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E D I S I 0 2 T A H U N X V I I 2 0 1 1
3. MINIMUM WAGE AND YOUTH EMPLOYMENT OF INDONESIA
The increases in the minimum wage observed in Indonesia are caused by a number of weaknesses in the process of fixing
minimum wage. The determination of the index is less cautious since the enactment of local autonomy lacks the guidelines on
how to use other criteria for fixing the minimum wage and the low participation of key stakeholders in the process of
wage determination. Minimum wage setting process becomes more complicated since the delivery of minimum wage fixing
authority to local governments in the era of autonomy.
Theoretically, labor demand is strongly influenced by wage levels. A problem that often occurs in terms of wages is a
difference between understanding and interest in wages between employers and employees. Government policy is
needed to overcome the differences of interest. One of the factors that support the development of a country is the
improvement of wages. Wage improvements will increase revenue for the community, which in turn affects the purchasing
power. Increase in demand for goods and services caused by the increase in income led businesses to grow faster.
3.1. The Wage Council
The wage council is an institution who has the function of formulating the minimum wage that became the basis for
setting minimum wages by the regional head. The wage council is a tripartite structural organization responsible for providing
advice to the head of the blood in setting minimum wages and regulating the system of wages and materials to prepare
the formulation of wage system. The council consists of a balanced tripartite representation model that talks every year
to determine the value of the minimum wage. The main basis for the increase in rates in the minimum wage is a survey of the
market price of the living minimum requirements.
In 2000, the wage council significantly changed, both in its composition and wage-setting mechanisms. This is related
to the implementation of regional autonomy and freedom of association. A previous member of wage council is dominated
by government representatives from various agencies. At that time, workers represented by a union, trade unions all over
Indonesia, while business associations represented by the association of Indonesian businessmen. The model composition
dominated by representatives of the governments do not pay commissions more as a tool of government control of the
provisions on wages to comply with the policies formulated by the government of Indonesia, especially those associated
with low-wage policy to attract investors. The impact of that is the minimum wage which is produced by provincial wage
commissions more supportive of policies that instead of paying attention to improving working conditions. The dominance
of government in the provincial wage commissions reinforced by the minimum wage fixing authority conducted by the
minister of labor, thus legalizing the formation of provincial wage council of government intervention on the provision of
minimum wages in accordance with their interests. At the present, the wage council is using a model
representation of a balance composition. Each element of the tripartite has the same number of representatives in the
council of wage. Increasing the number of representatives of trade unions in wage council is related to the ratification
of the conventions of the International Labor Organization on freedom of association. The trade union registered in the
provincial labor office has the right to become a member of the wage council. The more the number of registered trade unions
will increase, the more the number of union representation on the wage council. Increasing the number of trade union
representatives will be accompanied by an increasing the number of employers and government representatives, so the
composition remains balanced representation. These changes provide opportunities for workers to participate in decision-
making in wage council so that workers can take advantage of the wage commissions to fight for better conditions. The
other changes occur in the wage setting mechanism. Based on Ministerial of Labor decree No. 2262000, the provincial
and district minimum wage fixing authority was delegated to the governor. Devolution of this authority is the actualization
of the regional autonomy policy. On the dimensions of decentralization of public services at the local level, the
government as a public servant will be closer to the community and be able to understand and absorb the aspirations and
interests of local people as the subject of service. It actually can provide an opportunity for the central government and more
oriented to the interests of local communities. In other words, the governor can set wages in accordance with the aspirations of
local communities whose results are expected more in line with actual conditions.
3.2. Minimum Wage Setting: mechanism and procedure
Observation of the process of discussing the minimum wage on wage council at the provincial level indicates that all the
processes running seem to take place in a democratic way and according to the system wage council management. All
the elements included in the wage council have the same opportunity in the delivery of the aspirations. Representatives of
the Union take this opportunity to discuss the minimum wage sought by employers and government representatives. However,
in the end, workers still are not satisfied with the decision produced by the council of wage, because despite of the fact that
trade union representatives to openly express their aspirations, these aspirations were not accommodated in the decision of the
council of wage. The employees have to cope with a strategy that can prevent participation in decision making. Voting
mechanism, on the one hand, can be one of the struggles of the employees to incorporate their interests, but on the other
hand can be detrimental to employees. If all parties to the wage council to play its role, while the government acts as coordinator
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E D I S I 0 2 T A H U N X V I I 2 0 1 1 and facilitator between workers and employers, employees
exposed to what was true. It should also be supported with good negotiation skills for employees to offset the capacity owned by
businessman. However, if the government be more pro-holders of capital, it is difficult to fight for the interests of employees,
because they have to deal with the alliance between business and government.
Decision making at local wage council was still overshadowed by the bias of the government against the interests of the
investment. This is evident in the formulation of the minimum wage scale generated by the regional council of wages that do
not meet the needs of working life. In addition, the role of employees in key positions is also very low. It appears from the
organizational structure in the area of wage councils, which consist of several commission surveys of wages and minimum
living needs of the government and the commission comes from determination of wages employers. Both commissions
have an important role in formulating the minimum wage. These commissions have a key position in which have strong
human resources, both in terms of knowledge and negotiating skills. The key positions can also be used for entering specific
interests.
It is very difficult for union officials to fill key positions because they lack the capacity to negotiate and the knowledge of the
macroeconomic situation and on the capacity of the company. Their arguments are often easily defeated by the employers and
the government. This is caused by the lack of coordination and a good ability to work between union representatives and other
parties. However, there are still other things, while the skills of negotiation and employees knowledge is sufficiently good
and capable of balancing the other elements, if still happened alliance between the government and employers, then the
position will remain labor weak. Transparency on the part of employers about the ability of the company is required. When
employees know the status of the company, the demands for higher wages will be adjusted with the state-owned company.
In addition, employees must be able to provide good incentives for companies, for example, through performance. Increasing in
wage is not matched by increasing in productivity; however, this will create more competitiveness and weak and hurt workers
because it will open opportunities for workforce reduction. Therefore, between employers and workers should build
awareness in order to create a synergistic relationship.
In the economic theory, wages is defined as payments for services of physical and mental labor that is provided by
employers. Although we are aware of any professional or salaries wages with permanent workers for services workflow, and not
fixed, but payment for both continues called wages. Economists make distinctions between the two terms of wages that
monetary wages and real wages. Nominal wage is the amount of money received by the workers of employers in the payment
for job intellectual or physical workers used in the production process. While the real wage is the wage rate as measured
from the point of wage ability to purchase goods and services required to meet the needs of workers.
The minimum wage is the minimum allowable wage paid by firms to workers according to law. There are two groups of
pros and cons of minimum wage. The counter explains that minimum wage laws interfere with the smooth functioning of
labor markets and creating unemployment. On the other hand, proponents argue that minimum wages could increase wages
and poor fight poverty without creating a lot of unemployment.
To create productive employment opportunities are vast, various policy tools that affect the prices of factors of production will
be directed so that the level and price structure will explain the situation of shortage and excess of production factors in the
community well. Policy is directed to adjust wages to economic development and there is a harmonious balance between
wages as an element of production costs and wages as income for workers with due regard to wage rates contained in the
economy. The wisdom of wage increases will give priority to groups of workers with very low income towards a decent wage.
This is subject to the conditions of each region and business sectors. Principle of wage that must be met is the excitement
of working that can increase production and living standards, while improving the employees. This principle will be achieved
in ways that work rationally and efficiently, without leaving the atmosphere of cooperativeness in the company. The wage gap
between urban and rural tried to be minimized to reduce the urbanization.
In recent years, Indonesian government has increased the rate of minimum wage large enough. Since January 2001, Indonesia
had implemented decentralization policies and regional autonomy. In view of this policy, the authority to establish the
level of minimum wage is transferred from central government to local governments at provincial level, and the city. Transfer
of this authority may be further increased the minimum wage increases in some areas. Recently, local government tends to
take advantage of the increases in the minimum wage as an instrument of social policy.
4. ECONOMETRICS ANALYSIS AND DISCUSSION 4.1.
Data and Methodology
The data is collected from the Ministry of Manpower and Transmigration and the CBS. The data are provincial minimum
wage, GRDP, youth employment share from 2005 to 2009 of 30 provinces in Indonesia. There are 33 provinces in Indonesia,
but three provinces are not included in this study because they are new provinces. The three provinces are Papua Barat,
Kepulauan Riau and Sulawesi Barat. The secondary data from the labor force survey were applied in this study. Provincial
minimum wage is measured by a standard 40-hours workweek on real minimum wage in Rupiah. It means that deflated all
nominal wage data into real minimum wage data by using consumer price index. GRDP is measured by constant price
2000 in Rupiah exclude oil and gas. The youth employment
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E D I S I 0 2 T A H U N X V I I 2 0 1 1 share is measured by the number of youth workers aged 20
to 24 divided by the number of all workers aged 15 to 65 multiplied by 100.
Using fixed effect regression model, this study only interested in analyzing the impact of variables that vary over period
time. Another assumption of the fixed effect regression model is that those time-invariant characteristics are unique to the
provinces and should not be correlated with other provinces’ characteristics.
Table 1. Youth Employment Share 2005-2009
13.30 12.31
11.28 12.52
13.12 15.05
13.66 13.16
11.79
7.13 8.23
9.16 5.48
8.69 9.01
8.66
13.45 14.01
13.01 12.45
12.57 10.69
9.48 12.39
10.75 14.09
13.27 13.50
13.40 13.26
1 2
3 4
5 6
7 8
9
10 11
12 13
14 15
16 17
18 19
20 21
22 23
24 25
26 27
28 29
30
No.
Aceh Sumatera Utara
Sumatera Barat Riau
Jambi Sumatera Selatan
Bengkulu Lampung
Bangka Belitung DKI Jakarta
Jawa Barat Jawa Tengah
DI Yogyakarta Jawa Timur
Banten Bali
NTB NTT
Kalimantan Barat Kalimantan Tengah
Kalimantan Selatan Kalimantan Timur
Sulawesi Utara Sulawesi Tengah
Sulawesi Selatan Sulawesi Tenggara
Gorontalo Maluku
Maluku Utara Papua
Province 2005
11.90 13.95
12.40 14.96
12.38 14.50
12.51 13.27
15.24 12.92
10.04 10.19
7.41 9.23
13.92 11.25
13.25 14.30
13.48 13.96
13.01 11.37
10.22 11.12
11.92 13.21
11.12 10.52
12.52 10.99
2006
12.69 13.78
12.81 14.80
13.18 14.18
13.44 12.70
14.90 13.41
10.70 10.08
8.57 9.43
13.02 10.76
12.59 13.65
13.42 12.34
12.62 13.34
8.92 13.10
12.92 12.96
12.61 11.12
13.48 11.00
2007
11.55 13.48
10.98 12.97
12.83 13.93
12.28 12.92
14.31 13.64
10.76 10.60
8.57 8.48
12.31 9.92
11.90 12.91
13.14 12.46
11.46 11.41
8.96 12.54
11.25 12.23
11.49 11.81
13.68 11.06
2008
11.69 11.98
9.72 11.25
11.90 12.02
11.11 11.21
13.36 11.42
9.06 9.07
6.22 8.56
11.37 8.43
11.42 12.86
12.51 11.58
10.55 10.78
9.07 11.66
10.85 11.82
11.28 11.59
11.44 12.51
2009
Source: CBS, author’s calculation.
4.2 Analysis and Discussion
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