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Sh Sharin ing g th the gai gains ns from m gr growth: th: The role le of wage ge polic licie ies s and nd chall lleng nges es for Ind ndone nesia sia 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 2006-2015

Starting point: Wages and shared prosperity  As ASEAN’s largest economy, Indonesia has witnessed stable economic growth since 2000.  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

Wage growth in line with ASEAN trends  Real wages have Average real wages in Indonesia and ASEAN, 2005-2014 (Index, 2005 = 100) grown by about one quarter since 2005.  Performance in line with ASEAN countries.  Wage growth has supported positive social outcomes:  Growth of Indonesia’s middle class.  Decline in extreme working poverty. Source: BPS (2014) Labourer situation in Indonesia: August 2014, Badan Pusat Statistik, 3 Jakarta; ILO staff calculations based on revised population weights and backcast for 2011- 2014. ADB and ILO (2014), ASEAN Community 2015 (Figure 5.4).

Benchmarking wage growth against productivity  Productivity growth is an Labour productivity and real wages in Indonesia, 2005-2014 (Index, 2005 = 100) 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 Source: BPS (2014) Labourer situation in Indonesia: August 2014, Badan Pusat Statistik, Jakarta; ILO staff calculations based on revised population weights and wages, a gap is evident. 4 backcast for 2011-2014. ILO staff calculations based on BPS, National Accounts (February 2015).

Rising minimum wage are a factor behind rising real wages – but the instrument has limitations  Minimum wages have Trends in minimum and average wages for Indonesia, 2001-2014 (IDR, nominal) grown faster than 80% 2,000,000 average wages. 1,800,000 77% 1,600,000 74%  Simple average UMP 71% 1,400,000 Indonesian Rupiah is now more than 75% 1,200,000 68% Per cent 1,000,000 65% of average wages. 800,000 62%  Important factor behind 600,000 59% wage growth, in absence 400,000 56% 200,000 53% of other strong wage- - 50% fixing institutions. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014  Have minimum wage Simple average minimum wage Average net wages per month for employees gains lead to lower Percent of minimum wage to net wages Source: BPS (2014) Labourer situation in Indonesia: August 2014, Badan Pusat Statistik, wage inequality? Jakarta. * ILO staff calculations based on revised population weights and backcast for 2011- 5 2014.

Caveat 1: Many workers receive less than the provincial minimum wage (UMP)  Minimum wage Percentage of regular employees below and above the provincial minimum wage, 2011-2014 compliance is low 100% 90% outside large, formal 80% enterprises. 70% 60%  Almost half of all regular 50% employees receive less 40% 30% than the UMP. 20%  Casual employees are 10% 0% less likely to receive at 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 least the minimum wage.  Domestic workers are excluded from coverage. 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 6 Ketenagakerjaan.

Caveat 2: Low pay is on the rise, especially among women workers  When minimum wages Percentage of regular employees with low pay, 1996-2014 rise relative to average 50% 45% wages, lower inequality 40% is normally the result. 35% 30%  In Indonesia, the Per cent 25% low-pay incidence 20% 15% has risen despite 10% minimum wage growth. 5%  Women workers are 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 especially affected by Year Low pay rate for regular female employees (per cent) low pay (less than 2/3 Low pay rate for regular employees (per cent) of median earnings). Low pay rate for regular male employees (per cent) Source: ILO staff calculations based on data from the labour force survey from Badan 7 Pusat Statistik for selected years.

Caveat 3: Differences between provinces are rising – and higher than elsewhere in ASEAN  Gaps between provinces Inter-province differences in minimum wages, 1997-2014 (ratio) have been rising rapidly.  Large ddifferences are not always justified by economic fundamentals.  Indonesian minimum wage differentials are the largest in ASEAN. Note: Lowest UMK used for provinces that do not set an UMP.  Decentralization has Intra-country differences in ASEAN, 2014 weakened coordination.  Better coordination mechanism is needed. 8

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

ASIAN DECENT WORK DECADE 2006-2015 Decent Work for All Tha hank nk yo you! u! For mo more e information mation contac tact t Malt lte Luebk bker r at luebker@il @ilo.o o.org or Emm mma Allen en at alle len@ n@il ilo.o o.org rg