Indonesia’s Provincial Governments Announced the New Provincial Minimum Wages for 2023

It is always a tricky situation for authorities. While the country’s labor unions always demand sharp minimum wage growth, business-owners always hope to see limited minimum wage growth to keep the operational costs in check. And so, an acceptable middle way needs to be found. After all, it is in the interest of the government to have millions of satisfied workers (as they are voters in upcoming elections), but at the same time it is important to have optimally growing businesses (because businesses absorb labor, bring in much necessary tax revenues for the government, and – more generally – push the national economy to a higher level).

And what makes matters often more complicated is that there exist opposing views (or better: interests) within the government itself (both at the central government and regional governments). So, while some politicians or regional leaders advocate for steep minimum wage growth to seek popularity ahead of elections, others – who focus on the longer term and/or whose political campaigns are financially supported by certain business owners – are likely to advocate for very limited minimum wage growth. This therefore adds a layer of complexity to the matter.

Indonesian President Joko Widodo seems to tilt toward a preference to please the business-owners as he has been eager to create a conducive investment climate that attracts (foreign) investment, thereby encouraging economic growth. A competitive minimum wage is among the ingredients to offer an attractive investment climate to (foreign) investors.

Too steep minimum wage growth would imply that investors decide to try their luck somewhere else, causing Indonesia to miss out on direct investment. This would be negative for the following reasons:

(1) Direct investment creates jobs for the local population. This encourages social development as workers earn money that can be used, for example, for paying for their children’s education. Earning (more) money also means that these households can spend more on a monthly basis. This implies that more needs to be produced in society (encouraging an increase in production and investments as well as more job opportunities, establishing a sort of virtuous circle);

(2) Direct investment realization tends to strengthen tax revenue for the central and regional governments. Tax revenue can ideally be used for both economic and social development of the country;

(3) Export-oriented direct investment and import-substitution industrialization help improve the country’s exports, foreign exchange earnings, current account, and balance of payments. And so, overall, it encourages the establishment of a stronger economy;

(4) Inflows of foreign direct investment (FDI) encourage the arrival of new expertise and knowledge, previously unavailable in the country, while also encouraging the integration of Indonesia into the global supply (and value) chains.

However, too steep minimum wage growth could actually backfire on the workers themselves as their wages form a significant part of the business owners’ operating expenses. So, excessive wage growth could therefore force a business-owner to cut the number of workers working at his company or factory (while finding strategies to make more efficient use of the fewer workers that become available to him/her). Or, the business-owner keeps all workers and simply decides to raise selling prices of products/services that are sold to customers. This is not without risks, too, as it could result in a decline in demand for the company’s products or services, thereby actually putting additional pressures on the company’s financial situation (which could necessitate layoffs later on).

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