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Indonesia - Labor market policies and international competitiveness

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  • Agrawal, Nisha

Abstract

Indonesia's labor market in the 1990s is characterized by rising labor costs, reduced worker productivity, and increasing industrial unrest. The main problem is generous, centrally mandated, but unenforceable worker benefits. Legislation encouraging enterprise-level collective bargaining might help reduce some of the costs associated with worker unrest. Policy measures Indonesia adopted in 1986 led to a boom in manufacturing exports and foreign direct investment and put Indonesia on the path to rapid export-oriented, labor-intensive growth. In the second half of the 1980s, because of abundant cheap labor, real labor costs did not rise but worker productivity did, partly through improved education and training of the workforce. There are increasing signs that in the early 1990s Indonesia's competitiveness is being eroded by several factors: rising labor costs, low worker productivity, and increasing industrial unrest. One problem is generous, centrally mandated benefits, detailed in the new social security law. The estimated cost of the government-mandated benefits package would be a hefty 12 percent of the wage bill. The other problem is that the government has greatly limited organized labor, viewing it as a threat to political and economic stability. This approach of mandating benefits centrally through legislation without empowering workers to enforce compliance with the legislation (or negotiate their own benefits packages with employers) is beginning to strain industrial relations in Indonesia. Policymakers should consider allowing effective, democratic plant-level worker organizations. Legislation to encourage collective bargaining at the enterprise level would enable workers and managers to negotiate outcomes that might improve worker productivity. Improving dispute resolution mechanisms and the workers'ability to be heard in the workplace could reduce the incidence of illegal or wildcat strikes. But more than legislative changes are needed. Changes in approaches to industrial relations, deregulation, and increased competition in product markets could make unions'roles more positive, while limiting their"negative"role.

Suggested Citation

  • Agrawal, Nisha, 1995. "Indonesia - Labor market policies and international competitiveness," Policy Research Working Paper Series 1515, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1515
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    References listed on IDEAS

    as
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    2. Godfrey, Martin., 1993. "Employment planning within the context of economic reforms : a case study of Indonesia," ILO Working Papers 992974563402676, International Labour Organization.
    3. repec:ilo:ilowps:297456 is not listed on IDEAS
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    Cited by:

    1. Asep Suryahadi, 2001. "International Economic Integration and Labor Markets: The Case of Indonesia," Economics Study Area Working Papers 22, East-West Center, Economics Study Area.
    2. Belser, Patrick, 2000. "Vietnam - on the road to labor-intensive growth ?," Policy Research Working Paper Series 2389, The World Bank.
    3. Pangestu, Mari & Hendytio, Medelina K., 1997. "Survey responses from women workers in Indonesia's textile, garment, and footwear industries," Policy Research Working Paper Series 1755, The World Bank.
    4. Agrawal, Nisha, 1996. "The benefits of growth for Indonesian Workers," Policy Research Working Paper Series 1637, The World Bank.

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