Managing Indonesia’s Workforce Risks in 2013

Starting now, companies will face increasing workforce risks in Indonesia. Wages will rise by 15-30% over the next 12 months, pushing companies towards a labor cost trap, and a new regulation slated for implementation later this year will restrict companies’ flexibility on staffing.

It’s been a rough Q1 for many executives in Indonesia.  Double-digit minimum wage hikes, which came into effect at the beginning of the year, are driving up labor costs for companies across the board and putting significant pressure on their bottom lines.  This effect has been particularly acute in Greater Jakarta where mandated increases reached upwards of 40%.

Adjusting to these wage hikes has been a painful process, and executives would undoubtedly welcome a reprieve from dramatic shifts in their labor costs.  Unfortunately, however, a reprieve is not in the cards.  Over the next 12 months, workforce risks for companies in Indonesia will only continue to increase.

Mindful of upcoming elections and ongoing labor protests, Indonesia’s politicians will continue raising minimum wages, likely by another 15-30% over the next 12 months.  This will push companies towards a trap in which they must pay out hefty sums before reducing headcount and driving productivity among their remaining employees.

Minimum wage increases (2012-2013) and firing costs

 

If this weren’t difficult enough to deal with, Jakarta has also passed a regulation that will restrict companies from using temporary contracting for most positions. (In Indonesia, this practice is commonly referred to as “outsourcing” and remains a very sore point with labor leaders.)  When the regulation comes into effect in the middle of November, over 13 million workers currently employed under temporary contracts could start demanding full-time employment.

These developments have the potential to create significant liabilities for multinationals operating in Indonesia.  With this in mind, executives should take steps now to mitigate rising labor costs and upcoming staffing limitations.  Companies that proactively manage these workforce risks should be able to offset some of their costs.  Those that don’t will look back 12 months from now and reminisce about how good they had it in Q1 of 2013.

 

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