The Manpower Law of 2003 and its implementing regulations: Genesis, key articles and potential impact

Abstract

This paper reviews Indonesia's Manpower Law 13/2003 and related regulations, against a backdrop of slow employment growth, business concerns about the legislation and government attempts to change it in 2006. The paper focuses on severance rates and dismissals, short-term contracts and out-sourcing, and minimum wages, also briefly discussing other articles, and comparing the law with those in neighbouring countries. It suggests that certain articles have contributed to significantly higher wage costs and reduced flexibility in the management of labour in Indonesia's formal sector, even though compliance is by no means universal within the private sector. Key provisions, especially large increases in severance rates, and needs criteria imposed for the purpose of setting minimum wages, are also out of step with labour market policies in other developing countries. Circumstantial evidence suggests that these measures have adversely affected the investment climate and damaged prospects for a recovery in employment.

The Labour Markets of Emerging Economies

“…As highlighted above, there has been a widespread debate about labour market flexibility in Indonesia, particularly with regards to the impact of the Manpower Law, which was enacted in 2003. This law, if enforced, could bring about a substantial increase in severance pay and restrictions on temporary 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 , 1996-2009. employment (Manning and Roesad 2007). While it is very difficult to establish causality (many policies and pieces of legislation were changed around the same time), it could be argued that the enactment of the Manpower Law has played a role in the increase in casual employment as a consequence of the high level of severance pay afforded to permanent workers (and hence in the segmentation in the Indonesian labour market).…”

“…Following the end of the Soeharto regime, democratic reforms strengthened the bargaining power of trade unions. In response to the demands of unions, the government increased real minimum wages, which grew, on average, by 9.6 per cent from 1999 to 2003 (Manning and Roesad 2007;World Bank 2010). This growth in minimum wages varied across provinces (in 2000, minimum-wage setting was decentralized to the provincial level): for example, the total growth rate was 65.2 per cent from 2000 to 2003 in Jakarta, while it reached 90.8 per cent in Bandung.…”

“…As argued in the literature on the Manpower Law, the introduction of this legislation has considerably increased the 'rigidity' of labour market regulations in Indonesia, which now exceeds that of most countries in the region (see Manning and Roesad 2007;World Bank 2010). As highlighted in Chapter 3, according to the OECD EPL Index, Indonesia receives a high score, notably for the regulation of permanent workers (the highest score in the sample of OECD and non-OECD countries), which, in turn, is driven by high severance pay.…”

“…Moreover, the applicability of the law to workers has become more complicated with varying rates of severance pay (along with different eligibility for long-service pay) depending on the type of separation/dismissal. As outlined in the Law (and summarized in Manning andRoesad 2007 andWorld Bank 2010), the regulation of severance pay and long-service leave depends on the reason for dismissal or separation. In particular, the number of months of severance pay owed to workers dismissed for economic reasons is doubled in the case of …”

“…Long-service-leave pay Severance pay Figure 5.9 Severance and long-service-leave pay according to years of service -for dismissals due to economic reasons (Manpower Law 13/2003) Sources: ILO NATLEX database available at: www.ilo.org/dyn/natlex/natlex_browse.home?p_ lang=en; Manning and Roesad (2007).…”