Negative Impacts of Drastic Minimum Salary Rise to Indonesia Economy

Topics: Minimum wage, Investment, Wage Pages: 3 (857 words) Published: June 1, 2013
Negative Impacts of Drastic Minimum Salary Rise to Indonesia Economy In late 2012, minimum worker salary for 2013 has become an important and concerning issue. This was caused by drastic increase set by the local governments across Indonesia. In Jakarta, for instance, wages have increased by 44% compared to last year. The Bogor government also has implemented strong increases, where the minimum wage climbs up 70% from 2012. Although the rise is intended to improve welfare of workers and enhance their living standards, but the huge percentage will bring negative impacts for the Indonesian economy, particularly decreasing foreign investment, slowing down economic development and creating huge number of unemployment. First, this drastic rise will decrease foreign investment in Indonesia. Before investing their capital, foreign companies must make sure the ratio of productivity to labor cost beneficial for them. With this drastic wages rise, the production cost will grow significantly. If initially labor cost takes 30% from total production cost, with 70% of increment, production cost will escalate about 21%. Not to mention payment of work insurance (10.89% from minimum salary), religion holiday allowance (minimal 1x minimum monthly salary) and overtime work cost which is also adjusted to minimum salary. Meanwhile, productivity and efficiency of Indonesian workers is still low. According to World Economy Forum Global Competitiveness Report 2012-2013, Indonesia is ranked 120 from 144 countries for labor efficiency. Low productivity accompanied by drastic increment in production cost will create uncomfortable environment for foreign investors. This condition can push massive relocation of foreign investments to other countries with lower labor cost. The relocation will cause huge loss in economy since foreign investment can motorize economic development and creates millions of jobs. Not only will number of foreign investment decrease, the drastic rise also will slow...
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