Minimum wages will increase by an average of 7.5% in 2023

The Indonesian Ministry of Manpower has announced the average increase in minimum wages for 2023: It is a nominal (on a rupiah basis; US$1 = Rp 15,731) of 7.5%. In Jakarta, the minimum wage will increase by 5.6%. According to the exchange rate of the end of November 2022, the new minimum wage corresponds to $311 per month. In the remaining five provinces of Java, the increases are between 6.4% (Banten) and 8% (Central Java). The monthly minimum wages there are then between $115 and $169. For many foreign companies, Indonesia is a location for cheap contract manufacturing. The monthly minimum wages – with a standard working week of 40 hours – are an important factor for them. 

The minimum wage increase follows a fixed formula. Regional economic growth and the regional inflation rate play an important role in this. For the government, the calculation of the minimum wage is a balancing act between an increase required by social policy and the need to keep Indonesia attractive for labor-intensive manufacturing - for example for the textile industry. There are currently mass layoffs at clothing manufacturers. They compete with companies from the low-wage countries of India, Bangladesh, Cambodia and Vietnam. 

Due to short-term changes in the basis of calculation, the minimum wages in 2023 will increase more than originally planned (with an upper limit of 10%). This leads to resentment among the employers' associations. But the workers aren't happy either. The increase in the capital province of DKI Jakarta is one of the lowest in the country. Unions have called for strikes there. 

Production takes place almost exclusively on Java 

Every year, the local authorities define the monthly minimum wages for the following year for the provinces (Upah Minimum Provinsi - UMP) and for the counties and cities (Upah Minimum Kabupaten/Kota - UMK). Up until the corona crisis, growth was sometimes over 8%. Due to the setting of the rates in December of the previous year, there was also a strong increase in the crisis year 2020. On the other hand, the minimum wages remained almost constant in the recovery year 2022. 

County and city minimum wages are more important than those at the provincial level. The latter only form a lower limit, which the subsequent administrative level may adopt but not fall below. For foreign companies, the minimum wages in the 119 counties and cities on Java are of particular importance. Because almost the entire processing industry of the archipelago is located there. Almost 60% of Indonesians live ion Java and the share of Indonesian economic output that is generated there is just as high. 

The greater Jakarta area is the most expensive production location on Java. The city of Jakarta is even surpassed by the eastern communities of Bekasi and Karawang, home to Indonesia's automotive industry. Tangerang City, Tangerang Selatan and Depok bordering on Jakarta also have relatively high minimum wages - all parts of the "Jabodetabek" metropolitan area (Jakarta, Bogor, Depok, Tangerang, Bekasi). They also have a comparatively large number of industrial and service jobs. This also applies to the metropolitan area of the country's second largest city, Surabaya in East Java. 

Central and East Java attract with low wages 

The lowest minimum wages are found in rural Central and East Java, especially around Yogyakarta. These regions are heavily populated, and the competition for jobs has attracted the textile and furniture industries, among others. 

In macroeconomic terms, however, the minimum wages only have a limited significance for the prosperity of a region. After all, more than half of the workers work in the informal sector. And even in formal employment relationships, minimum wages can easily be circumvented, for example through temporary work. In practice, foreign companies and state-owned companies in particular have to pay minimum wages. Since a significant proportion of the other companies do not necessarily do this, average wages in many places are estimated to be around the level of the respective minimum wage. 

US Dollars and Euros are soaring 

Foreign companies are currently benefiting from the weak rupiah. The US dollar has appreciated by 10 percent since the beginning of 2022. Measured in US Dollar, the labor force in Indonesia will therefore become cheaper despite the forthcoming minimum wage increases. In general, however, the high currency fluctuations of recent years harbor risks. At the beginning of the corona crisis, the rupiah fell by 20% against the US dollar within two months - but then recovered just as quickly. The rupiah is generally sensitive to rate hikes by the US Federal Reserve. 

The euro recorded monthly fluctuations in value of more than 5% against the rupiah in 2022. Between April 2021 and September 2022, it had lost almost 20% in value. In the following two months it increased again by 11%. Even on a euro basis, Indonesia became cheaper at the end of 2022 despite upcoming minimum wage increases. 

High inflation fuels dissatisfaction 

In September 2022, inflation in Indonesia rose to 6%, the highest level since 2015. Petrol and staple foods in particular have become more expensive. This leads to dissatisfaction in large parts of the population and to demands for higher minimum wages. In some places, protests and strikes could lead to subsequent increases. 

Source: GTAI