Minimum wages in Indonesia will rise moderately in 2022

For many foreign companies, Indonesia is a location for low-cost contract manufacturing. When considering the general investment environment, the minimum wage is an important factor. There are currently only about 70 German manufacturing companies in the country. According to the local Chamber of Commerce and the Indonesian investment authority BKPM, several are currently preparing to relocate production from China. 

Every year the government determines the increase in monthly minimum wages across the country based on a fixed formula for cities and municipalities ("upah minimum kabupaten / kota: UMK"). The growth is often well above general economic growth; in recent years it has been more than eight percent.  

At the end of 2021, the government announced the monthly minimum wages for 2022 (a regular working week is usually 40 hours). Accordingly, they grow on a rupiah basis by an average of only 1.1 percent compared to the previous year. The reason for this is the lower economic growth caused by the corona crisis, but apparently also a changed calculation basis as a result of the major legal reform ("Omnibus Law on Job Creation"), which is intended to liberalize the labor market. In addition to economic growth, the inflation rate, purchasing power and employment rate are further components of the calculation. 

The new minimum wages are not yet set in stone. This is because the rights of workers in Indonesia are politically sensitive. The unions are quick to call for strikes and demonstrations. Some observers therefore expect that the government may raise the minimum wage for 2022 later in the year. 

Jakarta most expensive province 

The government sets the monthly minimum wages for the 34 provinces ("upah minimum provinsi: UMP"). But they are of little practical importance because the more than 500 cities and municipalities each have their own minimum wages. The provincial minimum wages are only a lower limit that cities and municipalities can accept, but may not fall below. 

Jakarta has by far the highest provincial minimum wages at more than 300 US dollars. The lowest are found in West, Central, and East Java. More than 150 million people live on Java, which corresponds to almost 60 percent of the Indonesians. More formal employment is needed there, in particular. 

Manufacturing industry almost entirely based on Java 

The vast majority of the manufacturing industry is based on Java. Hardly any foreign company produces outside the main island. Potential investors are therefore looking at the minimum wages in the 119 cities and municipalities there.   

The greater Jakarta area is Java's most expensive production location. The city of Jakarta is even surpassed by the eastern communities of Bekasi and Karawang, where the Indonesian automotive industry is based. The municipalities of Tangerang City, Tangerang Selatan and Depok bordering Jakarta - all part of the "Jabodetabek" area (Jakarta, Bogor, Depok, Tangeran, Bekasi - also known as the Greater Jakarta area) also have high minimum wages. You also have a comparatively large number of industrial and service jobs. The same applies to the metropolitan area of the country's second largest city, the East Javanese city of Surabaya. 

The lowest minimum wages can be found in rural central and eastern Java, especially around Yogyakarta. These regions are heavily populated, and the competition for jobs has attracted the textile industry, among others, which is in competition with other low-wage locations in Asia. 

In macroeconomic terms, however, the minimum wages have only limited informative value about the prosperity of a region. This is because more than half of the workers work in the informal sector. And minimum wages can also easily be circumvented in formal employment relationships, for example through agency work. In practice, foreign companies and state-owned companies in particular actually have to pay minimum wages. Since a considerable number of the other companies do not necessarily have to do this, the average wages in many places are roughly at the level of the respective minimum wage. 

Original article: www.gtai.de/gtai-de/trade/wirtschaftsumfeld/bericht-wirtschaftsumfeld/indonesien/mindestloehne-in-indonesien-legen-2022-moderat-zu-770084