1640. Labor Regulations and
Industrial Relations in Indonesia
Alejandra Cox Edwards
(August
1996)
Personnel management and
incentive systems help firms establish a comparative advantage. Pay scales
and hiring, firing and promotion decisions are central to competitive
strategy. Ideally, labor regulations should facilitate voluntary agreements
between employers and workers, helping reduce transaction costs.
Since the mid-1980s, deregulation
has proceeded rapidly in Indonesia. Employment opportunities, the capacity
to generate income, and the opportunity to negotiate better working
conditions have all expanded. Still, many Indonesians have voiced concern
that workers have not shared enough in the benefits of economic development.
Many hold the view that increasing the minimum wage would bring the bottom
wages up and reduce wage differentials. Additionally, international agencies
such as the International Labour Organisation and representatives of the
U.S. government have criticized Indonesia for violations of labor standards.
In response, the Indonesian
government increased workers' statutory rights and removed obstacles to
collective bargaining. Real minimum wages doubled between 1988 and 1995.
Enforcement of regulations toughened. While in earlier periods statutory
rights applied to a minority in the public sector, the expansion of
manufacturing employment has broadened the coverage of these statutes,
requiring the Ministry of Manpower to perform the nearly impossible task of
enforcing them.
Now the government should close
the gap between statutory rights and voluntarily agreed-on working
conditions. This means correcting the legal standards and reducing
government intervention in labor disputes. Current labor regulations in
Indonesia inhibit constructive discourse between workers and employers in
three areas: dismissals, dispute resolution mechanisms, and contributions to
social security. More appropriate legislative action, which also takes into
account the role of other agencies is needed in two areas: job safety and
child labor.
Personnel management and incentive
structures help firms establish a comparative advantage. Pay scales and
hiring, firing and promotion decisions are central to performance evaluation
and competitive strategy. Individual and collective bargaining is at the
heart of labor-management relations in modern enterprises, and industrial
action (or the real threat of it) is generally part of negotiation strategy.
Inviting public intervention rather than allowing such mechanisms as strikes
and lockouts to operate isolates negotiations from market conditions.
Ideally, labor regulations should
facilitate voluntary agreements between employers and workers, helping
reduce transaction costs. They often do the opposite -- and also discourage
the creation of jobs. Keeping Indonesia's economy competitive requires a
system of industrial relations that relies on voluntary negotiations of
wages and working conditions. The tasks workers perform and the employers
for whom they perform them must be subject to change. This process is a
normal feature of healthy labor markets.
This paper -- a product of the Poverty and Social Policy Department
-- is part of a larger study of the labor market in Indonesia undertaken by
East Asia and Pacific, Country Department III. It was presented at a joint
Ministry of Manpower-World Bank workshop, "Indonesian Workers in the 21st
Century," Jakarta, April 2-4, 1996. Copies of this paper are available free
from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact
Maureen McIntosh-Alberts, room S10-025, telephone 202-473-3750,
fax202-522-3252, Internet address mbuckmire@worldbank.org. (40 pages)
The full report is available on our FTP server.
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