A study conducted by the Organisation for Economic Cooperation and Development (OECD) shows that minimum-wage (MW) employees in the U.S. must work at least 50 hours a week to lift their families out of poverty, triple than the U.K. which is only 16 hours a week (the Wall Street Journal, 6th May 2015).
Unfortunately, the report does not include Indonesia as one of the examples so that I have to calculate it by my own in order to compare Indonesia with other countries. Therefore, in this article, I would like to elaborate this research and its relevancy in Indonesia’s case.
Figure 1: Hours a week a minimum-wage worker with two children would need to work to earn 50 percent of their country’s median household income, a common gauge for the poverty line
Note: I slightly modified this picture by adding Indonesia.
In order to calculate how many hours that Indonesia’s MW workers should have to raise their family from poverty, I assume three key assumptions.
First, I assume family has four members: a father, a mother and two children. Moreover, similar to the study, I assume that there is only one MW earner in the family.
Then, the MW is assumed 2 million IDR per month (pm). In Indonesia, different provinces have different minimum wage level. For example, Jakarta’s , the capital city, minimum wage is about 2.7 million IDR pm – the highest rate in Indonesia but many other provinces have only less than 2 million IDR pm. Therefore, to simplify, I assume the average MW is 2 million IDR pm.
Last, the poverty line used is 370,000 IDR per person per month (pppm). It means that the family’s income is assumed less than 1.5 million per family per month/pfpm (i.e. 370k pm x 4 people). BPS and TNP2K name this standard as “vulnerable people line” because these people are very fragile with the shocks and easily fall into poverty. There are about a hundred million (40 percent) people in Indonesia classified as vulnerable people. In addition, this assumption is nearly one and half higher than Indonesia’s national poverty line which is pretty low 250k IDR pppm.
In general, the poverty line in many countries is approximately 50 percent of their country’s median household income. In Indonesia’s case, based on a TNP2K’s study the median is about 400k pppm or 1.6 million IDR pfpm. Thus, the Indonesia’s poverty line is quiet ideal. However, Bank Indonesia survey in 2011 shows that the average household disposable income in Indonesia is more than 3 million IDR pfpm (around 750k IDR pppm) meaning that half of this average disposable income is 375k IDR pppm or much higher than the national poverty line.
Figure 2: Four groups of people based on their Income in Indonesia, 2008-2012
Note: The picture shows: 1) Indonesia’s National Poverty Line is 250,000/person/month (12 percent of population); 2) Vulnerable people earn less than 370k/person/month (40 percent of population); 3) Middle-income people earn between 370k-750k/person/month (40 percent of population); 4) High-income people earn more than 750k/person/month (20 percent of population).
One of the reasons why there is huge different between Indonesia’s median and average household income is because Indonesia’s demography structure based on income is right-skewed (i.e. the mass of the distribution is concentrated on the left) meaning that most people live with very low income. Therefore, probably we should re-think about Indonesia’s national poverty line. I think we should increase the poverty line from 250k IDR pppm to at least 300k IDR pppm.
My calculation shows Indonesian MW workers have to work only less than 30 hours per week or 6 hours per day to rise their family above the vulnerable people threshold, similar to Germany and better than Turkey, Canada, US or South Korea, although it is much worse than the UK and Australia. This data shows that Indonesia’s MW is actually not that bad, compared to many countries.
Actually, a study conducted by LPEM FEUI in 2007 confirms these findings. LPEM FEUI finds that less than one-third of firms said that labour issues as the main obstacle to do business in Indonesia. Top four main issues are macroeconomic instability (i.e. commodities or fuel price shock), bad infrastructures (ports, roads, electricity, and energy), corruption, and economic policy uncertainty. On the other hand, low-skilled labour and strict labour regulations are just at number nine and eleven, respectively.
Specifically, this study also reveals that MW is not the main constraints in Indonesia’s labour market. Firms only put MW at the third place, while they think the most severe problems in Indonesian labour market are severance pay and lay-off procedures.
Figure 3. Doing Business Constraints in Indonesia, 2003 and 2007
Note: Data for 2003 is taken from Asian Development Bank (ADB) report and data for 2007 is taken from LPEM FEUI report.
Source: Moccero (2008)
Due to very high severance pay and complicated lay-off procedures (i.e. high cost labour regulations), firms tend to hire new workers on a temporary basis. In consequence, it creates more outsourcing workers and reduces permanent or more secure jobs.
However, many Indonesian workers, particularly in informal sector, are still under-paid. Furthermore, another Indonesia’s main labour market challenge is: most of workers employ in Informal sector absorbing about 70 percent of workers in Indonesia. More than 60 percent of these employees work at “vulnerable jobs” (i.e. unpaid workers and own-account workers). Consequently, many of Indonesian workers are not covered by the law if they are fired, underpaid or loss their job (i.e. social protections and benefits). Therefore, it is highly important for the Indonesian government to improve not only labour market flexibility but also workers’ protection by creating more formal and secure jobs.