Sharing the gains from growth: The role of wage policies and challenges for Indonesia

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1 Sharing the gains from growth: The role of wage policies and challenges for Indonesia Malte Luebker, ILO Regional Office for Asia and the Pacific (with contributions from Emma Allen, ILO Office in Jakarta) ECOSOC 2015 Integration Segment Indonesia country-level consultation Jakarta, Indonesia (24-25 February 2015) Decent Work for All ASIAN DECENT WORK DECADE

2 Starting point: Wages and shared prosperity As ASEAN s largest economy, Indonesia has witnessed stable economic growth since However, by most measures, inequality has risen and the gains from growth have not been evenly shared. Wages play an important role to translate growth into equitable development in Indonesia: Share of those who rely on wages as their main source of income is growing (see presentation by Sukti Dasgupta). Wages have grown, but gains may have lagged behind potential (see intervention by Dr Zulfan Tadjoeddin). Wage setting relies mainly on minimum wages, with underdeveloped collective bargaining institutions. Strengthening wage-setting institutions for social and economic progress. 2

3 Wage growth in line with ASEAN trends Real wages have grown by about one quarter since Performance in line with ASEAN countries. Wage growth has supported positive social outcomes: Growth of Indonesia s middle class. Decline in extreme working poverty. Average real wages in Indonesia and ASEAN, (Index, 2005 = 100) Source: BPS (2014) Labourer situation in Indonesia: August 2014, Badan Pusat Statistik, Jakarta; ILO staff calculations based on revised population weights and backcast for ADB and ILO (2014), ASEAN Community 2015 (Figure 5.4). 3

4 Benchmarking wage growth against productivity Productivity growth is an important benchmark for sustainable wage growth. Link is broken in many countries. At first, the link appears intact in Indonesia. However, finding is an artifact due to difference in deflators (see GWR 2014/15). If GDP deflator is used for labour productivity and wages, a gap is evident. Labour productivity and real wages in Indonesia, (Index, 2005 = 100) Source: BPS (2014) Labourer situation in Indonesia: August 2014, Badan Pusat Statistik, Jakarta; ILO staff calculations based on revised population weights and backcast for ILO staff calculations based on BPS, National Accounts (February 2015). 4

5 Indonesian Rupiah Per cent Rising minimum wage are a factor behind rising real wages but the instrument has limitations Minimum wages have grown faster than average wages. Simple average UMP is now more than 75% of average wages. Important factor behind wage growth, in absence of other strong wagefixing institutions. Have minimum wage gains lead to lower wage inequality? Trends in minimum and average wages for Indonesia, (IDR, nominal) 2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 - Simple average minimum wage Percent of minimum wage to net wages 80% 77% 74% 71% 68% 65% 62% 59% 56% 53% 50% Average net wages per month for employees Source: BPS (2014) Labourer situation in Indonesia: August 2014, Badan Pusat Statistik, Jakarta. * ILO staff calculations based on revised population weights and backcast for

6 Feb 2011 May 2011 August 2011 November 2011 Feb 2012 May 2012 August 2012 November 2012 Feb 2013 May 2013 August 2013 November 2013 February 2014 May 2014 August 2014 Caveat 1: Many workers receive less than the provincial minimum wage (UMP) Minimum wage compliance is low outside large, formal enterprises. Almost half of all regular employees receive less than the UMP. Casual employees are less likely to receive at least the minimum wage. Domestic workers are excluded from coverage. Percentage of regular employees below and above the provincial minimum wage, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Below the provincial minimum wage Above the provincial minimum wage Source: BPS (2014) Labourer situation in Indonesia: August 2014, Badan Pusat Statistik, Jakarta. * Based on regular employees and provincial minimum wages, Kementerian Ketenagakerjaan. 6

7 Per cent Caveat 2: Low pay is on the rise, especially among women workers When minimum wages rise relative to average wages, lower inequality is normally the result. In Indonesia, the low-pay incidence has risen despite minimum wage growth. Women workers are especially affected by low pay (less than 2/3 of median earnings). Percentage of regular employees with low pay, % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Year Low pay rate for regular female employees (per cent) Low pay rate for regular employees (per cent) Low pay rate for regular male employees (per cent) Source: ILO staff calculations based on data from the labour force survey from Badan Pusat Statistik for selected years. 7

8 Caveat 3: Differences between provinces are rising and higher than elsewhere in ASEAN Gaps between provinces have been rising rapidly. Large ddifferences are not always justified by economic fundamentals. Indonesian minimum wage differentials are the largest in ASEAN. Decentralization has weakened coordination. Better coordination mechanism is needed. Inter-province differences in minimum wages, (ratio) Note: Lowest UMK used for provinces that do not set an UMP. Intra-country differences in ASEAN,

9 Strengthening wage-setting institutions for shared prosperity and equitable development Indonesia has been successful in higher living standards, partly due to rising real wages. But: Wage-productivity link is weak and low pay a concern. To translate future growth into equitable development, Indonesia needs stronger wage-setting institutions. Social objectives: Contain inequality and ensure fair share in the fruits of progress for all. Micro-economic objectives: Keep enterprises viable and provide incentives for productivity-enhancing investments. Macro-economic objectives: Maintain employment, competitiveness and strengthen domestic demand. Find complementary roles and robust mechanisms for minimum wage fixing and collective bargaining. 9

10 ASIAN DECENT WORK DECADE Decent Work for All Thank you! For more information contact Malte Luebker at or Emma Allen at