How
Capital Intensive Industries will Change
the
Labor Market?
Winarno Zain, AN ECONOMIST
Sumber
: JAKARTA POST, 23 Februari 2012
One
of the essential elements for a good investment climate is a conducive
industrial-labor relationship. This is an intricate and politically sensitive
issue that the Indonesian government has been facing and will face in the
future.
We note with concern that as the government works to improve roads, ports, electricity supply, government licensing systems and other services for investors, labor relations are getting worse.
More frequently conflict over wages and other labor demands are being settled through violence in the streets rather than at the negotiating table. Labor reform through revision of the Labor Law of 2003 is going nowhere.
The stalemate between employers and workers will not only inflict higher costs on employers but will also harm Indonesian workers and employment creation in general.
The tense industrial relations do not mean that investors will pull out of the country, or that prospective investors will turn their back on Indonesia.
The huge domestic market and the rising income of consumers are simply too powerful to resist and it seems investors have found ways to overcome higher labor costs.
Higher labor costs and the stringent legal requirements for employing permanent workers have driven companies to shift their production methods to a more technology-intensive system that uses less labor for each unit of production.
According to the Investment Coordinating Board (BKPM) figures, total investment in Indonesia in 2011 reached Rp 250 trillion (US$27.7 billion), but this investment only absorbed 400,000 workers.
This means it required Rp 625 million of investment just to employ one person. For Indonesia, a country that is in capital deficit, this is hugely expensive.
If there are no drastic policy changes, the trend of declining labor absorption will continue.
According to the Central Statistics Agency (BPS), the added value of large and medium enterprises has more than doubled from Rp 356 trillion in 2004, to Rp 800 trillion in 2009.
Most of this growth came from capital-intensive industries like automotive, chemicals and basic metals that grew annually by 30 percent, 20 percent and 14 percent, respectively.
Over the same period, the growth of labor-intensive industries like textiles, footwear and furniture was only between 6-9 percent.
The growing capital intensity of Indonesian industry cannot be denied: despite the doubling of value-added of large and medium industries during 2004-2009, the number of workers employed
by these industries only increased from 4.3 million people to 4.4 million people.
A mere 100,000 workers were added over five years. This happened during a time when around 10 million people entered the work force.
There are several reasons why the capital intensity of Indonesian industry is rising in the long term. The declining labor absorption is taking place because globalization has forced companies to employ more advanced technology in their operations, in order to sustain growth in the face of more competition.
The second reason is that political pressure for increasing wages will continue to grow in the future.
The pressure will not only come from electoral politics but also from the perception of justice and equity long held by the people of this country.
Indonesia still has a comparative advantage in the form of cheap labor costs compared with other countries.
Although minimum wages have been raised by 14 percent in various provinces, the level is still below $200 per month. This is well below India ($269), Thailand ($263), Malaysia ($298) and China ($300) as a 2010 survey by Japan External Trade Organization showed.
Moreover, wage increases did not catch up with inflation. Between 2004 and 2009, nominal wages in the provinces of Jakarta, Banten and West Java, rose on average by 3.6 percent per year, while the Consumer Price Index (CPI) was up by 6.3 percent.
But if the wage indices are compared with food inflation, the comparison is worse because the rate of food inflation was twice as high as general inflation until early 2011.
In March 2011, for instance, the food price index was up by 14 percent while the CPI was up by 7 percent. The price of food matters very much for the average worker because they spend a higher proportion of their income on food.
Another reason for the increase in the capital intensity of Indonesian industry is the emergence of the value-added considerations in formulating policies in industrial development.
The value-added consideration has been enshrined in the Law on Minerals and Coal Mining of 2009, where starting 2014 mining companies will be banned from exporting raw materials and permitted to export only processed products.
As processing industries are highly capital intensive, this policy will increase the capital intensity of Indonesian industries.
The trend toward rapid development of capital-intensive industries runs counter to the need for more intensive labor absorption in labor-abundant countries like Indonesia.
The higher intensity of capital and technology in industry not only reduces the need for workers but leads to more selective and restrictive labor recruitment.
Only skilled workers will be recruited, while those with manual skills will be left behind.
Of course it is not only globalization and competition that force industries to move into capital intensive mode.
Indonesian employers have long viewed the current Labor Law of 2003 as not only obstructive to harmonious industrial relations, but also imposing higher labor costs.
The obligation to meet various labor amenities as mandated in the law have deprived companies of the flexibility to adjust to fluctuations in the business cycle.
So the law could be another factor pushing industry to employ production methods that use less labor.
The law has produced an unintended discrimination among workers. The law only benefits those workers who are officially employed.
They receive more social protection but for millions of workers who are still outside the workplace and who are still seeking jobs, the gates of factories are being closed to them.
In the end, millions will be forced into the low-pay and poorly protected informal sector. ●
We note with concern that as the government works to improve roads, ports, electricity supply, government licensing systems and other services for investors, labor relations are getting worse.
More frequently conflict over wages and other labor demands are being settled through violence in the streets rather than at the negotiating table. Labor reform through revision of the Labor Law of 2003 is going nowhere.
The stalemate between employers and workers will not only inflict higher costs on employers but will also harm Indonesian workers and employment creation in general.
The tense industrial relations do not mean that investors will pull out of the country, or that prospective investors will turn their back on Indonesia.
The huge domestic market and the rising income of consumers are simply too powerful to resist and it seems investors have found ways to overcome higher labor costs.
Higher labor costs and the stringent legal requirements for employing permanent workers have driven companies to shift their production methods to a more technology-intensive system that uses less labor for each unit of production.
According to the Investment Coordinating Board (BKPM) figures, total investment in Indonesia in 2011 reached Rp 250 trillion (US$27.7 billion), but this investment only absorbed 400,000 workers.
This means it required Rp 625 million of investment just to employ one person. For Indonesia, a country that is in capital deficit, this is hugely expensive.
If there are no drastic policy changes, the trend of declining labor absorption will continue.
According to the Central Statistics Agency (BPS), the added value of large and medium enterprises has more than doubled from Rp 356 trillion in 2004, to Rp 800 trillion in 2009.
Most of this growth came from capital-intensive industries like automotive, chemicals and basic metals that grew annually by 30 percent, 20 percent and 14 percent, respectively.
Over the same period, the growth of labor-intensive industries like textiles, footwear and furniture was only between 6-9 percent.
The growing capital intensity of Indonesian industry cannot be denied: despite the doubling of value-added of large and medium industries during 2004-2009, the number of workers employed
by these industries only increased from 4.3 million people to 4.4 million people.
A mere 100,000 workers were added over five years. This happened during a time when around 10 million people entered the work force.
There are several reasons why the capital intensity of Indonesian industry is rising in the long term. The declining labor absorption is taking place because globalization has forced companies to employ more advanced technology in their operations, in order to sustain growth in the face of more competition.
The second reason is that political pressure for increasing wages will continue to grow in the future.
The pressure will not only come from electoral politics but also from the perception of justice and equity long held by the people of this country.
Indonesia still has a comparative advantage in the form of cheap labor costs compared with other countries.
Although minimum wages have been raised by 14 percent in various provinces, the level is still below $200 per month. This is well below India ($269), Thailand ($263), Malaysia ($298) and China ($300) as a 2010 survey by Japan External Trade Organization showed.
Moreover, wage increases did not catch up with inflation. Between 2004 and 2009, nominal wages in the provinces of Jakarta, Banten and West Java, rose on average by 3.6 percent per year, while the Consumer Price Index (CPI) was up by 6.3 percent.
But if the wage indices are compared with food inflation, the comparison is worse because the rate of food inflation was twice as high as general inflation until early 2011.
In March 2011, for instance, the food price index was up by 14 percent while the CPI was up by 7 percent. The price of food matters very much for the average worker because they spend a higher proportion of their income on food.
Another reason for the increase in the capital intensity of Indonesian industry is the emergence of the value-added considerations in formulating policies in industrial development.
The value-added consideration has been enshrined in the Law on Minerals and Coal Mining of 2009, where starting 2014 mining companies will be banned from exporting raw materials and permitted to export only processed products.
As processing industries are highly capital intensive, this policy will increase the capital intensity of Indonesian industries.
The trend toward rapid development of capital-intensive industries runs counter to the need for more intensive labor absorption in labor-abundant countries like Indonesia.
The higher intensity of capital and technology in industry not only reduces the need for workers but leads to more selective and restrictive labor recruitment.
Only skilled workers will be recruited, while those with manual skills will be left behind.
Of course it is not only globalization and competition that force industries to move into capital intensive mode.
Indonesian employers have long viewed the current Labor Law of 2003 as not only obstructive to harmonious industrial relations, but also imposing higher labor costs.
The obligation to meet various labor amenities as mandated in the law have deprived companies of the flexibility to adjust to fluctuations in the business cycle.
So the law could be another factor pushing industry to employ production methods that use less labor.
The law has produced an unintended discrimination among workers. The law only benefits those workers who are officially employed.
They receive more social protection but for millions of workers who are still outside the workplace and who are still seeking jobs, the gates of factories are being closed to them.
In the end, millions will be forced into the low-pay and poorly protected informal sector. ●
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