Indonesia’s Minimum Wage: Finding middle ground between Workers and the Economy

Indonesia's Minimum Wage: Finding middle ground between Workers and the Economy
Illustration: LEONARDO A. PUTONG

IO – A minimum wage represents the lowest nominal monthly remuneration, by law. Companies are legally prohibited from paying their workers anything below the minimum wage, which is intended to function as a safety net, to keep worker wages commensurate with the cost of living. Thus, the minimum wage is also expected to help minimize social inequality in income distribution.

Types of minimum wage: they are divided into the provincial minimum wage (UMP) which applies to all cities and regencies within the province and city/ regency minimum wage (UMK) which applies to a specific city/regency. Once the UMP is announced by the governor, a mayor or regent will set the UMK in their respective region.

The provision on a minimum wage is now governed by Law 11/2020 on Job Creation, and further by Government Regulation (PP) 36/2021 on wages.

According to PP 36/2021, a minimum wage applies to employees/workers with a period of employment of less than one year. For those who have worked a year or more, the amount of wage/salary is to be negotiated using the salary structure or pay scale used by their company.

Indonesia's Minimum Wage: Finding middle ground between Workers and the Economy

The PP has changed the formula to determine minimum wage quite drastically. Now, the amount is calculated by taking into account the economy and job market, as indicated by GDP, inflation rate, purchasing power, labor absorption rate and median wages.

As a consequence, the nominal amount of UMP and UMK will hinge on average consumption per capita, average number of household members, and average number of working household members. This data is based on a national economic and social survey by Statistics Indonesia (BPS).

On an economic metric, the UMP and UMK will be determined based on the regional domestic product in the fourth quarter (Q4) of the previous year and the first (Q1), second (Q2), and third quarter (Q3) of the current year. As for inflation, the provincial inflation rate from September of the previous year to September of the current year will be used.

For 2022, the UMP has been calculated using the above formula. The results show that the minimum wage for next year in all provinces is to be increased slightly, compared to that of this year. Nationally, the median minimum wage rose around 1.09% year on year (YoY).

The minimum wage in some provinces even increased by less than 0.5% YoY. In Jakarta, for example, the 2022 UMP is Rp4,453,935, up by only Rp37,749 (0.85%).

This meager increase created pros and cons in public discourse. The increase of UMP below the inflation rate is seen as “not pro-worker”. The government is accused of siding with business players. But is this really the case?