Indonesia to Factor Productivity Into New System for Wage Rises

Indonesia plans to factor in productivity into a new rule to set annual minimum wage gains, in an effort to lift the skills of workers and avoid labor disputes.

The new system is still being discussed with unions and the main employers’ association, Manpower Minister Hanif Dhakiri said in Jakarta on Thursday, declining to give a timeframe for implementation. Minimum wages are usually set in November, with thousands of workers protesting last year in a nationwide strike for higher pay because of inflation.

“Certainly we need a system that means labor costs are predictable and also a formula that will be fair for labor,” Dhakiri said at a business forum. “The formula is still secret. But essentially there are proposals to use productivity, that’s the main and important point.”

Indonesia’s labor productivity per worker is five times lower than neighbor Malaysia, and on average is also lower than in Thailand, the Philippines and China, the World Bank said in a report last year. The government is seeking to lift productivity through competency-based training, Dhakiri said.

President Joko Widodo is pursuing a two-pronged economic growth strategy of trying to boost the country’s appeal for investors while addressing income inequality.

Wages in Indonesia have risen steeply in recent years with increased industrial action, eroding the country’s competitive advantage against China as manufacturers look for other locations.

Minimum pay in the capital climbed 11 percent this year to 2.7 million rupiah ($205) a month. Unions called for at least 3 million rupiah, a level the employers group known as Apindo has said would lead to job cuts.

“The only way to accommodate wage increases without jeopardizing competitiveness is to increase labor productivity,” the World Bank said in the report. “Boosting economic growth through increasing labor productivity will be crucial.”

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