The Minimum Wage Dilema
Iwan Ungsi, A CIVIL SERVANT AND GRADUATE STUDENT AT S. RAJARATNAM SCHOOL OF INTERNATIONAL STUDIES, NANYANG TECHNOLOGICAL UNIVERSITY, SINGAPORE
Sumber : JAKARTA POST, 13 Februari 2012
“Labor was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labor, that all wealth of the world was originally purchased.” (Adam Smith)
The recent series of labor strikes in Bekasi marked the end of the euphoria that followed the Indonesia’s achievement of investment grade. It took 14 years for Indonesia to arrive at this level, yet disputes between employers and laborers remain unabated.
Invariably, these disputes are so easily predicted that the public seems to be more apathetic to the workers’ cry for their basic rights through their only weaponry: labor strikes, ranging from peaceful demonstrations at local government (or legislative council) buildings to occupying and paralyzing major city roads.
Equally, employers counteract with their own version and weapon of choice. Where mobility of capital is fluid in the increasingly globalized world economy, relocation could be one option to consider if businesses view profits as no longer viable due to increases in labor costs. Typically, cost-cutting exercises in organizations rely on redundancy measures, but this is no longer a workable alternative due to restrictions in the present labor regulation, established in 2003, requiring employers to pay huge severance packages to laid-off workers.
Analyzing the situation at hand, both employers and workers are trapped in a zero-sum game, with each party appearing to emulate the “prisoner’s dilemma” game theory model, whereby both parties appear to choose to not cooperate even though it is in their mutual interest to do so.
In this instance, the workers use strikes to halt companies’ productions with the aim to hurt the company’s bottom line, and in turn, the employers might resort to relocation in order to ensure business continuity albeit with a price. The impact of this relocation signifies unemployment for the majority of the company’s workers. In the final analysis, everybody hurts, nobody wins.
Ironically, within the “prisoner’s dilemma” context, the option to choose to collude will provide a far greater benefit to each party as opposed to focusing on their own self-interests. The key to this game theory model is to establish communication between the parties and find common ground in order to seek shared perspectives.
Relating to the companies and their workers, the logical win-win scenario (otherwise known as Paretto optimal solutions) would be for both parties to settle their disputes such that the workers obtain their demands of higher wages, and in theory, incentivizing the laborers to achieve higher output.
The first minimum wage legislation was endorsed by the New Zealand government in 1894. Since then, minimum wage laws have drawn debate all over the world. Based on International Labor Organization (ILO) reports, 90 percent of countries implement minimum wage laws.
The UK, Australia, Netherlands, France and the US are among the countries that adopt the highest minimum wage; other countries like Singapore choose to enact foreign worker levies as a form of an implicit minimum wage (Chew Soon Beng, Business Time, 2010). In Indonesia, the term became familiar in the 1960s, but it was only introduced in late 1979.
There are two opposing views on minimum wage legislation. The first is concerned with empowering low-income workers and strengthening their bargaining position in salary negotiations amidst the widely available pool of cheap labor due to the abundance of human capital in Indonesia. Workers have no choice but to agree to unacceptably low wages where competition for jobs is stiff. Insufficient job creation to absorb the available labor force is one of the causal factors of the imbalance in the demand and supply in the labor market.
On the other hand, the opposing opinion perceives the minimum wage as too limiting and inflexible, concluding that it would inevitability hurt the labor market and consequently harm the country’s international competitiveness. Most of the conflicts over minimum wages have roots in the basic premises of these two opposing views.
The remaining discourse is always about labor exploitation vis-à-vis the unemployment rate. As an emerging country, the pressure to maintain low wage policies has been considered as an unfortunate – but necessary — outcome in order to achieve low unemployment rates and steady job growth. Overseas manufacturing-based industries will automatically seek out the most efficient labor market for their plant locations. Thus, we should not misguide and sacrifice workers’ wages in a “race to the bottom” and compensate with foreign direct investment inflow.
In the longer term, low-wage labor policies would not sustainably benefit the country’s competitiveness, as Carolina S. Guina (2009) argued that in the context of global competition, labor regulations and standards emerged as critical factor in attracting foreign direct investment, and low wages could result in low productivity and lower skill levels which would be disincentives for investors.
We must strive to reconcile differences between employers and the labor force, seeking all possible solutions. One alternative is to emulate global best practices, which elevate the demand curve by increasing labor productivity and attracting new foreign direct investment. Hence, higher wages come in the same package as higher employment.
This is no unrealistic view, as Singapore already did it in the 1980s. Following Chinese leader Deng Xiaoping’s visit in 1979, Singapore PM Lee Kuan Yew forsaw the potential of China and concluded that no country could afford to contend with China if they opened up. Hence, Lee commenced an agenda to divert Singaporeans from the low wage trap. Initial steps were taken such as reforming wage structures, mobilizing macro-focused labor unions, establishing the Skill Development Fund and improving the function of the National Wage Council (Chew and Chew 2005). These steps resulted in a nation competitive edge and pushed the country to full
employment.
Yet, how do we compare the situation in Singapore with a population of 5.1 million people, from which 1.4 million are foreigners, to the Indonesian context with 240 million people and a 119 million-strong labor force? Presume we multiply the difficulties 50 times, will this be settled? Unfortunately, what Lee predicted more than three decades ago has materialized now that the Chinese dragon has awakened, and currently holds the second largest economy in the world.
We should begin by improving infrastructure, enhancing labor productivity and labor movements, establishing better vocational training, eliminating political influence over the minimum wage avoiding drastic increases, and implementing good governance policies.
None of these steps are achievable without tripartite collaboration, but by working together we can compete internationally. ●
The recent series of labor strikes in Bekasi marked the end of the euphoria that followed the Indonesia’s achievement of investment grade. It took 14 years for Indonesia to arrive at this level, yet disputes between employers and laborers remain unabated.
Invariably, these disputes are so easily predicted that the public seems to be more apathetic to the workers’ cry for their basic rights through their only weaponry: labor strikes, ranging from peaceful demonstrations at local government (or legislative council) buildings to occupying and paralyzing major city roads.
Equally, employers counteract with their own version and weapon of choice. Where mobility of capital is fluid in the increasingly globalized world economy, relocation could be one option to consider if businesses view profits as no longer viable due to increases in labor costs. Typically, cost-cutting exercises in organizations rely on redundancy measures, but this is no longer a workable alternative due to restrictions in the present labor regulation, established in 2003, requiring employers to pay huge severance packages to laid-off workers.
Analyzing the situation at hand, both employers and workers are trapped in a zero-sum game, with each party appearing to emulate the “prisoner’s dilemma” game theory model, whereby both parties appear to choose to not cooperate even though it is in their mutual interest to do so.
In this instance, the workers use strikes to halt companies’ productions with the aim to hurt the company’s bottom line, and in turn, the employers might resort to relocation in order to ensure business continuity albeit with a price. The impact of this relocation signifies unemployment for the majority of the company’s workers. In the final analysis, everybody hurts, nobody wins.
Ironically, within the “prisoner’s dilemma” context, the option to choose to collude will provide a far greater benefit to each party as opposed to focusing on their own self-interests. The key to this game theory model is to establish communication between the parties and find common ground in order to seek shared perspectives.
Relating to the companies and their workers, the logical win-win scenario (otherwise known as Paretto optimal solutions) would be for both parties to settle their disputes such that the workers obtain their demands of higher wages, and in theory, incentivizing the laborers to achieve higher output.
The first minimum wage legislation was endorsed by the New Zealand government in 1894. Since then, minimum wage laws have drawn debate all over the world. Based on International Labor Organization (ILO) reports, 90 percent of countries implement minimum wage laws.
The UK, Australia, Netherlands, France and the US are among the countries that adopt the highest minimum wage; other countries like Singapore choose to enact foreign worker levies as a form of an implicit minimum wage (Chew Soon Beng, Business Time, 2010). In Indonesia, the term became familiar in the 1960s, but it was only introduced in late 1979.
There are two opposing views on minimum wage legislation. The first is concerned with empowering low-income workers and strengthening their bargaining position in salary negotiations amidst the widely available pool of cheap labor due to the abundance of human capital in Indonesia. Workers have no choice but to agree to unacceptably low wages where competition for jobs is stiff. Insufficient job creation to absorb the available labor force is one of the causal factors of the imbalance in the demand and supply in the labor market.
On the other hand, the opposing opinion perceives the minimum wage as too limiting and inflexible, concluding that it would inevitability hurt the labor market and consequently harm the country’s international competitiveness. Most of the conflicts over minimum wages have roots in the basic premises of these two opposing views.
The remaining discourse is always about labor exploitation vis-à-vis the unemployment rate. As an emerging country, the pressure to maintain low wage policies has been considered as an unfortunate – but necessary — outcome in order to achieve low unemployment rates and steady job growth. Overseas manufacturing-based industries will automatically seek out the most efficient labor market for their plant locations. Thus, we should not misguide and sacrifice workers’ wages in a “race to the bottom” and compensate with foreign direct investment inflow.
In the longer term, low-wage labor policies would not sustainably benefit the country’s competitiveness, as Carolina S. Guina (2009) argued that in the context of global competition, labor regulations and standards emerged as critical factor in attracting foreign direct investment, and low wages could result in low productivity and lower skill levels which would be disincentives for investors.
We must strive to reconcile differences between employers and the labor force, seeking all possible solutions. One alternative is to emulate global best practices, which elevate the demand curve by increasing labor productivity and attracting new foreign direct investment. Hence, higher wages come in the same package as higher employment.
This is no unrealistic view, as Singapore already did it in the 1980s. Following Chinese leader Deng Xiaoping’s visit in 1979, Singapore PM Lee Kuan Yew forsaw the potential of China and concluded that no country could afford to contend with China if they opened up. Hence, Lee commenced an agenda to divert Singaporeans from the low wage trap. Initial steps were taken such as reforming wage structures, mobilizing macro-focused labor unions, establishing the Skill Development Fund and improving the function of the National Wage Council (Chew and Chew 2005). These steps resulted in a nation competitive edge and pushed the country to full
employment.
Yet, how do we compare the situation in Singapore with a population of 5.1 million people, from which 1.4 million are foreigners, to the Indonesian context with 240 million people and a 119 million-strong labor force? Presume we multiply the difficulties 50 times, will this be settled? Unfortunately, what Lee predicted more than three decades ago has materialized now that the Chinese dragon has awakened, and currently holds the second largest economy in the world.
We should begin by improving infrastructure, enhancing labor productivity and labor movements, establishing better vocational training, eliminating political influence over the minimum wage avoiding drastic increases, and implementing good governance policies.
None of these steps are achievable without tripartite collaboration, but by working together we can compete internationally. ●