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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

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SLIDE 1

Decent Work for All ASIAN DECENT WORK DECADE 2006-2015

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)

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SLIDE 2
  • 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.

Starting point: Wages and shared prosperity

2

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SLIDE 3
  • Real wages have

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.

Wage growth in line with ASEAN trends

Average real wages in Indonesia and ASEAN, 2005-2014 (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 2011-

  • 2014. ADB and ILO (2014), ASEAN Community 2015 (Figure 5.4).

3

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SLIDE 4
  • 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.

Benchmarking wage growth against productivity

Labour productivity and real wages in Indonesia, 2005-2014 (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 2011-2014. ILO staff calculations based on BPS, National Accounts (February 2015).

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SLIDE 5
  • Minimum wages have

grown faster than average wages.

  • Simple average UMP

is now more than 75%

  • f average wages.
  • Important factor behind

wage growth, in absence

  • f other strong wage-

fixing institutions.

  • Have minimum wage

gains lead to lower wage inequality?

Rising minimum wage are a factor behind rising real wages – but the instrument has limitations

Trends in minimum and average wages for Indonesia, 2001-2014 (IDR, nominal)

Source: BPS (2014) Labourer situation in Indonesia: August 2014, Badan Pusat Statistik,

  • Jakarta. * ILO staff calculations based on revised population weights and backcast for 2011-

2014.

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50% 53% 56% 59% 62% 65% 68% 71% 74% 77% 80%

  • 200,000

400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Per cent Indonesian Rupiah

Simple average minimum wage Average net wages per month for employees Percent of minimum wage to net wages

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SLIDE 6
  • Minimum wage

compliance is low

  • utside 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.

Caveat 1: Many workers receive less than the provincial minimum wage (UMP)

Percentage of regular employees below and above the provincial minimum wage, 2011-2014

Source: BPS (2014) Labourer situation in Indonesia: August 2014, Badan Pusat Statistik,

  • Jakarta. * Based on regular employees and provincial minimum wages, Kementerian

Ketenagakerjaan.

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

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

Below the provincial minimum wage Above the provincial minimum wage

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SLIDE 7
  • 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

  • f median earnings).

Caveat 2: Low pay is on the rise, especially among women workers

Percentage of regular employees with low pay, 1996-2014

Source: ILO staff calculations based on data from the labour force survey from Badan Pusat Statistik for selected years.

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0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Per cent 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)

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SLIDE 8
  • 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.

Caveat 3: Differences between provinces are rising – and higher than elsewhere in ASEAN

Inter-province differences in minimum wages, 1997-2014 (ratio)

Note: Lowest UMK used for provinces that do not set an UMP.

8 Intra-country differences in ASEAN, 2014

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SLIDE 9
  • 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.

Strengthening wage-setting institutions for shared prosperity and equitable development

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SLIDE 10

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

  • .org
  • r

Emm mma Allen en at alle len@ n@il ilo.o

  • .org

rg

ASIAN DECENT WORK DECADE 2006-2015 Decent Work for All