Supply and demand

Laborers in DKI Jakarta demonstrating for an increase of minimum wage[[1]][[2]] is not a rare thing to see. The reason is because they can no longer meet their needs with their current wage. However, minimum wage has been raised for many times since it was first introduced in the 1970s. So, what exactly is going wrong in our beloved country, or the problem is within the minimum wage itself? In this essay, the vision of why minimum wage should not be put into implementation in DKI Jakarta shall be given, for not only minimum wage law do not bring welfare to the people, instead it will cause unemployment and limit the workers’ productivity.

In other words, the problem lies in the minimum wage itself. Minimum Wage Does Not Solve Poverty If the purpose of the minimum wage is a protection to the workers so that they can prosper, it is precisely with the minimum wage system that the workers will never prosper. An increase of minimum wage equals to an overall-income increase of all workers. This means that the prices of goods and/ or services in the market are subjected to increase because as people hold more money, they demand more. This escalation of demand will eventually lead to the escalation of the price[[3]].

The prices of goods and/ or services may also rise because of cost-push inflation[[4]], whereas the businesses will try to compensate the revenue by raising the prices of goods and/ or services, hoping to receive the same revenue along with the rising wage[[5]]. These ways, the previous additional wage will mean nothing as the inflation follows. This then encourages the formation of a cycle that will never end – the workers demand an increased wage in order to meet their needs while in fact, the reason of inflation is none other than the increase of the production cost, which is the wage itself.

The real example is when even the wage has been increased for times, there are still ten thousands of people demonstrating[[6]]. Thus, if the minimum wage were raised to Rp10. 000. 00,00 or even Rp100. 000. 000,00, the workers will never be prosperous because the price will later multiply according to the rice of the wage. Minimum Wage Causes Unemployment The minimum wage increased from Rp1. 529. 000,00 in 2012[[7]] to Rp2. 200. 000,00 in 2013[[8]] (an increase of 43. 88%).

This hurts both employers and employees more than the aim to raise the poverty line. Examples are Google who was forced to discharge 12. 000 employees at Motorola Mobile and PT. Industri Sandang Nusantara who terminated the contract with 1. 864 employees[[9]][[10]]. The general reason can be seen in the following example. ‘X’ enterprise employs 10 workers in 2012 and had to pay a fixed cost for laborers for as much as Rp15million/month or 180million/year. But for 2013, ‘X’ enterprise has to pay Rp22 million/month or Rp264 million/year.

This means that the any enterprises in DKI Jakarta who used to pocketing a profit of Rp22million will earn approximately 0% profit, while for enterprises with profit under Rp22million will experience losses. Furthermore, if we compare the 4. 30% inflation in 2012[[11]] with the increased minimum wage of 43. 88% for 2013, we can see that enterprises might have increased the price for 4. 30% but have to pay 43. 88% more for wage and experience a 39. 58% gross loss.

To fill this gap, the best move for the employer is to cut down the number of employees[[12]], for cutting down the variable cost[[13]] will mean to lower the production. Minimum Wage Limits The Workers’ Productivity The legislation of the minimum wage will limit the willingness of workers to work harder, improve theirs capabilities and develop their skills. Workers should have been paid based on the measurement of their hard work, trust for their position, education, and working hour. But with minimum wage legislation, they will be paid through a fixed system – no matter what they do, how long they do, how good they do, they receive the same salary.

This situation later kills all the motivation for improvement. Whereas those in the bottom layers will keep doing political demonstration hoping for a minimum wage rise rather than working hard to earn high salary. On the other hand, an increase of the minimum wage also increases the difficulty for people with higher position to get additional salary, considering the company has to pay more to those in the below lines. This in the end will make the workers who are in the above line to also stop improving their skills.

In conclusion, deeply regretting that the minimum wage (1) is a burden for the economic growth and never prosper the workers, (2) eliminates jobs for the employers are unable to pay for new minimum wage, and (3) limits the workers’ productivity, I believe it is time for DKI Jakarta to erase minimum wage legislation and use collective bargaining agreements based on job classification of each sector, or known as the bipartite system. ----------------------- [1] Wage, according to Act No. 13 Year 2003 concerning Manpower, Article 1 Point No.

30, is defined as the right of the worker/ laborer that is received and expressed in the form of money as remuneration from the entrepreneur or the employer to workers/ laborer, whose amount is determined and paid according to a work agreement, consensus, or laws and regulations, including allowances for the worker/ laborer and their family for a job and or service that has been performed or will be performed. [2] Minimum wage is defined in Rule of Minister No. 1 Year 1999 Article 1 Paragraph 1 as the lowest monthly wage consists of basic salary including fixed allowances.

Thus the minimum wage for workers who worked for less than one year must consist of the basic wage and fixed allowances. [3] The economic term for this condition is ‘demand-pull inflation’; simply explained as an increased of wage will increase the aggregate demand for goods and/or services, which ultimately will increase the price in market. [4] A term used in Macroeconomics, simply explained as an inflation caused by the increase of the production cost – i. e. the wage. [5] Messmore, Ryan. "Increasing the Mandated Minimum Wage: Who Pays the Price?

". Heritage. org. Retrieved October 5, 2011. [6] http://www. tempo. co/read/news/2013/02/08/173459901/949-Perusahaan-Sudah-Daftarkan-Penangguhan-UMP: thousands of workers who are members of the Federation of Indonesian Metal Workers Union Protesters walk towards the National Palace, Thamrin, Jakarta, on Wednesday; mass of 50,000 workers demanding a living wage of at least 84 items KHL. [7] Article 1 of DKI Jakarta Governor Regulation No. 117 of 2011 on The 2012 Province Minimum Wage. [8] Article 1 of DKI Jakarta Governor Regulation No.

189 of 2012 on The 2013 Province Minimum Wage. [9] http://bisnis. liputan6. com/read/532901/pt-industri-sandang-jual-aset-phk-karyawan-untuk-bayar-utang. [10] http://suarapengusaha. com/2013/03/08/waduh-google-phk-12-000-karyawan-motorola. [11] http://www. ekon. go. id/news/2013/01/02/inflasi-tahun-2012-capai-430. [12] McConnell, C. R. and S. L. Brue, Economics, Irwin-McGraw Hill, 1999, 14th ed. , p. 594. [13] Defined in Investopedia as a periodic cost that vary depending on a company’s production volume. e. g. the flour for bread.