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;