INDONESIA IN MASS LAYOFFS What’s next for employees?

Bhima Yudhistira
Bhima Yudhistira is Executive Director of Celios (Center of Economic and Law Studies) He received a Bachelor’s Degree from the University of Gajah Mada Faculty of Business and Economics and a Master’s Degree from Bradford University, U.K.

In addition to a sandwich generation under pressure from two generations at once, there is the ominous difficulty of securing employment at a decent wage and with job security. Guy Standing once wrote that there would be a class known as precariat: one burdened with responsibility. Precariates have flexible working hours, but do not actually have any job security. Even in order to earn income to survive, precariates are willing to work around the clock with short rest hours and a high level of risk of work accidents. 

One domestic example of a precariate worker is an online motorcycle taxi driver. Assuming there are 5 million of these online drivers in Indonesia, most are of productive age and young. Initially, the existence of ride-hailing apps was seen as a partnership with flexible working hours. However, along with the increasing economic pressure and difficulties in finding work in the formal sector, many young people are forced to work as full-time drivers. The precariat phenomenon does not only occur in urban areas, but also in rural ones. The massive adoption of digital employment schemes during the pandemic has caused the precariate class to flourish. The impact of the difficulty of finding jobs and the effects of unemployment due to the recession have also impelled young people to work for very low wages. The relatively high level of the informal sector correlates with the difficulty of finding work in the formal sector. The problem in the informal sector is that some jobs pay far below a minimum wage. The resultant “informalization” of the labor sector will steadily degrade the quality of people’s income over the long run. 

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Joseph Stiglitz observed that in a post-pandemic environment, many businesses and the public will desperately rely on the support of government. The “State Centrist” was clearly a trend, where during the pandemic crisis, the Government assisted the private sector with various stimulus packages. When the economic cycle went into a decline, the idea emerged for government intervention as part of the Neo-Keynesian prescription. Even countries controlled by ostensibly “conservative” parties are resorting the same tactic, spending huge amounts of government revenue, as never before. 

In the G20 discussions, it seems that a “state-centric” effort to deal with the excesses of the global recession is rapidly gaining ground. G20 countries need to work together to take post-pandemic issues more seriously, with agendas such as “Financial Safety Nets” as a fund to anticipate pressure if a pandemic occurs again – including stimulus packages needed to ameliorate a global recession, folding it into an integral part of the state centric. The concept of the state as a “daddy” always ready to protect its population from the threat of a prolonged recession needs to be purged with concrete policies. 

The Indonesian government should immediately act, by issuing a comprehensive economic stimulus package to anticipate the explosive layoffs. First, business sectors that are prone to layoffs, such as the textile and apparel sector, need to get discounts, to reduce their production costs. One simple move would be to continue the discount on electricity rates: it is expected to reach a minimum of 60% at peak loads. Cost-push inflation that encourages business actors to lay off employees must be overcome, with production cost stimulus packages. Utilities such as electricity bills at least have a meaningful role with 20% of the production costs of textile companies. 

Second, the government needs to expand wage subsidy assistance to workers who are vulnerable to being laid off. After mapping vulnerable business sectors or companies, disbursement of BSU (Wage Subsidy Assistance) can be used as a solution to reduce the wage costs of business actors. The ideal amount of BSU is around Rp. 1.5-3 million in a big city with a minimum wage, such as Jabodetabek, and in other areas it should not be below Rp. 1.2 million per worker. It is also necessary to expand BSU to workers in the informal sector. As of August 2022, as many as 59% or more of workers are in the informal sector; they thus dominate the formal sector. Therefore, it is perceived that the expansion of the recipients of wage subsidies will be a stimulus to expenditures by vulnerable groups. 

Third, increase the minimum wage by 11-12% by 2023. David Card, a Nobel Prize in Economics winner, in his thesis entitled “Myth and Measurement: The New Economic of Minimum Wage” refutes the myth that a high minimum wage will dampen employment. Instead, Card said that the policy of raising the minimum wage would stimulate the creation of new jobs. With an increase in the minimum wage, workers will directly spend surplus income in the real sector. The money will go directly to the turnover of business actors so that they will in turn need more workers. 

Fourth, the diversion of government spending that has not been absorbed, in the amount of Rp1,200 trillion, has the risk of generating various problems. One of these is low absorption, indicating that there is a budget plan that has not changed even in the midst of a pandemic. There is a lot of budget wastage at the end of the year, even though if the procurement of goods and services is planned properly, a residual budget will not accumulate at the end. Data on the poor absorption of the budget is also in line with the large number of regional governments parking funds in banks. Next, there are indications that the government is deliberately not accelerating absorption because it wants to use the remaining budget to cover the initial expenditures of 2023. Financing conditions are likely to be very difficult next year; for example, if you want to issue SBN, interest will be more expensive. While the world is hit by a global recession, the government is also starting to worry that the tax ratio will fall and commodity prices will also fall. 

Read: The woe of textile industry in the face of recession

For the problem of poor budget planning, the solution is to implement strict sanctions on regional governments, by holding back allowances and facilities to regional heads whose absorption is low. Meanwhile, for institutional ministries, they will directly reallocate spending to Perlinsos rather than funds that are not absorbed or absorbed at random in order to waste a budget. 

Fifth, supporting affordable housing projects. In Indonesia, 75% of residential house purchases depend on mortgage schemes. The sensitivity of mortgage interest rates to primary home purchase decisions is very large, especially for families who are just planning to buy their first house: once mortgage interest rates go up, there will be two options. First, lowering the expectation of the price of the house to be purchased, even though the location is further from the place of work. Second, postponing the mortgage, and starting to save, to increase the amount of down payment/DP before deciding on a mortgage. This condition needs to be taken into account because the property sector has links with 175 other business sectors, from ceramics, cement, steel, to housing accessories. The absorption of labor in the construction sector can also have an effect. Data as of February 2022 revealed the number of workers in the construction sector reached 8 million people, while in the real estate sector it was 450 thousand. (Bhima Yudhistira)