By Tauvik Muhamad, Programme Officer of ILO-Jakarta Office
The Government of Indonesia has arranged tripartite talks between its representative labor unions and the business community, to discuss proposed amendments to the Manpower Act (Law No. 13 of 2003). It is hoped the talks will diffuse further protests by workers nation-wide, who have found fault with the planned adoption of a more flexible labor market policy.
In France, Prime Minister Dominique de Villepin's government withdrew proposed changes to the French labor laws. The French people took to the streets, rejecting the ""easy hire and easy fire"" amendment, touted by the government as a way to reduce youth unemployment.
Those with a pessimistic view perceive that labor market flexibility is transforming a ""tide that lifts all boats"" into a tsunami, increasing poverty and misery.
Labor market flexibility refers to a competitive, or neoclassical, labor market where workers are free to allocate their services in response to shifting relative wage opportunities. At the same time, firms are free to adjust the workforce in response to shifting relative profit opportunities.
In such a framework, collective bargaining (driven by trade unions), strongly enforced hiring and firing rules, unemployment benefits and minimum wages are regarded as price distortions, as they constrain the free choice of workers and firms.
Some empirical evidence shows that flexible labor market policies during the economic crisis stabilized the unemployment rate. But most mainstream economists argue that flexibility is a key explanation for why unemployment and poverty did not rise more than they did during the crisis. They argue that a flexible labor market will have a positive impact on the economy as a whole.
A contrary argument says that although many people lost their job during the financial crisis, open unemployment did not rise during the crisis because most of the workers who lost their jobs returned to their villages to work in the informal sector, which is not regulated by existing labor laws.
It is obvious that credible industrial relations, and designing a formal system of social protection for coping with labor market risks, targeted at both the formal and informal sectors, is a necessary condition for the effective implementation of labor market flexibility. Indonesia is the first country in Asia to ratify all core ILO Conventions, particularly Convention No. 87, the right to organize.
But trade union organizations in Indonesia are still very weak contributors to the development of a coherent industrial relations system. This is indicated by very low union density and the little power workers' representatives wield in public policy debates and dialogue on labor laws (resulting, for example, in the limited coverage of the employment protection scheme).
It is evident that economic liberalization -- such as business cycle swings, technological job displacement, and foreign competition -- has eroded, if not eliminated, workers' social protection, something for which workers' organizations had struggled for many decades before finding success. This is why a more flexible labor market, involving a reduction of real wages and working conditions, would not be an option from the point of view of trade unions.
Greater flexibility in the hiring and firing of workers, employment contracts, employee turnover, wage determination, minimum wages, working time, and social benefits in the labor market, in the context of globalization, seem to be a ""one size fits all"" policy in most developed and developing countries. They are believed to be ways of reducing of unemployment and attracting investors to sustain economic growth. This will, eventually, create job opportunities. More rigid employment regulation has been seen to damage labor market performance. Neo-liberal economists advocate a more flexible labor market by weakening labor market regulations.
At the micro level, workers usually seek employment protection, and employers do not appear to oppose it as vigorously as some economists do. There is no convincing evidence that companies themselves would take the option for a very high degree of flexibility and high labor turnover. They may prefer a stable employment relationship, and appreciate experience as a transaction cost, which reduces screening and training costs. Efficiency wages are counted over the longer term.
ILO studies suggest that there is a positive relationship between labor market regulation and employment tenure. The studies have shown that labor markets in Europe and Japan are quite stable, as indicated by the surprising resilience of long term jobs, reflected in long average tenures and contributing to more productivity.
The objective of the labor market, and employment policies, should be to realize the right of every citizen to work or to (re-)integrate into the labor market, the right to a free choice of employment, as well as the right to decent conditions of work, and protection against unemployment and underemployment. This is the challenge for policy makers: To develop innovative policies that can better manage labor market changes from an economic and social point of view.
The writer is a Program Officer at the International Labor Organization in Indonesia.