Does Minimum Wage Policy Effectively Improve Unskilled Workers Welfare in Indonesia?

Name                : Muhammad Yoga Izzani
Number        : 15311050
Major                : Management IP, Faculty of business and economics UII[pic 1]

Does Minimum Wage Policy Effectively Improve Unskilled Workers Welfare in Indonesia?

1. Introduction

Nowadays, Industrial development in Indonesia is taking place very rapidly as the progress of science and technology.  The process of industrialization in Indonesian society grew rapidly with the establishment of the diversity of company and workplace. As a result job competition in Indonesia is going harder and challenging.

Every worker candidate has to have a good skill to make them can be accepted by the company. However, it is not always the education level that decides the guarantee of employment. According to (Badan Pusat Statistik, 2014) in 2013 there are still 421,717 university graduates that still in unemployment zone. It is proving that company is not only need a higher hard skill, but also soft skill. Company need a worker that also have a good soft skill such as good communication, adaptation, team work, the ability to solve a problem, and think creatively (Susanti, 2015) .

Talking about skilled worker, the policy about the minimum wage would be very detrimental to workers who have very low qualifications (unskilled labor). It is because companies will only hire employees with high qualifications (skilled labor) in accordance with their expenses. On the other hand, the number of available worker is higher than the ability of company to hire the worker. In conclusion, there is an excess supply of labor and they are in the unemployment zone. As a result, minimum wage policy will give more unemployment either structural or frictional unemployment.

Minimum wage policies are a minimum standard that is in use by entrepreneurs and companies to determine the amount of wages for the workers, including workers, employees, and company officials. The minimum wage policy formation mechanism is carried out through an examination in which the components of minimum wage policy are the price of daily basic consumer goods. The results of the price formation then are the material basis for determining the minimum wage policy, further modification of the interests of employers, government workers, and communities. The minimum wage policy as well as measuring the level of prosperity of the region, where revenues are obtained from the average worker like a standard minimum wage policy in each province. As a result, the higher the level of the minimum wage policy in an area, the more prosperous communities in the area.

Meer and West (2013, p. 27) stated that in the long run the group of that worker will be facing a long unemployment or the delay of hiring. They also stated in (United States Bureau of Labor statistics, 2013) that unemployment happens almost for someone who have less educated and experiences worker. Sulistiawati (2012, p. 14) mentioned that worker in the prime sector commonly has a lower education, hence the increase of minimum wage will affect in the decreasing of demand of worker in this sector.

In the case of the minimum wage policy by the government it is not effective enough to improve the unskilled worker welfare. It is because businessman has to increase the cost of company and make them set the high price as a result it makes inflation; small business cannot pay the higher salary that will make them bankrupt; and will make a higher unemployment.

This paper will be giving an information and solution of minimum wage policy towards improvement of unskilled workers welfare in Indonesia.

1. Discussion

Minimum wage policies influences some things such as make a higher level of inflation, make a small business go to bankrupt and make a higher unemployment for unskilled worker. In a term of inflation, the minimum wage policy from government is also will be influencing towards the increase of goods and services price. It is because producer will be increasing the price of goods that have been produced to make some profit and for covering or paying the wage for their worker. After the increase of those goods and service, as a result inflation becomes something that will be happening. It is because the price is higher and the money demand is also rapidly up. Telisa Falianty as an EC-Think macroeconomic specialist stated that the higher of minimum wage in the future will push the inflation higher than present (Falianty, 2013).

Because of inflation effect If the minimum wage policy increases, actually there are no differentiates between before and after. It is because when governments uses minimum wage policy and increase it someday, it also makes the increase price of goods and services. As a result it seemed that there is the same effect toward the worker. The point is when the income of worker increases, the price of good will also increase, so for covering household cost (daily living cost) will be same. It can be like that because with the increase of cost of production will also increase the sale price (Wahyudi, 2013). As a result no differentiates in a minimum wage policy.

After making inflation the other effect of minimum wage policy is it will increase the number of unemployment and close some firm. If a company cannot capable for paying the worker or in the other word the company will become deficit. Then automatically there will be an unemployment and worse, with the closing of a firm will relocate to other country or region. For example a company in Jogjakarta can move to other region such as Semarang or Surakarta because the minimum wage in those cities is lower. This effect happens in medium companies and will make an increase of unemployment level in that city.

When there is a wage policy and it increases someday, company will limit the demand of worker as a result there is a decrease of employment. Company will decrease their employment by decreasing the number of job vacancy. Because there is a decrease number in hiring a worker, there will be a harder competition to enter a working world. In this case, of course company will hire the most skilled worker. They will choose the skilled and throw away the unskilled. As a result, unskilled will not be chosen. In conclusion the minimum wage policy will not effectively improve unskilled worker welfare.

Minimum wage policy can makes a small business have to go to bankruptcy zone. It is because small business cannot pay the higher salary of their worker if there is a minimum wage policy. Its policy also will make some of price be up. It is as the effect of the company that has to pay more for their worker and choose to increase the price as the change of obligation to pay more salary. As a result there will be inflation.

The other effect of this policy is it will make inequality of welfare. Even there is a positive effect of minimum wage policy such as the increase of wage for the worker, however there are some things that has to know that, this improvement of salary may not everyone can enjoy it. Because here, company side have to constantly conduct the effort to decide a company strategy as fast as it can to make a cost efficiency, worker, raw material, and another input that needed in company operational  activities. It is because when it is not be conducted, company will not reach an effectively, profitability and productivity. From doing efficiency, this is also no doubt that doing worker efficiency (dismissal and workers who doing double working). For white-collar workers who have the skills and better education is what can be given or multiple jobs holding. So for the workers / laborer are in doubt they can be enjoyed on the increase in minimum wages.

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