Improving Labor Productivity and Standards at Plant Levels

Forum on Labor Management Cooperation: Latest Trends in Unionism
And the Labor Movement in APO Members Countries
Jakarta 11-15 September 2006
Indonesia Country Paper
Improving Labor Productivity and Standards at Plant Levels
By Didik Prihadi Sumbodo
Vice Secretary General of APINDO
The Employers’ Association of Indonesia
1. Economic Development Challenges in Indonesia
Main challenges in current economic development in Indonesia are how to accelerate the national post-1998 crisis economic recovery and the global competition. A crucial problem in the national economic recovery is creating employment due to current unemployment rate that reach 10 millions people or more.
In the meanwhile, there should be expansion in global market shares for products and services generated by the national business sectors, due to the fact that the rank of Indonesian economic competitiveness was continuously decreasing; from the 37th rank in 1999 to the 44th rank in 2000, the 49th rank in 2001, the 69th rank in 2002 and the 72nd rank in 2003, the 69th rank ini 2004 and the 74th rank in 2005.
The industrial sector is a leading sector represented by non oil and gas exports, accounted for 70% to 80% of he entire Indonesian Export. From the overall industrial exports, Garment and Textile products are Indonesian leading sectors. Both of them contribute 17,4%, while electronic appliance products, palm oils, processed rubber and Paper and Paper Goods contribute 23,6% of the entire Indonesian industrial exports.
Globalization and free trade require economic transparency of a country for the benefit of international commerce activities. Indonesia depends heavily in its exports to serve as main driver of its economic growth, but in so far the role has not optimally been played. Two of the main reasons are unstable domestic conditions and the export activities were still too sensitive to foreign market conditions, especially in the export targeted countries having economic stagnations such as the USA and Japan.
To improve Indonesian export growth, some efforts have been tried, including lifting export barriers, deregulation policies promoting export advantages, export commodities diversifications and export target countries diversification and improving product qualities standards. In addition, to improve competitiveness especially for leading Indonesian export products in he international market, some efforts have been initiated in improving labor productivity. Improved labor productivity will make the resulted products and services more competitive to the extent that it creates positive impacts on business development and work force absorption.
2. Indonesian Workforce and Unemployment
One of Indonesian employment problems is open unemployment, i.e., the percentage of the total workforce having no job and actively seeking jobs; another problem is underemployment, i.e., workforce having working hours less than their expected hours or they who work long working hours in non-formal sectors with very low productivity.
According to Bambang Widianto (BAPENAS) open employment rate comprises of several classifications based on educational backgrounds, i.e., 3.3 millions (6%) for primary education background or lower, 2,3 millions (11,5%) for junior high school educational background, 3,3 millions (16,9%) for senior high school background, 199 hundreds thousand (10%) for academic diploma background and 245 hundreds thousands (9,1%) for university graduate background. We should add transient open unemployment figure of 3.5 millions to 5,5 millions to the above figures; most of them were unskilled workforces.
Among 29 millions underemployed workforces, i.e., who work less than 35 hours a week, 12 of them still strive to get better jobs, and the rest 17 millions of them were not seek better jobs due to one factor or the others.
Based on those facts, the main target and objective of employment in Indonesia are to reduce unemployment and underemployment figures and to improve working conditions, including wages or compensation. To be more specific, the target and objectives were focused to certain target groups such as youngsters, females, migrant workers etc. Referring to BAPENAS data, it is planned that by the end 0f 2009, the open unemployment figures would decrease to only 5.8 millions (5,1%) from 10,3 millions (9,9%) in the last 2004.
In evaluating plan achievement, we should monitor, inter alia, the open unemployment rate ( total, by gender, by age, by duration of unemployment etc); underemployment rate (time-related and productivity-related); share of formal sector – informal sector; wages; the quality of work (most significant qualitative indicators o be identified); youth unemployment and underemployment; thresholds for regional dispersion and employment-related institutional development ( the methodology to be developed).
3. The Union Development in Indonesia
Since 1998, the initial stage of Indonesian Reform, fundamental changes occurred in industrial relation sectors, especially rapid growth in national level union establishments. These fundamental changes occurred under 3 newly passed low and regulation: The Presidential Decree No. 83/1998 on the Ratification of ILO no 87 on freedom to associate and gathering and the protection of rights to join or establish labor organization; Law No. 21/2000 on unions, providing comprehensive freedom to labors to establish their unions/associations; and Law No, 13/2003 on manpower. Through these law and regulations, several manpower aspects including industrial relations have new regulations and directions.
Base on labor data, since 2002, there are 70 unions/labor associations; 15.750 working units home based at heir companies; 144 national level labor associations; and 2 labor confederations. It is also important to observe that national level union’s development growth is faster that on company levels. As a general figure, before 1998, there was only one labor confederation, 12. National level labor associations and 12.000 company level labor unions. As a general rule, unions should evolve in bottom-up direction, from company level, then federations or other similar forms would emerge, and these federations will form confederation(s).
Some points worth to be mentioned based on their links with unions development in Indonesia are: freedom to associate, i.e., labor rights to establish their own associations and their rights not to establish their own associations; harmonization of labor associations within a company, i.e., the possibility of the establishment if two or more labor associations within the same company, which possibly would create potential conflicts/disharmony which in turn interfere with the production process; and the capabilities of labor unions/associations leaders, i.e., the ability of the company level labor association(s) leaders to understand the nature of labor associations as a means in achieving common objectives positively, independently and contextually.
4. Competitiveness and Productivity in Indonesia
Indonesia still has to improve its future competitiveness to compete in international markets, especially in ASEAN environment. As a preliminary figure, in 2003 and 2002 Singapore was still occupied the 6th rank, Malaysia occupied the 29th rank in 2003, from the 27th rank in 2002. Thailand ranked 32 in 2003, from the 30th rank in 2002, while Vietnam ranked 60 in 2003 and stepped down from the 56th rank in 2002. The Philippine ranked 66 in 2003, stepping down from the 62nd rank in 2002.
Michael Porter was explicitly stated that productivity is the core in determining the level of competitiveness on individual, company, industrial or national levels. The productivity is in itself a source of living standards and individual and per capita income sources. On the other hand, competitiveness is basically an ability to create a certain prosperity level. The OECD define competitiveness as a country’s ability in producing goods and services that meet international market requirements and its ability in creating sustainable prosperity among its citizens. There is, therefore, a parallel association between productivity level and competitiveness.
According to the APO ( the Asian Productivity Organization) 2004 Survey Report, ASEAN countries annual average GDP growth during 1998 – 2000 are Singapore (7,12%), Malaysia (6,48%), Vietnam (6,36%), Thailand (5,93%), Indonesia (5,4%) and the Philippine (2,51%). While during the same periods, the average Total Factor Productivity (TFF) are Vietnam (3,27), Malaysia (1,29), Thailand (1,00), Singapore (0,78), the Philippine (-0,37), and Indonesia (-0,80).
Economic growth of a country and business growth of a company are the sources of workforces and prosperity generation. Recently, the United Indonesia Ministries have declared an economic growth through investment improvement (especially from off-shore sources) to create employment, community income and multiplier effects in form of business activities growth.
Investment growth and technological investment are theoretically and empirically have been showed to be able to generate economic growth. But growth without economic efficiency (market, improper protection and subsidies, and other factors) and Human Resources Potential development will only result in bubble economy. This condition will vulnerable against any tide and regional or global economic flux. 1997 Southeast economic crises showed than some Southeast Asian countries were quite sturdy against these fluxes, while Indonesia are still struggling to exit from the extended crises until now.
Productivity improvement, especially in the total factor on macro, sect oral, industrial company and individual levels is the main determinant of company product competitiveness on global, regional and domestic levels. Among the improvement of productivity of the others factors, productivity improvement in individual level play an important position.
5. Labor Productivity Improvement anda Labor Standards Improvement on Company Level
A company exists to create value added. The value added would be distributed among stockholders; production means holders, laborers and the general publics in form of tax payment to the Government. No company will exist without value added, for no party will be interested to develop and involve in the company’s processes. No dividend will be paid without value added, and nor labor and wealth fringe benefit improvement.
Total labor costs, including wages and wages improvement are not given constructs, but rather the final product of series of business processes. To build company ability in wages expenditures is how to build the company ability to grow. The company growth sill depend on it’s ability to generate year-to-year ever growing value added The bigger the value added generated, the more value added that could be distributed among varieties of items, including personnel costs and company reserves.
Labor cost is commitment cost not influenced by a company’s performance. The main characteristics are that the size of the relatif share of labor cost per value added changes in countercyclical direction with the business cycle. If a company performance decrease, then labor cost share increase, the profit will decreasing, inhibiting capital expansion due to no new investment available for development purposes. Should this condition continue in the long run, he the company will deteriorate and probably will not be able to pay any wage to any employee or any dividend to any shareholder, and it has just to wait its final destiny: bankruptcy.
Past experiences showed that productivity improvement will generally be achieved through the increase in capital investment on production facilities and equipments (technological innovations). To achieve such a condition, the company should accumulate capital through their internal reserves provided for investment purposes.
To maintain company ability in paying wages, dividend and internal reserve require the implementation of productivity standards principles; in other word, the increase of wages and total labor cost should be matched by productivity improvement. The productivity standards principles are concept where the relative employee share were kept to be constant, nominal wages increase are in limited ranges, or labor cost increase should be maintained within the limit of value added per employee growth on company level.
Ideally, productivity improvement on the company level should be performed on the company level by involving the managers and the entire employees of the company. Social dialog within the company will serve as an important means un productivity improvement. This social dialog comprises generally the transparency and mutual trust among the managers and employees/ the unions. Representatives of both parties will discuss and identify the company operational areas to be targeted in productivity improvement and which also serve as labor standards improvement.. At the end of each discussion, an evaluation should be performed and results and its follow up should be agreed upon. Ideally, the cycle should be repeated on the other department to the extent that in the mid-term time frame the productivity and labor standard improvements would occur.