bekasi City.  On 27 July 2017, the West Java Governor issues separate Decision on the particular labor-intensive for garment industry.

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[1] Power imbalance in the garment supply chains drives manufacturers to compete on price without the possibility to fairly negotiate it with the buyers. Buyers unilaterally set negotiation terms from price fixing to product variety (see Dorothy McCormick and Hubert Schmitz,’ Manual for Value Chain Research on Homeworkers in the Garment Industry’ (2001) Women in Informal Employment)

[2] By this time, the Government Regulation No. 78 of 2015 has taken effect. The regulation stipulates, inter alia, minimum wage increment threshold which should be in line with average yearly inflation rate.

[3] The approved 2016 Bogor regency minimum wage is IDR 2,960,235 per month.

[4] Government Regulation is a form of Indonesian Legislation regulated by the President to implement particular Act. The content of Government Regulations is the material to enforce and operates the Law. The Law No. 12 of 2011 on the Establishment of Laws and Regulations stated that Government Regulation is an “organic” rule rather than the Law itself. Thus, it should not supersede Law/Act.

[5] Mochamad Solehudin, Detik News, Disnaker Jabar: Tidak Ada Aturan Perusahaan Garmen Bayar Upah di Bawah UMKI (2017) < https://news.detik.com/berita-jawa-barat/d-3516537/disnaker-jabar-tidak-ada-aturan-perusahaan-garmen-bayar-upah-di-bawah-umk&gt;

[6] Syarif Arifin, Sedane Majalah Perburuhan, Upah Padat Karya: Pemasok Menang, Buyer Senang (2017) < http://majalahsedane.org/upah-padat-karya-pemasok-menang-buyer-senang/&gt;

Labour Intensive Minimum Wage: Executive Discretion on Regulated Labour (Part I)

When it was issued a few months ago, West Java Governor Decision about certain labour intensive-garment industry minimum wage (garment sector minimum wage) initiates debates in the labour realm. The high point of the debate is the amount of the minimum wage in question which is lower than the city/regency minimum wage. On the sideline of the focus is on the due process of the establishment of the Decision that heavily influenced by what the state assert as administrative discretion.

Some claim that the garment sector minimum wage that applies in four cities/regencies in West Java (Kabupaten Purwakarta, Kabupaten Bogor, Kota Depok and Kota Bekasi) is necessary to sustain the country position as one of the leading producers in the ever-complex international garment supply chains. They assert that the minimum wage regulatory construction does not recognize minimum wage for the labor-intensive industry. It only put all types of industry in one group with one general label: industry (employer). Thus, regulated minimum wage, in this case, provincial or municipal minimum wage, is industry blind. It does not consider the financial constraint inherently to labour intensive industry as their labour cost is higher than capital-intensive industry. Higher labour cost, they assert, has caused the Indonesian labour intensive industry its competitive value compared to other (cheaper) manufacturing countries in the international market.

The opponents, however, argue that the regulatory rationale of the Decision only stems from economic efficiency idea. Statutory instruments that centered on efficiency theory often creates bias in favour to those who have capitals and does not address the distribution of welfare discourse. They also argue that such regulatory product dismisses the inherently unequal bargaining power in the market. Instead of protecting the rights of those who have lesser bargaining power, the regulation emphasized the uneven power relations and undermined wider social interests in the distribution of justice (welfare). Additionally, the regulatory foundation that is used to produce the Decision is clearly classified sector-based minimum wage that amount should not be lesser than the prevailing provincial or municipal minimum wage.[1]  Thus, it is asserted that the Governor Decision distort legal certainty of the superior regulatory instruments.

Despite dissenting opinion, obscured legal standing and regulatory objective behind the Governor Decision, one thing for sure is that a first labour intensive minimum wage would not be established without the central government influence. This raises the question how immense the executive power intervention on regulated labour. It also begs the question of legal certainty and of regulation effectiveness to address competing market interests.

 

[1] See Minister of Manpower and Transmigration Regulation No. 7 Tahun 2013

The History of Indonesian Labour Law (Part IV)

Reformation Era (1998-at present)

The Economic crisis that hit Asia in 1998 become the primary trigger of the reformation movement. Rapid high-cost economy brings about the ideas of deregulation, privatization, market liberalization, and democracy.  Strict authoritarian administrative was considered to affect the country’s economic resilience and competitiveness. Thus, in order to survive the crisis, it is necessary to change the political map of the country. All things considered. The reformation movement is altered not only the state industrial design but also social and political principles.

Regarding labour matters, Reformation brings new opportunity to deregulate national labour market to increase competitiveness in the global economy. The first step that the transition administration ratifies the ILO Convention No. 87 on Freedom of Association and Protection of the Right to Organize and ILO Convention No. 138 on Minimum Age to be allowed to Work in 1998-99. Ratifications of these conventions not only put Indonesia back in the game as a country that respects human rights but also convinces the international world that Indonesia is on the same level playing field amongst sovereign countries.

Ratification of Convention No.87 resurrects collectivism in the labour realm. It abolishes the single union system and with the issuance of Union Act No. 21 of 2000 put union/s in active the union in a position of active participation in creating sound industrial relations and enforcing workers’ rights. Although, its regulatory objective is to protect worker’s right to associate, the Union Act, however, does not lack criticism. For instance, the stipulation of establishing a union at the company level with only ten persons not only rapidly proliferate the number of unions but also opening a possibility of saturated industrial relations. It gives, as the opponent argue, too much power on collective labour in dealing with the individual employer which could jeopardize sound industrial relations and hamper day to day business processes. The concern of union polarization is also often argued by the opponent of the Act.

In regard to ratifying Convention No. 138, it enhances the degree of protection of underage worker by increasing the working age from 10 years old to 15 years old. It averts exploitation of children as cheap (and docile) labour. Additionally, in the socio-community perspective, it protects school-age children to get a compulsory education and thus in time increase the capacity of the future workforce. It is worth to note that working age revision to 15 years is in line with the state’s nine years- compulsory education which has been a public policy since 1994.

Ethical and community values on labour and employment relations may perhaps change in the early reformation era. From labour as economic tools to fulfill the needs of the society to individual or collective who have certain rights as a human being and as workers. However, it was not followed by revision of the regulatory umbrella, Labour Act No. 25 of 1997. At least not until 2003, when the state issued Labour Act 13 of 2003. The Act replaces as many as 15 labour regulations. Thus, it is a legal umbrella for other labour regulations such as government or ministry regulations.

The Act consists of 17 chapters and regulates almost every aspect of labour, except Safety and Health. Labour Act No. 13 of 2003, a regulatory product of the reformation era, could be seen as the bedrock of modern labour regulations. It implants universal worker’s rights (human rights) in labour policy such as the conception of decent work, anti-discrimination, protection for women at the workplace, rights to associate, and job security. The core improvement compares to the previous obsolete Acts is the principle of labour as individual and social being. It introduces labour (first) as individual with protected individual rights to meet their needs and life demands, and (second) as a social being that contributes to the greater objective in the economic development. Thus, it could be argued that Labour Act 13 of 2003 aim is to humanized labour to achieve a financial goal.

Despite this strong central point, the Labour Act No. 13 of 2003 is far from perfect. Some argued that the Act create challenges instead of answers to ever changing and competitive market and problematic social condition. Type of employment contract: permanent full-time, non-permanent full time, daily/casual, outsourcing that is regulated by the Act in practice create new challenges and sometimes dispute between employee/collective of employees and employer. Employers claimed that the scheme, in reality, is not flexible enough to tackle business challenges. While employee/s or collective of employees perceived the system as a way to legally evade ethical responsibility to provide protection and ensure worker’s rights are upheld.

The revision of definition of children from persons under the age of 15 to 18 years is also socially problematic. This is because the revision is not followed by improvement of the policy of compulsory education. It still regulates 9 years of compulsory education which means children are only required to go to school until they reached 15 years of age. This means that in some regions where the education level of the population is only up to the compulsory level, the labour market is saturated with children age less than 18 years, the legal full time working age. The proponents of this legal definition may perhaps argue that it was establish to provide more protection to children in the crucial stage of  mental and physical development. Additionally, there is separate regulation, that imposed rigorous protection requirements, that allow children between 15-17 years to work. Nonetheless, these arguments do not address the problematic social issues prone to those qualified as children by the Labour Act such as exploitation, poverty and other social problems related to unemployment.

In addition, it could also be argued that at some degree the protection that stipulated in the Act is a form of shifting public responsibility to private actors. For instance, in the case of termination of employment relations, the significant amount of severance that company should pay likely shows the unfair distribution of social welfare responsibility between the state and private sector. Instead of creating a sustainable system of social protection, in relation to (after) employment, the state requires private actors to hold social welfare burdens. This policy, in return, would negatively affect workers when employers, intentionally or unintentionally, circumvent the stipulated regulation because they have not enough capital or unwilling to risk part of their capital to comply with the rule.

Labour Act No. 13 of 2003 is not the only regulation that aimed to align public policy with labour socio-economy and political norms that are progressively changing after the reformation movement in 1998.  The proliferation of labour collectivism likely resulted in the issuance of Act No. 2 of 2004 on Industrial Relations Dispute Settlement. It introduces resolution outside the litigation system and Industrial Relations Court in Indonesian labour policy.    

Conclusion

Labour regulatory objective during the period after Indonesia independence is to move away from the imperialist legal system that disadvantaging labour. The state, at this period, interferes the market to set new labour standards and strike a balance between corporate/employer power and labour power. However, as the new country constantly changing in search of its sovereign form, labour matters become less important. At some point, labour collective was viewed as a hazard to the harmonious socio-political life that the state eagerly pursued.

The fundamental changes in the labour sphere in the new order regime era is greater state interference in the market. It is solely directed by the state’s main agenda to achieve maximum economic gain and political amity. The state was standing on the side of those who have capital as regulatory objective heavily influence by financial interests. Labour is viewed as production instruments, as it is often viewed in the liberal market, and collectivism is perceived as a risk to the economy and socio-political harmony; thus, the state minimizes the power of labour. Consequently, power relations between employers and employees is very much imbalance which in time create complicated industrial relations at the workplace.

Unlike the previous era, state labour policy in the reformation era infused the universal values of human rights and worker’s protection. The central concept of the Act is providing decent work while balancing power relations between employer/s and employee/s. However, some aspects of the Act by design likely increase friction of interest between employer and employee such as the type of employment contract. It is clear that there is more work to be done by the regulator to facilitate labour aspiration, demand of increasingly competitive local and global market and social issues.

UU No 13 Tahun 2003 EnglishUU NO 13 Tahun 2003

The History of Indonesian Labour Law (Part III)

New Order Authoritarian Era (1966-1998)

After it comes as the champion in the 1965 political turmoil, the new military junta adopted authoritarian modernization. Principally, military regime often views itself as bringing political, social and economic stability to justify the rigid control of the state in every aspect of life. For instance, the state controls the economy to pursue maximum economic growth. Naturally, labour movements are closely monitored. Labour activity outside of production of goods and service is perceived as a disturbance to the smooth rotation of industrial wheels. In the case of Indonesia, importantly, labour is viewed as political risks to the ruling government. Labour movement brings about the idea of collectivism which is feared the most by an authoritarian state. Thus, a barren single union is created, operated and monitored by the state. It is likely that this scheme is formed only as a legal consequence of ratifying ILO Convention No. 98 by Law No. 18 of 1956 and the regime produced Labour Act No. 14 of 1969 instead of rightly providing a voice to collective in order to equally and actively participate in industrial relations.

In the early era of the new order regime, state interference in labour matters is very much apparent. Labour Act No. 14 of 1969, for instance, stipulates that the state runs labour provision, dissemination, and arrangement. Labour also viewed as production tools which roles are to produce goods and service for the society.  Worker rights are limited to the protection of safety and health, and morals, right to be treated with dignity and provided with a workplace that maintains workforce morale. Although collective right is legally recognized history shows that in practice this was not the case.

Unlike collective rights, the authoritarian government seems to view Safety and Health as a good matter to regulates further in a separate Act. First, occupational safety and health discourse less likely create a rift in the workplace. Second, sound occupational health and safety have a direct link to worker productivity.  Thus, Safety Act No. 1 of 1970 is issued. It stipulates responsibilities of the employer to provide a safe and healthy workplace in details and worker rights of the safe and healthy workplace.

Over time, the effect of global economic competitiveness and geopolitical shifts weaken the power of the militaristic regime. Although, industrial relations and workplace dialogue are still restrained by Labour Act No. 25 of 1997, that replace the 1969 Act, regulates the elements of universal workplace rights and protection such as employment conditions, floor wage, statutory leaves and social insurance which was only regulated in Presidential Decrees. Despite its drawback, this Act put a firmer foundation for the advancement of workplace protection and rights.

The History of Indonesian Labour Law (Part II)

After Independence (1945-1965)

Three years after independence, the new Republic issued Labour Act No. 12 of 1948. The Act regulated young workers, female workers, working hours and employers’ obligations for workplace protection. The regulatory objective behind the Act is clearly to step away from the liberal Civil Code that let the market dictate labour rights and responsibilities. It imposed some of the rights and protections that may not reasonably negotiate through the liberal Civil Code employment regulatory scheme. The fact the Civil Code did very little to protect native Indonesian is also likely to be one of the considerations. At this very early stage, labour regulations only provided basic protections. In other words, the Act is issued to define employment relations, and the rights and responsibility entail rather than merely leave it to market power. The parties in the market itself drastically altered after the colonial ruler forced to leave the newly established countries, leaving labours as a vulnerable group that should be protected to achieve social equilibrium.

The Labour Act was preceded by Workplace Accident Act No. 33 of 1947 and followed by Law No. 23 of 1948 on Labour Inspection, Law No. 21 of 1954 on Labour Agreement between Employer and Union, Law No. 18 of 1956 on Ratification of ILO Convention No. 98, Ministry of Manpower Regulation No. 90 of 1955 on Union Registration Law No. 22 of 1957 on Industrial Relations Dispute Settlement.  The laws and regulations in question were not effective in practice as the new Republic of Indonesia was still politically and administratively struggling to find its form. Additionally, labour unions activities were closely monitored and regulated to avoid political insurgency. Nonetheless, despite these challenges, they set a cornerstone to modern Indonesian Labour Regulations.