A catch-all omnibus job creation bill aims to put Indonesia’s demographic dividend to work.
Since his election in 2014, Indonesian President Joko Widodo, affectionately known as Jokowi, has struggled to hit his lofty target of 7% annual growth. Between 2014 and 2019, Indonesian gross domestic product (GDP) growth has remained obstinate, floating between 4.9% and 5.2% annually.
Jokowi’s latest effort to drudge GDP growth figures out of the 5% trench comes in the form of an omnibus job creation bill designed to put Indonesians to work. But union leaders and Indonesian employees are concerned that their labour rights are at stake.
The clock is ticking on Indonesia’s demographic dividend
Omnibus bills are broad, catch-all legislative tools designed to accelerate reforms. When passed by Indonesia’s House of Representatives, omnibus bills revoke any preceding legislation that conflicts with their articles.
Should the job creation bill come into law, it will reportedly replace more than 70 existing legislative articles.
Jokowi has reason to accelerate the economic reform process. Indonesia’s legislative body is notoriously slow, passing an average of seven laws a year between 2014 and 2019. Although his coalition government controls 75% of seats in the House, to enact serious economic reform, Jokowi needs to circumvent the sluggish legislative procedure.
For the Indonesian economy, time is of the essence. In 2020, the size of Indonesia’s working-age population will exceed its dependents. The phenomenon, known as a demographic dividend, offers the country the opportunity to reduce its public expenditure and increase revenues, generating a financial windfall.
However, to reap the economic benefits of a demographic dividend, the working-age population must be put to work. If there are no jobs, the glut of 14 to 65-year-olds will rapidly become a financial burden, rather than a source of public revenue. Without work, they become a drain on the public purse, relying on government assistance and welfare handouts.
Details are scant but an hourly wage scheme is among the contested items
The bill could provide the impetus Jokowi needs to realise his 7% growth ambitions. Indonesia’s growth rate has been limited by its current account deficit. Export earnings have deteriorated since the turn of the millennium. In 2000, the Indonesian manufacturing sector accounted for around 28% of domestic GDP. By 2019, it had fallen to 20%.
This fall in export revenues has limited the Indonesian government’s ability to finance its many infrastructure projects, forcing Jokowi to seek foreign investment.
Jokowi’s government claimed that details of the omnibus job creation bills are still being finalised. However, in January, Manpower Minister Ida Fauziyah revealed the bill would focus on five main issues, including minimum wage and severance pay.
Indonesia’s minimum wage and severance pay laws have been a major obstacle to foreign investment. The high cost of doing business in Indonesia deterred many firms leaving China during the US-China trade war from setting up operations in Indonesia. While US firms relocated to Vietnam, Thailand and Malaysia to avoid tariffs, none came to Indonesia’s shores.
Currently, the minimum wage rate is determined annually based on a 40-hour workweek. By introducing an hourly wage scheme, the government hopes to reduce the cost of doing business in Indonesia, drawing in foreign investment, and increasing the number of jobs available to Indonesia’s expanding working-age population.
The bill has drawn criticism from employee groups
The hourly wage scheme has come under fire from employee groups and trade unions who fear that the legislation could result in lower monthly wages and the removal of hourly employees from worker safety net programs.
On January 28, more than 100 trade union representatives from IndustriALL gathered at The National Symposium on Trade Unions’ Response to the Omnibus Bill. Speaking at the event, Eduard Marpaung, president of Lomenik, questioned whether stimulating foreign investment was worth it if it came at the cost of worker welfare.
“Every citizen should have the right to work and earn a humane livelihood. Any employment policy must ensure protection of jobs and social security; labour is not commodity,” he said.
Others, like IndustriALL Southeast Asia regional secretary Annie Adviento, hinted that the political instability caused by the bill might offset any benefits. “Political stability is a top concern of foreign investors; the backlash shows the controversial bill could end up causing more social unrest,” she said. Labour unions have already threatened further protests over the legislation.
Will the bill have the desired effect?
Employers have hailed the legislation and jumped on the potential benefits. At the opening of the World Economic Forum in Davos on January 21, property tycoon and editor of the Jakarta Globe John Riady called the legislation a “game changer”. But will it have the desired effect?
The efficacy of the bill will ultimately depend on its implementation. Until Jokowi’s government reveals the final provisions of the job creation bill and the implementation of an hourly wage, observers can only speculate on the bill’s potential impact. However, there are some indications that it may not have the desired impetus.
Firstly, Agus Gumiwang Kartasasmita, Indonesia’s industry minister, has suggested that an hourly wage system would not apply to the country’s industrial sector, exempting factory workers from its provisions. Without applying the hourly wage to the industrial sector, it will do little towards increasing Indonesian export earnings and draw manufacturing industries to the archipelago.
Secondly, without measures to slash red tape, there is scant indication that an hourly wage alone will create substantial employment opportunities. In 2017, Brazil introduced an hourly wage as part of its national labour reforms. However, it has had no effect on Brazil’s employment rate.
Without adequate worker protections, an hourly wage does not stimulate economic growth. Employers can use the hourly wage to manipulate worker hours to lower their wage bill, perhaps even employing more workers in the process. With more workers working fewer hours, the underemployed rate rises, even if the unemployment rate falls. These underemployed workers may not earn a livable income, increasing poverty rates and reducing workers’ quality of life.
Even if the bill includes provisions to protect workers from underemployment, there is no guarantee it will come into effect any time soon. The House has made the omnibus job creation bill a priority for 2020; however, its priority list now features 50 bills. If it passes even half of these in a single year it would be a landmark year for legislation.
To fulfil Indonesia’s economic potential, Jokowi needs to put the nation to work. If he fails at this task, Indonesia’s demographic dividend will quickly become a financial sinkhole. However, an hourly wage alone cannot provide those jobs. Additionally, to avoid turning the country’s workforce against the government, the governing coalition would benefit from giving labour leaders a seat and the table and a voice in the bill’s creation.
Jokowi used a piece of political sleight of hand in an attempt to prevent unrest. Calling the omnibus bill a job creation bill allowed him to brand his opponents as being against job creation. However, union leaders have called his bluff. Now it is time to work with them to produce a bill that both sides can champion. Indonesia needs the jobs to unlock its potential, but in doing so it must be wary of unlocking a path to worker exploitation and public unrest.