When a Minimum is not the Minimum: Wage Regulatory Exemption for Indonesian MSMEs

The International Labor Organization defines minimum wage as the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract. In contrast, in the recent contentious labor law reform, the Government of Indonesia allows micro and small businesses (MSMEs) to pay workers below the provincial minimum wage (UMP) and the city/district minimum wage (UMK) per the Government Regulation (PP) Number 36 of 2021 concerning Wages, a derivative of Law (UU) Number 11 concerning Job Creation. The regulatory relief may support market flexibility as well as increase MSMEs’ business opportunities. However, whether or not the regulatory exemption follows the principle of minimum wage remains to be seen. The ramification of the respective relief on decent work is also still unclear.

Per the Government Regulation No. 36 of 2021 concerning Wages, a derivative of Law (UU) Number 11 concerning Job Creation, the minimum wage provisions in Article 23 to Article 35 are exempted for micro and small businesses. However, the exception to the application of MSMEs for micro and small enterprises is enforced with several provisions. Wages in the MSMEs are determined based on an agreement between the employer and worker under two conditions: at least 50 percent of the average public consumption at the provincial level, and the agreed wage value is at least 25 percent above the provincial poverty line. In addition, Article 36 paragraph (3) of the Government Regulation No. 36 of 2021 stipulates that the average public consumption and the poverty line as referred to in paragraph (2) letters a and b shall use data sourced from authorized institutions in the field of statistics.

Micro and small enterprises exempt from the minimum wage requirement shall rely on traditional resources and not on high-tech and capital-intensive enterprises. Per Law Number 20 of 2008 concerning Micro, Small, and Medium Enterprises, micro-enterprises are businesses with a maximum net worth of Rp 50 million, excluding buildings and land for business premises with an annual turnover of a maximum of Rp 300 million per year. Meanwhile, a small business is a business that has a net worth of IDR 50 million with a maximum of IDR 500 million. The results of business sales are between Rp. 300 million to Rp. 2.5 billion per year.

The rationale behind the affirmative regulatory action to exempt a minimum to some economic groups may bring about more questions than answers. Nonetheless, the decision likely stems from a macro-financial perspective as well as the founding principle and political will that built the minimum wage setting in the first place.

Similarly, with other statutory matters regulated by the National Labor Laws, the minimum wage point of view is somewhat distorted by the manufacturing-based economy frame of reference. As such, the existing minimum wage setting relies heavily on the economic stability of labor and technology-intensive production processes, which does not always ring true in the MSMEs environment. Indonesia’s agriculture sector, for instance, is populated by approximately 70% smallholders. The industry itself depends on its continuity on how nature works. In other words, at some point, processes in a farm could not be persistently predicted due to natural distruption. This affects the ability of smallholders (MSMEs) to pay their workers at the same rate as thriving manufacture.

Varying from the eco-centric perspective above, the human-centered approach to minimum wage asserts that basic human necessities would not be contracted too far between each indicator of decent work despite the economic activity typology. A worker still needs to eat at almost the same level of quality, for instance. Paying workers working in the MSMEs lower than the minimum wage, albeit higher than the poverty line, means sacrificing the quality of food they consume to get by, which could compromise their productivity and health over time.

The question remains. How should the Government approach such a delicate matter? To find the sweet spot of balance interests is arduously challenging. Even if the balance reached, it would not be risk-free. Nonetheless, the principle is clear, affirmative action such as regulatory relief should not relinquish basic human necessity or put it in the back burner. A reform in the minimum wage setting in Indonesia should also consider a human-center approach to building the nation as a whole. After all, to put it in a very simple terms, humans build the economy instead of the other way around.