metadata: authors: 0: author: Nayar,Reema
count: Indonesia
docna: 0: docna: Indonesian labor legislation in a
            comparative perspective : a study of six APEC countries
docty: Policy Research Working Paper
subtopic: Conflict and Fragile States,Labor & Employment Law,Settlement of Investment Disputes,Labor Markets,Labor Standards,International Trade and Trade Rules,Trade Unions,Rural Labor Markets
teratopic: Social Protections and Labor,Environment,Finance and Financial Sector Development
abstracts: cdata!: The author compares Indonesian labor
            legislations with labor policies in five other APEC
            countries: Chile, the Republic of Korea, Malaysia, Mexico,
            and the United States.  The report focuses on legislation
            affecting union regulation, minimum wages, nonwage
            compensation, and working conditions.  Current legislation
            in Indonesia is a mixed bag of laws protecting workers'
            welfare but controlling organized labor.  Indonesian laws
            restrict the ability of labor organizations to effectively
            represent workers to management at the plant level.  In
            this, they are similar to Malaysian laws and, to a lesser
            extent, new Korean legislation.  They provide a stark
            contrast to current legislation in Chile and the United
            States.  But Indonesia legislation governing minimum wages,
            mandated nonwage benefits, and other labor standards, appear
            to be at least as generous as legislation in the five other
            countries.  Indonesia is under pressure to ease restrictions
            on unions.  The author suggests that allowing effective
            plant-level bargaining could give workers more of a voice at
            the workplace, but that improving industrial relations will
            require more than legislative changes.  Careful changes in
            legislation and industrial relations could help unions play
            a more positive role, while downplaying labor's more
            negative role.  The author cautions against centrally
            mandating labor standards, instead of letting workers and
            their employers negotiate them at local plants.
geo_reg_key: 517198,517191
repnme: repnme: Indonesian labor legislation in a
            comparative perspective : a study of six APEC countries
display_title: Indonesian labor legislation in a
            comparative perspective : a study of six APEC countries
listing_relative_url: /research/1996/10/696216/indonesian-labor-legislation-comparative-perspective-study-six-apec-countries
topicv3: Trade m1326924 698,Trade Unions m1327198 1670,Dispute Resolution m1327498 843,Collective Bargaining m1503879 2811,Military m1505651 3036
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Social Protections and Labor,Environment,Finance and Financial Sector Development
origu: Country Operations Division-353
no_of_pages: 64
author_keys: 0: author_key: 99076
model_extractions: POLICY **RESEARCH WORKING PAPER** 1673

# **Summary findings**

Nayar compares Indonesian labor legislations with labor policies in five other APEC countries: Chile, the Republic of Korea, Malaysia, Mexico, and the United States. She focuses on legislation affecting union regulation, minimum wages, nonwage compensation, and working conditions.

Current legislation in Indonesia is a mixed bag of laws protecting workers' welfare but controlling organized labor. Indonesian laws restrict the ability of labor organizations to effectively represent workers to management at the plant level. In this, they are similar to Malaysian laws and, to less extent, new Korean legislation. They provide a stark contrast to current legislation in Chile and the United States.

But Indonesian legislation governing minimum wages, mandated nonwage benefits, and other labor standards appear to be at least as generous as legislation in the five other countries, which all have substantially higher per capita incomes.

Indonesia is under pressure to ease restrictions on unions. Nayar suggests that allowing effective plant-level bargaining could give workers more of a voice at the workplace, but that improving industrial relations will require more than legislative changes. Careful changes in legislation and in industrial relations - and increased - deregulation and competition in product markets could help unions play a more positive role, while downplaying labor's more negative role.

She cautions against centrally mandating labor standards instead of letting workers and their employers negotiate them at local plants.

This paper is the first in a series of studies on labor market issues initiated by the Bank's East Asia and Pacific Region, Country Department 111. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Reema Nayar, room J4-007, telephone 202-473-3468, fax 202-473-8299, Internet address rnayar @worldbank.org. October 1996. _(55_ pages)

**_The_** _Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be used and cited accordingly. The findings, interpretations, and conclusions are the authors' own and should not be attributed to the World Hank, its Executive Board of Directors, or any of its member countries._

1'roduced by the Policy Research Dissemination Center
# INDONESIAN LABOR LEGISLATION IN A COMPARATIVE PERSPECTIVE

# A Study of Six APEC Countries

Reema Nayar
This paper is the first in a series of studies on labor market issues initiated by the Country Department III of the East Asia and Pacific Region of the World Bank. It was prepared in the Fall of 1994 when the author was a Young Professional in the department. Helpful discussions with Nisha Agrawal, Arup Banerji, Ajay Chhibber, Dipak Dasgupta Alejandra Cox Edwards and Farrukh Iqbal are acknowledged. Tity Hernawati provided assistance in the field.
# INDONESIAN LABOR LEGISLATION IN A COMPARATIVE PERSPECTIVE

# Table of Contents

|||Page Nos.|
|---|---|---|
|I.|INT|RODUCTION ................................................... I1|
|II.|A B<br>RE|RIEF BACKGROUND OF INDUSTRIAL<br>LATIONS IN INDONESIA<br>.2|
|III.|IND<br>PE|ONESIAN LABOR LEGISLATION IN A COMPARATIVE<br>RSPECTIVE<br>.4|
||A.|Collective Labor Relations ..............................<br>4|
||B.|Minimum Wages .............................<br>20|
||C.|Non-Wage Compensation: Employer Mandated<br>Benefits and Social Insurance Systems .23|
||D.|Other Labor Standards: Hours of Work, Leave,<br>Minimum Age of Employment ............................<br>27|
|IV.|CO|NCLUSIONS ............................<br>27|
|REFE|REN|CES<br>..<br>29|
|Table|1:|Union Densities .31|
|Table|2:|Selected Data on Strikes .32|
|Table|3:|Major Causes of Strikes .33|
|Table|4:|Ratification of ILO Conventions .34|
|Table|5:|Union Registeration, Security, Collective Bargaining Rights .35|
|Table|6:|Dispute Resolution and the Right to Strike .37|
|Table|7:|Minimum Wage Legislation .39|
|Table|8:|Old Age, Disability and Dealth Programs .42|
|Table|9:|Sickness and Maternity Programs .47|
|Table|10:|Work Injury Programs .50|
|Table|1 1:|Other Labor Standards .53|
# 1. **INTRODUCTION**

The rapid growth in manufacturing exports and employment since the mid-eighties in Indonesia has been accompanied by increasing attention abroad to the rights and welfare of Indonesian labor. Formal complaints of Indonesia's record in labor affairs were issued by two major bodies in 1987-88. The International Confederation of Free Trade Unions (ICFTU) complained to the ILO, Geneva about the lack of trade union freedom in Indonesia, and in 1987 the AFL-CIO (The American Federation of Labor and Congress of Industrial Organizations), petitioned the US Trade Representative (USTR) to remove Indonesia's GSP privileges because of its poor record on worker rights. In June 1992, Asia Watch and the International Labor Rights Education and Research Fund (ILRERF) petitioned the USTR to review Indonesian labor rights practices. The charges include violation of rights to freedom of association, to bargain collectively and strike, and of the ban on forced labor. A review was initiated in 1992 to determine Indonesia's compliance with the worker rights provisions of the GSP lawl/.

Within Indonesia, there has been a marked increase in labor unrest in the 1990's. Wages, especially failure to comply with minimum wage legislation2/ and inequitable impacts of minimum wage legislation, and restrictions on freedom of association were among the most frequent causes of strikes. Workers also demanded non-wage compensation such as paid vacation and sick leave, participation in the social insurance scheme, and improvement of working conditions. Labor leaders and a number of NGOs (in particular, the Legal Aid Institute, YLBHI) in Indonesia have voiced protests over abuses of labor rights and have been pressing for change in a number of laws that restrict the freedom of workers to organize particularly in laws relating to the resolution of disputes (military involvement, treatment of striking workers and labor activists) and also on registration of independent unions.

In late 1993 and early 1994, the government responded to these criticisms by announcing its sympathy for worker rights and welfare. The government also repealed a controversial decree on the involvement of the military in labor disputes, increased the minimum wage, set a deadline for compliance with minimum wages and union representation, granted permission for organizations other than the single officially recognized union to engage in collective bargaining, etc. The criticisms however, continue as does the labor unrest, and Asia Watch and other NGOs charge that a number of the legislative changes are superficial and inadequate.

The international concern for labor rights and standards in an increasingly integrated world economy has at least two distinct motivations. The first is a humanitarian one, basic human rights considerations on the use of prison or forced labor, child labor, blatant restrictions on freedom of association and organization, etc. The concern is that the growth resulting from increased trade and investment should not be at the cost of workers; rather that they should be able to share in the benefits of growth. The economic motivation to impose international labor standards is based on the argument 1/In June 1993, the U.S. Government had given Indonesia until mid-February 1994 to demonstrate progress in protecting worker rights provisions of the GSP law. A US Trade Delegation visited Indonesia in September 1993 on invitation by the Indonesian Government. On Feb 16, 1994 the US Trade Representative decided to "suspend but not finally terminate" its review of Indonesian labor rights policies and to revisit the issue in August.

2/ The government responded to the increasing international scrutiny with a strengthening of the minimum wage legislation beginning in 1989. The reluctance of employers to comply and the increased awareness by workers of rights was associated with further unrest.
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that low-wage developing countries have lower labor costs as a result of denial of decent wages and working conditions which gives them a competitive edge in an inter-linked world economy. Some fear that this will force producers in countries with high labor standards to lower their standards, thus leading to a "destructive race for the bottom.3/" Developing countries, on the other hand, charge that developed countries are motivated by protectionist intentions: linking unrealistic labor standards with trade raises labor costs in developing countries and protects their own positions in world trade.

This paper puts Indonesian labor legislation in a comparative perspective. Labor market policies in Indonesia are compared with those in five other APEC countries: Malaysia, Korea, Mexico, Chile and the United States. The paper focuses on legislation regulating unions, minimum wage laws and payroll taxes and employer mandates for non-wage compensation, and other labor standards (such as hours of work, etc.), areas which are the subject of current concern in Indonesia. It should be noted that important labor market policies relating to training, severance pay, etc. are not covered.

The comparison shows that Indonesian labor market policies are a mixed bag of protectionist legislation and controls over organized labor. While legislation regulating unions does make it difficult for workers to organize and enter into effective collective bargaining with employers (in this respect being very similar to the other two East Asian countries, and indeed, Chile until the end of the last decade), Indonesian minimum wage legislation and labor standards are at least as generous as those in the other countries studied, all of which are at a considerably advanced level of development. The paper suggests that there may be a positive role that effective plant level collective bargaining can play and cautions against using centrally mandated labor standards in lieu of terms of employment negotiated in a bipartite manner.

Section II presents a brief background of Industrial Relations in Indonesia, drawing mainly from a recent paper by Chris Manning (1993). Section III presents Indonesian labor market legislation and compares them with those in the other five countries discussing in turn collective labor relations, minimum wages, social security systems and other labor standards. Section IV concludes.

# **II.** A BRIEF BACKGROUND OF INDUSTRIAL RELATIONS IN INDONESIA

In a recent survey article, Chris Manning4/ contrasts the tightly controlled industrial relations system which emerged in Indonesia after 1965 with the labor activism of the Sukarno era. An extensive labor protection system (including a 40-hour work week, and the right to maternity and menstruation 3/These concerns have led to unilateral decisions by individual governments or regional grouping to introduce a .social clause" in their external relations, linking trade with labor standards (The US Omnibus Trade and Competitiveness Act of 1988 makes violation of labor rights an 'unfair' trade practice actionable under section 301 of the U.S Trade law.). The social clause is the subject of current debate which is concerned with issues such as the extent to which such concerns should be expressed in a charter, where the line should be drawn, and whether trade policy instrument **s** hould be used. While there is more consensus on prohibiting blatant human rights violations, and having international labor standards that are consistent with the level of development of the country, there is less agreement over specifics. Moreover, the debate over whether trade policy is the appropriate instrument is far from resolved.

4/Manning, 1993 is an excellent survey of the evolution of the Indonesian industrial relations system and labor welfare in the New Order period. This section draws heavily from that article.
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leave for women) was introduced in Indonesia after independence and was supplemented by the mid 1950s by additional laws regulating industrial accident compensation and procedures, labor inspection, child and female work, and the drawing up and reporting of collective labor agreements. These policies on labor protection and trade unions represented a radical change from the pre-colonial period. By the mid-1950's the union movement comprised of a total membership of around 2 million, representing about 20% of all employees, in 13 federations with close links to political parties. About half of all registered union members were in the communist supported SOBSI (All Indonesia Workers Organization). However, the difficulty of reconciling union freedom and industrial disputes with the requirements of economic stability and growth, and the perceived threat from organized labor to economic stability led to the introduction of increased controls (such as the dispute resolution law, Basic Law No. 22, 1957, which is currently in effect) and measures which set the precedent for military intervention in labor affairs.

These controls were intensified after the military assumed power in 1965, partly for political reasons, but also because the new government was not prepared to allow the possibility of labor unrest to discourage private investment, which it began to regard as essential for economic rehabilitation. The banning of the communist party (PKI), the much more direct role of the army in political life and the elimination of effective political opposition was associated with parallel changes in the labor movement. The leftist union was banned and its leaders removed from the industrial relations scene, the close links between political parties and labor were broken by an extension of government control over and fusion of political parties, and military and police intervention in labor affairs increased. A unified trade union movement was now considered essential for political and economic stability and growth. Thus, what is now the SPSI5/ was formed in 1973, consisting of members of existing trade unions who disbanded and joined the new organization. The government introduced _'panca sila'_ labor relations, based on principles rejecting conflict between interests of workers and management and emphasizing cooperation anid conciliation; and this served as the ideological framework behind a policy agenda which emphasized control of labor unrest and strikes in order to encourage investment. The SPSI grew to become a large and complex organization and had an estimated membership of slightly under 1 million in 1991. Although membership figures suggest that unions were represented in about one-third of all enterprises with 25 employees or more, the percentage of all employees or only manufacturing employees (5-10%) that were even nominal union members in the early 1990's was much lower than during the Sukarno period. As seen in Table 1, the proportion of the non-agricultura **l** abor force that is currently unionized is by far the lowest in Indonesia while being roughly comparable in the other 5 APEC countries.

Following a spurt of labor unrest and recession in the late 1970's to mid-1980's6/, the government introduced further controls over labor. The increased unrest was in part due to macroeconomic conditions and in part due to inefficient dispute mechanisms and tight government control over the SPSI which did not serve as an effective representative of workers in enterprises. The continuing conditions of labor surplus was probably the driving reason for the workers' lack of bargaining power. Moreover, in this pre-manufacturing exports era/liberalization era, international and domestic criticism of labor conditions was not a major issue of concern. However, further controls were introduced due to continuing government anxiety not to discourage new investment considered central to economic strategy in the post-oil boom period. The new measures weakened the SPSI even further, reduced the independence of unions at the enterprise level, discouraged genuine collective bargaining and increased the responsibility of the Ministry of Manpower in labor affairs. This was also the period in 5/lt was then known as the FBSI (the All-Indonesia Labor Federation).

6/See Table 2.
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which the controversial Ministerial Decree No. 342 (recently repealed in response to international criticism) strengthening the role of the military on labor affairs, was passed.

About the same time (mid-eighties), the Government began to make a serious policy commitment to manufacturing exports. This was closely associated with greater international scrutiny of labor standards which in turn fuelled mounting domestic criticism. The Government, now more concerned about the international (and domestic) scrutiny, responded particularly by focusing on minimum wage legislation beginning in 1989. As seen in Tables 2 and 3, the lack of compliance with the new legislation (aggravated by the limited enforcement mechanisms, too few inspectors and lack of effective plant level unionism and dispute resolution mechanisms) was one of the major reasons for the increased incidence of strikes in the early 1990's. In addition to tight labor controls, Chris Manning attributes the rise in unrest (which was now more concentrated in the relatively low wage but typically large, export oriented textiles, clothing and footwear industries than in the high wage, capital intensive industries particularly in the greater Jakarta region) to the greater vulnerability of the government to international and domestic criticism, higher levels of awareness and education among workers and to rising expectations about labor standards rather than to lower wages in the export oriented industries relative to other industries or to the rest of Indonesia. The stagnant trend in real wages (in agriculture as well as industry during the second half of the eighties) was a direct result of the continuing labor surplus conditions.

# **III. INDONESIAN LABOR LEGISLATION IN A COMPARATIVE PERSPECTIVE**

The range of labor legislation existing today in Indonesia (a mixed bag of pro-welfare legislation and labor controls) can thus be understood in part in the historical context outlined above. In the following subsections key features of the labor laws are compared with those in five other APEC countries to see which aspects are relatively more pro-labor and which aspects are more repressive and to get a sense of Indonesian labor standards relative to its level of development. Indonesian policies are compared with those in two other East Asian countries (Korea and Malaysia), two Latin American countries (Chile and Mexico), and the United States. The other East Asian and Latin American countries have (purchasing power corrected) per capita incomes that range from 2.5-3 times that of Indonesia's. United States per capita income is about 8 times that of Indonesia's. Following the comparison of each labor market institution is a discussion of the rationale for and potential impacts of each set of institutions and brief summary of available empirical evidence.

The primary sources of the legislation are the official labor codes in the various countries. For Indonesia, the discussion is based on legislation that is valid at the time of writing. For all the other countries, the legislation discussed was valid at least until the early 1990's. The discussion focuses on legislation that applies to the majority of wage workers in the private sector.

# **A. Collective Labor Relations**

In 1993, the U.S. Trade Representative put Indonesia on a list of developing countries that risk losing tariff concessions now received on some of their exports to the US under the generalized system of preferences (GSP). The decision on whether to suspend Indonesia's privileges was initially due in February 1994 at which time the review of Indonesian labor rights policies was suspended and the issue was to be revisited in August. A GSP mission visited Indonesia in August/September 1994 and the dialogue is still in process.
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The main criteria used by the U.S. for evaluating labor market practices are the extent to which countries afford their workers basic rights which include the freedom to form unions and to bargain collectively, as well as a minimum working age, prohibition of forced labor, and minimum standards for wages, hours and health and safety. The most important of these issues in the case of Indonesia concern the rights of workers to organize and to bargain collectively, and the involvement of the military in labor affairs (security forces are apparently used to arrest picketers and workers trying to organize collective bargaining and to monitor workers). In the rest of this section, legislation regulating collective labor relations in Indonesia are compared with those in the other 5 APEC countries.

Workers organizations in these countries range from powerful politically linked trade unions in Mexico to weak union systems in the other two East Asian countries which have a common history of elimination of communist unions and delinking of unions with politics, to Chile where a similar weakening and repression of unions was followed by the implementation of labor policy reform in the early eighties. The powerful trade unions in Mexico operate in close alliance with Mexico's dominant political party (the PRI)7/ through the Mexican Workers Confederation (CTM)_/; these close links are said to have negative impacts on union democracy. In Korea, the only legally allowed and not yet independent center (the FKTU) now coexists with several independent unions which have formed regional and industrial councils, reflecting the recent history of alternating repression and unrest and some liberalization of labor controls9/. In Malaysia, relatively independent unionism is weakened by the considerable government power in the regulation of unions which it has been using in recent years to impose in-house unions in preference to industry unions. Moreover, freedom of association is restricted in export processing zones. In Chile, there has been a steady increase in the proportion of the workforce affiliated to unions, in the affiliation to federations and confederations and in the number of collective bargaining agreements signed, particularly since 1989. And in the U.S., decentralized collective bargaining has typically determined labor contracts; the steady decline in the proportion of the workforce that is unionized and a decline in the prevalence of collective bargaining are issues of current concern in labor-management relations.

# Freedom of Association. Formation of Independent Worker Organizations and Collective Bargaining

The Indonesian Constitutionlo/ says that "freedom of association and assembly" shall be prescribed by statute. There are two such laws which clearly guarantee the right to form unions. The first is Law No. 18 of 1956 which made the ILO Convention No. 98 on the Right to Organize and Bargain Collectively, ratified by Indonesia in 1957, a law. The second is the Basic Law No. 14 of 1969 which explicitly states "the right to set up and to become a member of a manpower union." Unionization rates in Indonesia, however, are substantially lower than those in the other five countries and are among the lowest in the world. There is only a single legally recognized union in the private sector, the SPSI (All Indonesia Workers Union), which is for all practical purposes a government 2/Despite the statutory prohibition against "interfering in political matters".

8/Similar in many respects to the AFL-CIO in the U.S.

9/For a brief sununary of the history of industrial relations in the two east Asian countries, see Freernan, 1993.

10/The right to form a labor union was explicitly mentioned in the provisional constitution of 1950. However, in the 1945 Constitution which was reinstated in 1959 and valid today, the right to organize was left to be determined in future laws. See Adiwinata, Katz and Katz (1974).
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controlled institution. Further, although 8000 of **the** 37000 companies with more than 25 workers have collective labor agreements (cla) and 23000 of the remaining have company regulations in lieu of collective labor agreementsll/, several observers and researchers claim that only a handful of these cia's represent the outcome of genuine collective bargaining between workers and employers.

The lack of genuine representation of workers and effective collective bargaining at the plant level is attributed in part to government regulation which makes it impossible to set up alternate legal worker organizations to the SPSI and its affiliated plant level organizations. The government has recently brought out new regulations in an attempt to address some of these criticisms. Until recently, the only recognized union was the SPSI. However, the government has for some time been considering decentralizing the SPSI, in effect returning to its earlier structure (when it was the FBSI) in which independent unions were affiliated to the FBSI federation. In October 1993, the SPSI began the process of decentralizing, and 12 of its 13 industrial sectors were subsequently given the right to register as independent industrial unions federated with the SPSI. The SPSI will now assume the role of national trade union center and the formal legal changes will be completed by the SPSI convention in October 1995. However, government decrees effectively prevent the formation of independent unions (see Fane 1994, American Embassy, 1994) as specific requirements have to be met for recognition.

While workers in the private sector, including those in export processing zones, are free to form worker organizations or company level unions, only registered unions can negotiate binding collective labor agreements with employers. In February 1993, a new regulation eased the organizational requirements for a union to receive recognition from the Department of Manpower. Yet the conditions for recognition are still considered to be rather restrictivel2/. Recent regulations have also increased the ability of for new unions to form and negotiate contracts at the plant level. According to a Ministry of Manpower Regulation (No. PER. 01/MEN/January 1994), workers may set up plant level unions in companies with more than 25 workers which do not already have established unions as long as it is approved by more than 50% of the existing workers. Only one union is permitted in each company. These new unions (which may not include persons executing the functions of managementl3/) may enter into binding collective labor agreements. Other articles in the regulation say that the corporate unions "can establish cooperation with or be affiliated to the All-Indonesia Labor Union" (SPSI) and that they are "recommended to join the All-Indonesia Labor Union of relevant business sectors" within 12 months from their establishment thus raising questions about the independence of these new unions and their ability to represent the workers. The Ministry of Manpower reports that there are about 60 of these new plant level unions, and the first cla was signed this September. Several NGO's and observers also claim that these unions are basically "yellow unions" which are being set up by employers (and are being pushed by the government in response to the international criticism).

1 1/Unofficial numbers from the Ministry of Manpower.

12/ A federation of trade unions may register as long as it has representation in 5 of Indonesia's 27 provinces, a minimum of 25 branches at the regiona **l** evel, at least 100 workplace/factory trade union units, and have a minimum membership of 10,000 in each of these levels.(MMR # Per-03/MEN/1993). According to MMR# KEP438/MEN/1992, toform a trade union at the factory level, they must first obtain written permission from DPC SPSI and must be registered with the organization atthe branch level (i.e. SPSI, since there is no other legal trade union).

13/This appears to be the first specific exclusion of people in management positions from a workers union.
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Termination of employment on the basis of union membership is forbidden by law but Indonesian law does not specify the extent of union securityl.4/. According to the law, union membership contributions and their distribution to different levels of the trade union organization is to be determined by the federation of trade unions (in this case the SPSI center). In a recent interview with SPSI officials we were told that the distribution of SPSI collections between different levels of the trade union were as follows: 50% plant level, 25% district level, 15% province level, and 10% national level. There is a check-off provision which determines that employers may automatically collect the regular contributions which are then sent to an account with the Ministry of Manpower and then to the trade union. In addition to members of the union, the Minister of Labor could require an employer to extend to the non-union employees the same benefits to which union members are entitled. The Minister of Labor can also decide that part or all of a collective labor agreement must be complied with by employees and employers who are not parties to the agreement but are in the same field of activity. The law does not appear to specify whether non-members who benefit from a collective agreement may be required to pay dues.

Reports on collection of dues are contradictory. On the one hand, NGO's working on labor issues claim that dues are collected from all workers where there are plant level SPSI units (and in some cases even when there are none) irrespective of membership; indeed to the extent that most SPSI units are unions "on paper only" and not true representatives of workers collection of dues from members versus non-members is an irrelevant issue. On the other hand, Chris Manning (1993) reports that "despite the introduction of check-off provisionsl5/ in 1977 and the subsequent revision of the law in 1984, the union's central body still depended on the government for its operating budget in the mid-eighties and many members made no financial contributions." At any rate, the routing of dues through the Ministry of Manpower is indicative of the extent of independence of the SPSI from the government, although the Ministry considers it as part of its role in the establishment and functioning of trade unions. Moreover, no change in the check-off laws have accompanied the recent regulatory changes on setting up of independent sectoral and plant level unions. The apparent lack of knowledge and understanding of checkoff laws by workers no doubt exacerbates the lack of clarity in the law.

14/Union security provisions have to deal with the tradeoff between the ability of unions to be collective representatives ofworkers on the one hand and the excess union power or violation of an individual's right to work on the other hand. Unions claim that union security provisions which usually involve some kind of compulsory membership in the union as a condition of employment are necessary to preven **t** he "free-rider problem". In other words, unless workers are forced to join a union at the time of employment or within a period of time after employmen **t** , hey may have no incentive to join unions and bear the costs associated with unionization ifthey are going to benefit from the unions negotiations by virtue of being employed by the firm or industry. Naturally, this would weaken the bargaining power of a union and its ability to function and some sort of union security is essential for unions to be able to represent workers collectively. Closed shops and union shops condition employment on union membership (In a closed shop, a worker must belong to a union before obtaining ajob. Thus under a closed shop arrangement the right of management to select workers from the labor market is severely restricted; it extends considerable power to unions to regulate the supply of labor. A union shop requires union membership within a certain time period after the union member is hired. Thus it is less restrictive on the ability of management tohire labor but still contradicts abasic constitutional right-to work or right of disaffiliation). In an agency shop, workers do not have to belong to a union at any stage but are usually required to pay dues to the union if they benefit from collective agreements negotiated by **it,** thus addressing the monetary costs associated with the free rider problem.

15/Wher **e** mployers collect contributions on behalf of the union and then transfer the funds to the union.
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Tables 4 compares the ratification of ILO conventions on freedom of association, the right to organize and collective bargaining: three of the six countries (Korea, Chile and the U.S.) have not ratified either of the 2 conventions. Yet all the countries guarantee freedom of association in their constitutions and/or laws. Table 5 compares key aspects of the regulations governing the formation of workers organizations and the process of collective bargaining in Indonesia to those in the other five countries.

Only in one other country, Malaysia, do unions require prior authorization from the government in order to legally represent workers in collective bargaining. Indeed, Malaysian law gives considerable authority to the Registrar and the Minister of Laborl6/, and to employers who have to "recognize" the unions in a rather lengthy procedure. The procedure for employer recognition of unions in Malaysia is reported to be quite exhaustive: for example only 33% of trade union attempts to prompt employers to take part in collective bargaining in 1988 succeeded outright; the remainder were still being reviewed or awaiting formalities. In all the other countries, prior authorization from the government is not required although registration may be necessary to function legally. While Chile and Mexico do require that unions must be of a minimum size (in Chile this varies with the size of the firm), Indonesian requirements particularly for unions beyond the plant level are far more stringentl7/.

Legal plant or enterprise level unions may enter into collective contracts in all six countries. Korean law requires that all enterprises establish labor-management councils to decide working conditions18/. Chile and Mexico permit more than one union at the plant level. Chilean law is especially detailed on addressing potential conflicts that may arise from multiple unions and collective bargaining agreements at the plant level. Bargaining beyond the plant level, however, is more restricted in the majority of the countries.

As discussed previously, while Indonesian laws permit collective bargaining to take place at any level by a legal union, the laws regulating the establishment of legal unions in effect restrict collective bargaining to SPSI affiliated unions. The only exception is the recent law for independent plant level unions, the effect of which remains to be seen. In effect, collective bargaining cannot take place by nonSPSI unions beyond the plant level. In Malaysia, collective bargaining may take place at the enterprise or higher level as long as unions are legal (and have been recognized by the employer) which also means that they must consist of workers from a single trade or industry. The active encouragement of in-house unions is a relatively recent policy in Malaysia (attempt to "look east" at Japan) although in-house unions existed prior to the initiative. Malaysia has unique provisions for export processing zones: pioneer companies, mainly foreign owned that set up production facilities under the tax benefits conferred by the Investment Incentives Act are also privileged by the Industrial Relations Act Employers in these industries may simply conform to the minimum standards laid out in the Employment Act. There is a period of prohibited collective bargaining: which is usually 5 years coinciding with the tax holiday period 16/The registrar has the power to refuse or revoke registration under certain circumstances. The Minister of Labor has extensive powers in the Trade Union Act and may suspend unions which in his opinion are being "used for purposes prejudicial or incompatible with the interests and security of public order of the country.." as long as it is cleared with the Internal Security Minister and published in the gazette. While the Minister has the overall ability to change rules and regulations made under the Trade Union Act or to suspend individuals or classes of trade unions, the Registrar has considerable immediate power over the routine administration of trade unions.

17/ However, until the recent past, the minimum representation stipulations in Chilean law were considered rather restrictive to the establishment of unions.

18/Historically, these were introduced to weaken unions
- 9 -

but the Minister can extend beyond the 5 year period and also extend the decision to any other industry as long as he/she notifies in the gazette.

In Chile, workers affiliate to enterprise level unions and while plural enterprise unions, as well as federations, confederations, central are permitted, collective bargaining beyond the firm level requires the voluntary cooperation of employers. Collective bargaining is also allowed only after the first year in operation of an enterprise.

A collective contract in Mexico can assume different forms. Some labor agreements, entered into by one or several unions with various employers or employers' organizations, cover entire branches of industry rather than simply companies, and are made mandatory by federal decree. Such an industrywide collective contract is known as a _contrato-ley._ This in effect grants the government another mechanism of control over the labor relations process; the government decides whether to issue a _contrato-ley_ and whether to make it mandatory. Thus, this can apparently deprive a significant proportion of the organized workers and employers in an industry of the right to bargain independently.

In the U.S. the bargaining unit appropriate for collective bargaining is determined by the National Labor Relations Board on a case by case basis and typically is determined by the autonomy of the unit (plant, local plants, company etc.). An employer must bargain collectively with different company unions on a coordinated or coalition basis. There are many thousand local unions, many of which represent the employees in one establishment or company, some of which represent those in a given craft, and some of which represent employees in the same industry working for different employers. They play a significant role in collective bargaining, with many contracts signed between a single local and management or between a coalition of locals of a multi-plant enterprise and representatives from management. In many unions, moreover, full agreement between management and labor requires not only an overall national or master contract between the union and employer(s) but also local agreements designed to deal with the problems and needs at specific sites. Virtually all local unions are members of national or international unions which are often important in collective bargaining and wage determination. More than one industrywide union can exist.

All the countries exclude from the right to collective bargaining, individuals in management or supervisory positions, etc.. In the U.S., professional employees may form separate unions but managerial employees are excluded.

In all the six countries, a collective contract applying to the majority of the workers may be applied to all other workers in the enterprise (or establishment). In Indonesia, this decision is made by the Manpower Minister, in Chile by the employer and in the other four countries it is automatic. The intention is to ensure that inferior conditions are not negotiated with other workers. One potential problem that could arise from this for the union, however, is a free-rider problem where workers would not have the incentive to bear some of the costs associated with unionism while potentially benefitting from it. On the other end of the trade-off of course that considerably strengthen unions are union security provisions such as the closed shop. Mexico is the only country that explicitly permits closed shops to be negotiated in a contract. Closed shops are illegal in the U.S. and Chile. While union shops are illegal in Chile, they may be negotiated in collective agreements in Korea and in the U.S. in the case of intrastate trade as well as in states that have not forbidden all forms of union security ("right-to-work" states). Indonesian and Malaysian law do not have any specific reference to union security.

In the United States, union shops are permitted in collective contracts but they can be "deauthorized" or voted out according to specified rules. Also, since national law states that the only condition under which workers can lose their job for non-membership is the non-payment of dues, it
- 10-

functions like an agency shop. Moreover, national legislation applies only to inter-state trade and states can enact their own laws outlawing union or agency shops for intra-state trade. Until 1987, 20 states had enacted "right-to-work" laws and prohibited all fomis of union security. These were mostly southern and south-westem states. Union shop clauses were found in 81 % of all labor contracts in 1987 reflecting to some extent the historical prevalence of industry in the north and northeast. Still, in right-to-work states where even agency shops are prohibited, the laws undermine the ability of unions to bargain collectively.

Thus, to summarize, laws regulating unions while permitting plant level collective bargaining may restrict plant level collective bargaining by independent worker representatives by restricting their organization as in the case of Indonesia and Malaysia by restricting their formation into legal organizations. On the other hand the imposition of contrato-ley type contracts by the government in Mexicol9/ provide another way of restricting work relations governed by contracts negotiated between workers and management. Chilean and U.S. laws are more favorable to genuine plant level collective bargaining by independent worker organizations. On the one hand, Mexican laws strengthen unions through union security provisions while at the other extreme there is no reference to union security in Malaysian and Indonesian laws and all forms of union security are prohibited in most right to work states in the U.S.

# The Resolution of Disputes in the context of Collective Negotiations and the Right to Strike

Restrictions on the right to strike, apparent inefficiencies and delays in the process of resolving disputes between workers and employers, and the intervention of the military in labor affairs are said to further undermine the ability of Indonesian workers to organize and act collectively. The procedure for resolving disputes arising in the process of collective bargaining is provided in Act No. 22 of 1957 on the Settlement of Labor Disputes. This act was promulgated to limit strikes and lock-outs and in effect also establishes compulsory arbitration. In response to the recent criticisms, three ministerial decrees on the implementation of the act (Decree Nos. Kep. 342/MEN/1986, which explicitly sanctioned coordination by the MOL conciliator with the Regional Government, Police Resort or Military District to overcome possible physical violence in the case of a strike, Kep. 1108/MEN/1986 and Kep. 120/MEN/1988) were repealed and replaced with a new Ministerial Decree (No. Kep. 15A/MEN/1994) in January 1994.

According to the existing legislation, the settlement of disputes in industrial relations should go through stages including a corporate or bipartite level settlement, mediation by an official appointed by the Minister of Labor, and settlement by regional and central committees. If direct bipartite negotiations between employers and registered labor unions fail and arbitration is not chosen, strikes and lock-outs should as far as possible be avoided and mediation may be requested. Mediation must be conducted by an official appointed by the Minister of Labor within 7 days. If mediation does not work, the case must be transferred to the regional committee (P4D). Regional Committees consist of 5 representatives each from government (representatives from 5 ministries), labor and employer circles appointed and discharged by the Ministry of Labor according to a government regulation.

Only if conciliation does not work or if employers refuse to negotiate may workers strike legally. However, they must notify the employer as well as the Chairman of the Regional Committee of their intention to strike. Workers must receive an acknowledgement of such a notification from the Chairman, which must be sent within 7 days of the receipt of the original notification to strike. If mediators notice l9/And Korea and Indonesia.
> - 11 -

any strike and/or slowdown, they must visit the location and attempt to negotiate with the parties. If this fails, they must transfer the cases to the regional committee2O/.

Regional committees may make binding decisions unless an appeal of such a decision is lodged within 14 days and the matter is not of a specific local character. If there is such an appeal or if the Central committee (P4P, based in Jakarta and consisting like the P4D of representatives from government, labor and employers appointed/discharged by Cabinet through Presidential Decrees upon proposal of the MOL through government regulations) decides to withdraw a dispute for settlement by itself, the dispute is then transferred to the Central Committee whose decision is binding unless the Minister of Labor nullifies it or postpones its execution. Decisions of the P4P and P4D are upheld by the civil courts. Nullification or postponement of a Central Committee decision by the Minister of Labor may only take place if it is necessary in his opinion to maintain public order and to protest the interests of the state and may only take place after consultation with the other 5 ministers who are represented in the Central Committee.

A regional/central committee may decide to hold an inquiry either if it requires additional information or if a strike (or lock-out) is contemplated or has been taken by either of the disputing parties. In this case the right to strike is suspended and the decision of the regional/central committees is binding.

Thus, dispute resolution procedures are quite elaborate and the right to strike exists, at least in the law. Yet there appear to be several problems with this which in effect limit the ability of workers to negotiate with employers. First, the law assumes that workers will be adequately represented in disputes by unions which does not appear to be the case. Second, the process is often subject to delays. Third, NGO's question the independence of the labor tribunal or the central committee. Fourth, the procedure in effect sets up compulsory arbitration. Fifth, the right to strike is severely restricted. Finally, the military is often involved to some degree or the other.

Chris Manning (1993) attributes the increase in labor unrest in the late seventies and early eighties at least in part to the dispute resolution mechanisms and to the lack of confidence of workers in the SPSI as true representatives of workers at firm level. "Dispute resolution mechanisms were inefficient, and did not have the confidence of workers. Delays of several months often occurred in the settlement of disputes through the regional and central government dispute committees. Many firms which had connections with military and political leaders were able to resist formal government and union attempts to resolve disputes and to impose decisions which went against the firms' interests. The close involvement of military (and civilian) officials in business... .explains how even medium-scale businesses could gain decisions in their favor or stalemates despite major transgressions of the labor code. There are also reports of corruption among members of the committee and of their tendency to favor employers. Moreover, decisions arrived at by the committees have no formal status in the civil law code, yet workers could not afford to take matters further to civil courts if, as often happened, SPSI failed to negotiate a satisfactory outcome on their behalf." and "The SPSI remained under tight government control and did not develop into an effective national union organization or support the growth of genuine form level union activities ...... At the enterprise level, the fact that the SPSI was relatively powerless to represent workers in case od dispute considerably undermined worker confidence in labor's formal representatives. Some SPSI units, especially those operating in large and more established foreign and 20/The new regulation also says that "in the case of disputes in industrial relations arising beyond the provisions in labor laws, the settlement shall be integratedly conducted with the relevant agencies pursuan **t** o their respective duties and functions," a clause which being interpreted as still sanctioning military involvement by NGO's.
- 12 -

domestic firms, were active in negotiating working conditions through collective labor agreements, and in representing workers in labor disputes. But many were little more than token labor organizations, with leaders appointed by management and often coming from the ranks of management-personnel managers or supervisory staff. They received little support from their local branches especially since many members of the regional boards of SPSI were military officials or members of Golkar." (Chris Manning, 1993).

Workers thus typically by-passed the normal industrial relations procedures and sought assistance from the national or regional parliaments or from the Legal Aid Institute. Strikes did not last long but there were protracted negotiations between management and labor representatives who were often dismissed subsequently.

Because strikes are only permitted within the restricted set of circumstances described above, most strikes that do take place are illegal. Finally, there is a ministerial regulation, No. 4, 198621/, which permits an employer to dismiss workers if they are absent for 6 consecutive days. This regulation has apparently been used to justify dismissal of striking workers. Moreover, Indonesian law does not appear to specify the extent of worker rights to reinstatement or replacement or wage payment in the case of legal strikes. Since strikes are typically not legal, this is of course currently irrelevant. Dismissal cases of individual workers are to be resolved through regional committees and mass dismissals through a central committee.

Even critics acknowledge that there has been a fundamental change in the attitude of the government in recent years. Military involvement in labor relations while still prevalent is said to be lower, particularly in recent months. Employers have reported that the military has refused to respond to their calls to intervene. Yet, even after the repeal of Ministerial Decree No. 342 on January 4, 1992, the military were reported to be involved in 23 labor disputes to a greater or lesser extent in the month of January alone22/. NGO's and observers argue that military involvement in labor affairs is still permitted through other regulation, in particular a Bakorstanas (National Intelligence) 1990 decree. They also report that a major stumbling block is the lack of independence of the labor tribunal or the P4P from the government. Labor is still reported to be fired for attempts to organize.

As discussed earlier there has been a sharp increase in the number of strikes in the 1990's, and particularly in the last 2 years primarily associated with lack of compliance with (and more recently worker demands for increases in) minimum wages. The inability of workers to engage in productive negotiations with employers stemming from a lack of confidence in unions and their limited representation of worker causes and in the dispute resolution process and its independence can encourage wildcat strikes and walkouts as one of the limited options available to workers.

Table 6 compares Indonesian dispute resolution procedures and the right to strike with the other five countries. Indonesian laws in this area are in many ways very similar to those in Malaysia (and to a lesser extent in Korea) where the right to strike is very restricted and in fact the Minister of labor has substantial powers to intervene in the dispute resolution process and may impose compulsory arbitration through the Industrial Court. Neither the Malaysian Constitution nor any statutory law provides the trade union with a specific "right to strike". But this can be inferred by a whole range of statutory provisions in the Trade Union Act and Industrial Relations Act. A strike, to be legal, must be called by a registered 21/This is based on reports from various people. I have not been able to locate the regulation.

22/American Embassy, 1994
- 13 -

trade union on behalf of its members and must receive two-thirds majority in a secret ballot23/. Sympathy or political strikes are not permitted: the strike must relate to a dispute between a group of workers and their employer. Just as in Indonesia there is a cooling-off period of 7 days after the Registrar has been notified of the intention to strike and a strike must be suspended if the Minister calls an inquiry or investigation. In fact it must be suspended if the matter is with the industrial court. Malaysian law does however specify that workers who have gone on strike lawfully cannot be dismissed on grounds of absence from work and workers may be represented by organizations other than a registered trade union in the industrial court. Workers may not strike over the enforcement of a collective agreement since it is recognized in the industrial court and is to be dealt with there24/ nor can it take place over issues considered "management prerogative" as collective bargaining over these is not permitted.

The arbitration procedure in the industrial court is reported to be often slow and protracted, due to participation of lawyers. The industrial court in Malaysia has its origin in emergency legislation passed in 1964 when external military threat (due to the Indonesian Confrontation) was at its height. Prior to that, arbitration was voluntary. The award of the industrial court may not be challenged for 3 years.

There has been a steady reduction in strikes since the 70's in Malaysia and in the workforce involved. Of course illegal and wildcat strikes exist and are never recorded. Still, the effect of government sponsored amendments to laws in recent years have made it practically impossible for a well run trade union to maintain a strike for any length of time. Strikes in Malaysia are rare and do not last long. In 1988, 5784 days were lost to strikes, little more than half for the previous year, though they included a major dispute in the plantations with the National Union of Plantation workers, the country's biggest union. There were 988 disputes of all kinds during the year, according to the Ministry of Labor.

Korean laws also similarly set out elaborate dispute resolution mechanisms and the laws on strikes resembles those of the other two east Asian countries. Once again, workers must notify the Administrative Authority as well as the Labor Relations Commission (a tripartite body) and the employer of the intention to strike and there is a cooling off period of 10 days. Administrative Authorities (Minister of Labor, Mayors, Provincial Governors) may suspend the strike if it prevents normal operation of safety protection facilities of workplaces and factories. Just as in Korean Trade Union Law, the Dispute Adjustment Law specifically prevents third party intervention in various collective labor activities and in a strike in particular. Strikes are also prohibited outside the place of business, over interpretation of mediation proposals and for 15 days following referral of a dispute to arbitration. The Minister of Labor has the right to emergency adjustment which may lead to suspension of a strike. While the law does specify that an employer may not be allowed to claim damages which have been suffered from a labor dispute against a union or worker, it does not appear to be specific on suspension or replacement of striking workers.

Despite its paternalistic traditions, Korea does not lack for tripartite structures. There are no Labor Courts, but there are tripartite Local and Central Labor committees which together provide a dispute resolution procedure which can lead on to civil courts. As discussed earlier, all firms with more than 100 employees must have a labor-Management Council, meeting at least quarterly with equal representation from each side. After some disagreement the government accepted in the autumn of 1989 23/The ballot is valid for 90 days.

24/A newly concluded agreement must be deposited by the parties with the registrar of the industrial court and may be amended there.
- 14 -

an FKTU proposal that there should be a broad tripartite committee to discuss a wide range of employment issues.

The other three countries on the American continents provide a contrast in their dispute resolution mechanisms and especially in the right to strike. The labor codes of all these three countries are also more specific on liabilities of workers in case of strikes. Chilean legislation is particularly detailed on the right to strike. Mexico requires notification of strike intention and has a cooling off period of at least 6 days (which varies across industries) while United States legislation does not require notification of strike intentions and does not have a cooling off period. Chilean law dictates that a strike may become effective on the third day after a majority vote.

In Mexico, after the notification of the intention to strike is received by the Conciliation and Arbitration Board (to which the employer must respond in 48 hours), the board sumnmons both parties for a conciliation in an attempt to avoid a strike. If the attempt fails and work stoppage begins, at the request of any interested party within 72 hours, the Board establishes the legality of the strike. Solidarity or sympathy strikes are permitted in Mexico which distinguishes these from "justified" strikes which may be attributed to the employers although workers do not have rights to wage compensation in the former. Strikes are permitted over demanding compliance with a collective bargaining agreement. In the case of legal "justified" strikes the employer must compensate them for lost days of work. For all legal strikes, wage contracts are suspended and even temporary replacement workers cannot be hired. In illegal strikes workers must return to work in 24 hours after illegality is established. Workers may not terminate workers except in an illegal strike.

In Chile, when parties have not reached an agreement and the term of the current collective labor contract has expired or more than 40 days have passed after a draft collective contract affecting one or more enterprises was submitted, the workers bargaining committee may chose to call a vote by which the workers decide whether to accept the employer's last offer or to strike. Of course, the negotiation must not be subject to compulsory arbitration, voluntary arbitration must not have been chosen and the vote must be called and carried out according to law. For collective contracts concerning two or more enterprises, the workers of each enterprise must state whether they accept the last offer or strike. If it is the latter, strikes exclusively comprise the workers of the enterprise or enterprises in question. A strike is effective if more than _50%_ of the workers involved stop work. Once a strike has been declared and become effective, the employer may declare the total or partial lockout. A lockout may be declared if the strike affects more than 50% of the total workers in an enterprise or establishment or if the strike implies parallelization of activities which are indispensable to safeguard the functioning of the enterprise or establishment irrespective of the proportion of workers on strike. The judicial procedure in case of dispute rests on the labor courts if the contract does not designate an arbitrator. Arbitration decisions may also be appealed at these courts.

In Chile, during a strike, the employment contract is suspended, workers are not obliged to work, employers are not obliged to pay wages, benefits or economic privileges from the employment contract. Workers may pay voluntary contributions to pension fund and social security. Employers are prohibited from offering workers on strike individual resumption except as in the law. Substitute workers may be hired from the first day of the strike, or striking workers may be allowed to work if certain requirements are met (i.e. they must be hired on the same terms as those existing prior to the strike but adjusted and adjustable in the future for the CPI). Permanent replacement workers may be recruited and workers on strike may return to work after 15 days of the strike under similar conditions. The legal maximum duration to a strike has been removed in the new labor code, but a strike is considered ended if more than 50% of the workers return to work. Then all remaining strikers must return to work within 2 days. The 1987 code on the other hand favored individual resumption of work over collective resumption thus
- _15 -_

weakening collective action. Workers can also vote on a settlement by arbitration, acceptance/refusal of last offer, acceptance/refusal of written proposal of the employer. Compulsory conciliation which was used until 1973 is no longer used to resolve disputes.

In the U.S., although no notification of intention to strike is required, the law does require notification before termination or modification of a contract at which point the Federal Mediation and Conciliation Services assigns a mediator. Strikes in violation of no-strike clauses in collective bargaining agreements are illegal. Legal strikes are classified as "Unfair Labor Practices" (for example when an employer refuses to bargain) or "economic" strikes. The distinction which is often difficult to determine is established by the NLRB. Employers may hire replacement workers in a strike. While in case of un unfair labor practices strike the employer must hire returning strikers even if replacement workers are to be displaced, this is not required in economic strikes. Employers must however place returning strikers on a priority list to be hired in future vacancies.

In the U.S., while mediation may be made available even without a request from the parties, there is no requirement that the parties use the services of the FMCS and mediation awards are not binding. In 1990, over 28000 contracts were negotiated and the FMCS assisted in about 7000 of them. There were 711 strikes which amounts to about 2.5 % of contract negotiations. There is a reliance on collective bargaining to set forth dispute resolution procedures and available services and this explains why there are very few strikes over the enforcement of collective bargaining agreements; almost every private sector agreement has a grievance procedure. They frequently provide for arbitration of disputes a procedure which has been successful in the U.S. Unfair labor practice charges are settled through NLRB procedures.

Latin American countries despite showing a preference for arbitration in their legislation, do not appear to use it frequently or successfully. This is true in Chile. In Mexico too, there is a preference for direct settlement, conciliation through special authorities and settlement by courts. Mediation and binding arbitration are less widely practiced. Of course, voluntary conciliation, mediation or arbitration may be chosen in all six countries.

To summarize, important regional similarities emerge in a comparison of the procedures for resolving disputes and in the right to strike. The East Asian countries restrict the right to strike in several ways: through requiring notification of strike and a cooling-off period, restricting the subjects over which strikes are legal, and by suspending the right to strike under various circumstances. In Malaysia and Indonesia conciliation by a MOL official typically occurs even before a strike is anticipated, and can lead to a process which is compulsory and in which decisions are binding. The right to strike is much less restricted in the other 3 countries, even though Chilean legislation for example does not permit sympathy strikes and Mexican law establishes a cooling-off period in strikes. Collective bargaining contracts typically establish processes for the resolution of disputes in the U.S. and frequently provide for arbitration, a procedure which has worked rather successfully in the U.S. in contrast to Latin American countries. Although strikes are easier, for example in Chile and in the U.S., the number of strikes as a proportion of contract negotiations (2.5% in the U.S. in 1990, 4% in Chile in 1991/92) is small.

# Economic Impacts of Unions

It is now agreed that unions can have both positive and negative impacts on the economy (see box). The "monopoly" face of unions can be associated with higher wages in the organized sector, a consequent misallocation of resources, loss in output due to strikes and restrictive work practices negotiated by unions, high low-wage employment in the unorganized sector which disproportionately
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- 17 -

bargaining process to learn about and improve the operation of the workplace25/. On the other hand, if management responds negatively to collective bargaining (or is prevented by unions from reacting positively), unionism can significantly harm the performance of the firm. While management giving in to exorbitant union wage demands can be associated with a decline in the organized sector, their reaching sensible agreements with labor could be mutually beneficial. On the other extreme is the case where management cooperates with racketeers who suppress union democracy and offer "sweetheart" contracts, i.e. contracts imposed by management without input from representatives of labor.

Several studies have attempted to measure the impacts of unions on wages, employment, output, total compensation, productivity in the U.S. Unfortunately, there are very few comparable studies for developing countries. Even the empirical evidence for the U.S. is mixed and is based on varying data sources, time periods and methodology. On the whole, the union relative wage advantage in the private sector in the U.S. lies in the range of 10 to 20%26/27/ which vary over time and across demographic groups. The union relative wage advantage tends to be larger during recessionary periods. Unions appear also to have improved the economic well-being of black men relative to white men, and to reduce women's wages relative to men since women workers are considerably less likely to be union members than are males. The overall effect of unions on the dispersion of earnings appears to have been positive28/ in the U.S.. Available empirical evidence on the loss of output or the "social loss" from unions suggests that the loss of output from the union wage differential, restrictive work practices and strikes associated with unions was estimated to be about 0.8% of GNP in the U.S.

On the other hand there is considerable evidence in the U.S. that unions do reduce worker quit rates, alter the entire package of compensation allotted to fringe benefits and union workers were found to be more productive in many sectors than non-union workers (although less productive in others). Unions effects on productivity are neither constant nor always positive and vary across industries and time periods as industrial relations practices vary; increased wildcat or illegal strikes associated with poor industrial relations practices have been associated with loss of productivity.

The limited evidence from union impacts from developing countries (including Malaysia and Mexico) suggests similar impacts as in developed countries29/. In most developing countries, even when the right to strikes is not restricted, strikes are not common; most unions lack strike funds and most workers lack the savings to carry out strikes. The success of the East Asian "miracle" countries (Korea, Singapore, Malaysia, Taiwan) in the 1980's and the mid-1980's success of Chile raises the question of whether suppressing unions contributes to economic growth. While the hypothesis has not been handled 25/See Freeman and Medoff, 1984.

26/Evidence from data between 1965-75 approximately. See Ehrenberg and Smith for a summary of empirical evidence of union impacts. Earlier summaries are available in Freeman and Medoff (1984) and Lewis (1986) for relative wage effects.

27/ Since unionized workers tend to have better non-wage benefits, tend to be represented in less flexible, more structured and more hazardous work settings, and could potentially be more able, ignoring benefits in such wage advantage calculations may understate union compensation differentials while ignoring non-pecuniary conditions of employment or worker ability may lead to an overstatement of union total compensation advantage.

28/Work by Richard Freeman suggests this. See Farber (1986?) on exercising caution in interpreting some of the available empirical evidence on union impacts.

29/See Freeman 1993 and references therein. Also Panagides and Patrinos for Mexico.
- 18 -

# **Underlying Theories of Union Impacts (continued)**

An alternative view to the monopoly approach to unionism is the "institutional response/collective voice" view of unions. Proponents of this view argue that there are important ways in which unions can raise producitivity of organized workers and can be associated with greater efficiency. Unions provide workers with an effective "collective voice" at the workplace. that may generate productivity improvements given appropriate institutional responses from management. Stated more broadly, this view is based on the premise that. for various reasons, the economy may differ from a Pareto optimal world. The existence of important public goods and externalities at the workplace, monopsony and barriers to exit and entry in labor markets, imperfect information, profits and quasi-rents (associated with barriers to entry and differing cost: structures) provide opportunities for unions to increase economic efficiency and productivity.

The productivity enhancing potential of the collective voice model of unionism lies in the public goods nature of several working conditions and rules in the workplace (safety, lighting, heating and the firm's personnel policies-formnal grievance procedure, pension plan, layoffs, work-sharing, cyclical wage adjustment, promnotion). These policies affectthe entire workforce and one person's consumption does not exclude someone else's. Moreover, the costs to an individual of changing any of these are likely to be higher than his or her share of the benefits. Competitive markets will providei less of these goods than is socially optimal as there is an incentive for individuals to "free-ride." Workers increase their bargaining strength by forming labor unions. The availability of collective voice makes it less risky for workers to reveal their true preferences as most countries have laws that prohibit firing employees because of membership in a union. To.... enforce equivalent laws that protect individuals who express their preferences from job loss could be more difficult and costly.

Proponents argue further that unions collect information about the preferences of all workers and enable: **fim** to choose a more efficient mix of waige and personnel policies. Unions are likely to represent the:interests and preferences of the 'average' worker as opposed to the "marginal" worker (as would be the case in the absence of unionism) **in** the determination of some of the public goods at the workplace. Thus for example, outcomes of collective bargaining such as pension or health insurance plans versus take-home pay will take account of all workers and appropriately consider the sum of preferences for work conditions that are common to all workers. Such contracts can be more efficient than the contract that would result in the absence of unions.

.. . . .. i Finally, unions constitute a source of worker power enabling better enforcement of worker rights, dilutingt authority of management, and offering members protection through a system where many workplace decisions. arevbased&on rules rather than simply supervisory judgement or whim and where disputes over proper mnanagerial decision making on work issues can be resolved. The ability of unions to enforce labor agreements, particularly those with deferred claims, creates thepossibility for improved labor contracts and arrangements and higher efficiency.

Thus, the voice/response theory of unionism argues that unions increase efficiency, improve income distribution among workers and can be expected to be democratic. The efficiency and higher: productivity results from nthesocially optimal provision of public goods and design of compensation between wage and :non-wage benefits, the: imnrased flow Of information between workers and managers especially at the Ievel of the enterprise can lead to More productive work; relations, and the lower quite rates associated with improved "voice' lead to lower training and, hiring costs, less disruption, increased incentives for investment in firm-specific skills. Positive union impacts on income distribution could: arisen ut of a political process in which the majority rules and the greater dependence on rules to reduce managerial discretion. Finally, unions could be expected to be democratic and important social organizations because they require the approval: of a majorty of members and could represent the political interests of lower income and disadvantaged persons.

in careful empirical work, Freeman (1993b) and Fields (1994) argue that labor market repression is not necessary for economic growth and may been associated with high costs, while unpublished work for Korea shows that suppression of labor in Korea had high costs in terms of high accident rates and a "disgruntled" work force. Chris Manning argues that the continuing conditions of labor surplus rather than government policies towards private sector unions was the driving reason for labor's low bargaining power and real wage stagnation in the late eighties although the lack of sufficient mechanisms for worker voice may have contributed to the worker unrest and wildcat strikes. In other words, controls over unions are unlikely to be the reason for low wages; which have more to do with underlying market conditions.
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# Strikes

The strike is perhaps the most important source of union bargaining power. Unions are able to win concessions at the bargaining table because of their ability to impose costs on management, which typically take the form of work slowdowns and strikes. A strike is an attempt to deny the firm the labor services of all union mnembers. Whether a strike or the threat of a strike can enable a union to win a concession from management will depend on (i) the profitability of the ftirm and its ability to raise prices without losing its market, (ii) the ability of a union to impose costs on the firm, (iii) whether the firm has the financial resources to withstand losses during a strike and (iv) whether union members have the financial resources to withstand losses during a strike.

Given that a strike apparently reduces total output thus necessarily involving losses on both sides, economnists have puzzled over why they occur. Various models of strike activity include explanations such as imperfect or asynmmetric information, the need for unions to strike periodically to retain their credibility, political models of strike activity (Ashenfelter and Johnson, 19?), and total costs models of strike activity.

In the Ashenfelter-Johnson political model of strike activity, there is a divergence of objectives between union leaders and members. The former are concerned with the survival and growth of the union ad their own personal political survival in addition to the termns and conditions of employment. Union leaders, who have more infornation than the rankand-file, may have lower wage expectations. Rather than risk dissension with the union, however, they can recommend a strike, which will serve the purpose of bringing the expectations of the unions in line with those of the leaders. Thus union wage demands will fall during a strike. Although the model is based on many restrictive assumptions, it provides an explanation of why strikes increased in the U.S. in 1959 with the passage of the Landrun-Griffin Act which increased union democracy and therefore the chances that the union leaders could be voted out of office if they failed to satisfy union members' expectations at contract negotiation time. It focuses only on strikes that result from disagreement over economic issues ignoring those that may result from conflict over recognition procedures, grievance procedures, unsafe working conditions, etc.

In the more recent asymmetric information models of strike activity, either firms or unions or both do not have perfect information about the other party's willingness to make concessions or to resist. In such situations the process of bargaining may increase the accuracy of the information to each party but the bargaining process will be slower the greater the initial level of uncertainty. A strike, by increasing the costs to the parties of prolonged bagaining, increases the incentive to each party to reveal its true position more rapidly thus leading to a quicker solution. Thus, a greater initial level of uncertainty about an employers willingness to pay (for example in the case of firms with widely varying profitability) for wage increases should increase both the probability and the duration of a strike.

In total costs models of strike activity, because strikes impose costs on both parties, they will try to reduce the costs of strikes, for example by starting to bargain well in advance of the expiration of a contract. However, strike avoidance has a price so that strikes will be more likely to occur when they involve lower joint costs to managers and unions, for example in the case of durable goods industries, goods where inventories can be built up, industries where there are fewer domestic and foreign competitors providing substitutes, and the higher the strike funds available to unions and firns.

Indonesia is under pressure to ease restrictions on unions. In considering future policy, it would be important to consider that effective, democratic plant level worker organizations, by providing "voice" at the workplace may be able to play a positive role and reduce some of the cost associated with worker unrest. Legislation encouraging collective bargaining at the enterprise level could enable workers and managers to negotiate outcomes relevant to the plant or enterprise that would enable workers to be more productive in the enterprise30/. Improving the dispute resolution mechanism and the ability of 30/Collective bargaining at the industry or national level could potentially give considerable monopoly power to unions (Note, however, that the efficiency implications and the extent of monopoly power associated to different levels of bargaining will depend on the market structure, extent of monopsony, competition, etc.). On the other hand, restricting bargaining to company unions has historically been a tool to weaken unions (for example in Chile
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workers to be heard can reduce the incidence of illegal or wildcat strikes. What would be needed, however, would be more than legislative changes. In order to move to a mutually beneficial industrial relations system, appropriate and responsible changes in behavior from employers and workers in addition to government are called for. Careful changes in legislation, industrial relations practice and increased deregulation and competition in product markets could improve the positive role that unions can play while controlling the "negative" role.

# B. **Minimum Wages**

The Indonesian Government responded to the greater international scrutiny of labor standards in the late eighties by focusing particularly on minimum wage legislation. In 1989 it revised the existing system of minimum wages which had been introduced in most regions from the early seventies. Minimum wages are currently regulated through Ministry of Manpower Regulation No. PER05/MEN/1989 (amended in 1989 and 1990). The minimum wage refers to a lowest basic wage/salary plus permanent allowances where the basic wage/salary must be 75% of the minimum wage. Minimum wages are to be fixed based on considerations of "minimum physical need", costs of living and labor market conditions. There is no national minimum wage but regional minimum wages (established separately by sectors and sub-sectors) are fixed through Decisions of the Minister of Manpower. The 1989 regulation states that minimum wages must be reviewed at least every two years. A 1990 decree requires that the minimum wage be adjusted once a year in proportion to the CPI. Regional wage surveying boards3l/ propose regional (sectoral and sub-sectoral) minimum wages which have to be approved in stages by the Governors/Heads of Local Government and the Minister of Manpower. A National Wage Surveying Board provides technical guidance to regional boards.

Ministerial decrees announcing new minimum wages clarify further that the minimum wage constitutes money received in cash, excluding benefits of an incentive nature. They also state that sectoral minimum wages also apply to workers paid per contract/ unit/piece, to workers on probation, women workers, and apprentices. Minimum wages are established with a standard 7 hour workday and 40 hour workweek and are announced daily wages. Legislation introduced in 1990 requires that increases in the minimum wage be proportional to increases in the CPI. While in 1994, minimum wage decisions for different regions came out in three groups at three different times in the year, the Manpower Ministry plans to regularize this further, announcing new minimum wages once a year for all regions. The gap between minimum wages and minimum physical needs has been closing and the Manpower Ministry expects that in 1995, the average minimum wage will be above average minimum physical needs. As discussed earlier, failure to pay the minimum wage (and more recently demands for increases in minimum wages) has been the major cause of strikes in the past couple of years.

under the Pinochet regime, earlier legislation in Korea, current legislation for independent plant level unions, and decades ago in the U.S..) Yet, since collective bargaining at the plant or enterprise level can be important for the flow of information, for example relating to specific working conditions, between workers and managers at a decentralized level, it should be actively encouraged by the law.

31 /This are quadripartite bodies consisting of representatives from labor, management, government, and universities. They also establish basic-needs figures (Minimum Physical Needs or "KFM") for each province which refer to monetary amounts considered sufficien **t** o enable a single worker or families of various sizes to meet the basic needs of nutrition, clothing, and shelter. KFM's are apparently much higher than poverty lines estimates but are widely accepted as important indicators for evaluating welfare trends. Several researchers argue that the KFM is actually "quite low."
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Table 8 compares key features of the minimum wage legislation with the other five countries. It is clear that minimum wages provisions in Indonesia are at least as generous as in any of the other countries. Malaysia stands out as the only one of the six countries with no minimum wage. The other four countries either have more exclusions in coverage for example for apprentices or workers on probation (U.S., Korea) and/or permit certain non-wage benefits to be counted as wages (U.S. and in Korean law), and, at least at first glance have minimum wages set at lower levels relative to average manufacturing wages. The minimum wage as a ratio of an average manufacturing wage was 0.51 in Indonesia in 1991 and is likely to be slightly higher in 199432/. The real value of minimum wages fell through the eighties in the U.S., Mexico and Chile33/. In the first quarter of 1993, approximate calculations based on available data reveal that approx one-third of all manufacturing industry workers had monthly income below 1.2 times the minimum wage while about 15% had monthly incomes below 0.8 times the minimum wage34/. While not cast in stone, these estimates suggest that the minimum wage may be more binding in Indonesia than in the other countries being studied35/36/ Minimum wage provisions are usually designed to guarantee each worker a reasonable wage for his or her work effort and thus to reduce the incidence of poverty. Proponents also argue that they increase productivity. Neoclassical economic theory, on the other hand, suggests that such legislation could have unintended adverse consequences. Even in the case of full coverage, repeated minimum wage imposition as in the case of the U.S.37/ could be associated with a cycle of short run employment losses, inflation reducing the real value of the minimum wage and restoring employment, and then an increase in the minimum wage starts the process all over. In a growing economy with complete coverage, the net effect of a one-time increase in the minimum wage is to reduce the rate of growth of 32/Minimum wages in Jakarta, for example, in 1994 are about 1.5 times their 1991 value. Wage trends in 1993 Sakemas data show that nominal manufacturing wages increased at about 11 % between 1991 and 1992. Assuming the same rate of growth for the next 2 years and assuming manufacturing growth rates in Jakarta are the same as the Indonesia wide rates, this would make the ratio slightly above the 1991 ratio. At any rate, with annual indexation to the CPI, this ratio is unlikely to decrease without real wage increases.

_3/Although in Chile real minimum wages have grown at 7% per annum since 1989 while average wages have grown at 4% per annum in real terms.

34/These are approximate calculations based on available published tabulations from the Sakemas household surveys. In Chile, about 5-6% of workers are reportedly at the minimum wage and almost no workers are below the minimum wage. In Bell (1994) 1988 household survey data showed that 2.16% of formal sector workers were below the minimum wage, 24.18 were below 1.5 times the minimum wage and 48.02% were below twice the minimum wage. For full time male workers in the informal sector, the corresponding numbers were 16.48, 44.74 and 62.94 respectively.

35/See Bell, 1994 for minimum wages relative to income distributions in Mexico and Columbia. The numbers for Indonesia appear to be more like the Columbia numbers where distortionary impacts of minimum wages were found. Note that the Columbia numbers were from manufacturing firm data and may underestimate the number of workers at the lower end of the income distribution.

36/lnterviews with employers inn Indonesia suggested that smaller labor intensive firms such as small garment firms appeared to find the minimum wage somewhat problematic whereas the minimum wage was not an issue for the larger less labor intensive firms.

37/In the U.S. the minimum wage was typically fixed in nominal terms at about 55% of current average wage. Rising wages in the rest of the economy gradually erode the minimum wage and eventually the process is repeated.
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employment. In the case of incomplete coverage, which is far more typical in developing countries given the huge size of the informal sector, the imposition of a minimum wage may be associated with lower employment and higher wages in the covered sector and higher low wage employment in the uncovered sector (as is the case with union negotiated wages that are too high)38/. Thus there are both winners and losers, the losers more likely to consist disproportionately of the less advantaged (lower skilled, younger workers, women with interrupted work experience) workers. There is reduction in total output, either through unemployment or through a misallocation of resources.

As discussed in the next section, minimum wages that are set too high could increase the employment loss associated with employer mandates and payroll taxes. If wages are free to adjust downwards, employers will typically pass on a substantial fraction of the costs of such mandates to workers thus reducing potential employment losses that could result. Minimum wages that are set too high introduce rigidity and prevent employers from passing on these costs to workers thus potentially leading to higher employment costs than in the absence of minimum wage.

In developing countries with a large informal sector (where it is more difficult to enforce minimum wages) in which women are more likely to be found, minimum wages benefit men disproportionately. Because a larger fraction of women are also in jobs with more flexible hours of work or part-time work, minimum wages set on a hourly basis may have fewer disincentive effects for hiring women than those set on a more lump-sum basis such as monthly wages39/. Minimum wages are set on a monthly basis in Chile, on daily basis in Indonesia and Mexico and on an hourly basis in the other 2 countries.

In the U.S., although the precise magnitudes of the relationships are yet to be pinned down, it is now widely agreed that increases in minimum wages do reduce employment opportunities, especially among teenagers. Most research has focussed on unintended consequences employment reductions. Very little research has addressed the question of whether minimum wage legislation is achieving its intended goal of reducing the incidence of poverty. The few for the U.S. that have considered this have found that minimum wage legislation has only a minor effect on the distribution of income. This finding is not surprising because not all low wage workers are members of low income families: e.g. teenagers. In other words, minimum wages more directly affect low wage workers, not low income families. Empirical evidence from Mexico based on data from formal sector manufacturing firms (Bell, 1994) shows virtually no disemployment effects for unskilled workers primarily because the minimum wages are set rather low relative to the distribution of wages. However, the use of household level data did suggest that the minimum wage had an important effect on the unskilled wage distribution in the informal sector, affecting in particular women and part-time workers.

It may be politically difficult to argue for elimination of minimum wage and countries face immense pressure to introduce or raise minimum wages as they develop. In the U.S., instead of elimination, people are arguing for youth sub-minimum or training wage. However, such sub-minimum wages for particular groups while retaining minimum wages for the rest may end up benefitting these groups relative to others, for example, in the U.S. teen employment at expense of adult.

38/ Mincer argues that under some circumstances, it may be rational for workers to remain unemployed for a while to search for jobs in the covered sector.

39/See Gill, Sedlacek and Nayar (forthcoming),
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It should be noted that there are at least two reasons why increases in minimum wages that are set too high may not have dramatic employment effects. The first relates to compliance. Enforcement could be expensive and typically limited resources are spent on it4O/. Enforcement is particularly difficult when a large share of employment is in the informal sector, such as Indonesia (the share of informal workers as a percentage of non-agricultural workers around 1990 was 63% in Indonesia compared to 31 % and 25 % in South Korea and Malaysia respectively). Non-compliance with the minimum wage outside of large businesses in Mexico are common4l/. Moreover unions, which could potentially be very important in enforcing minimum wages are virtually absent in Indonesia. In Mexico too, union leaders are apparently not very active in enforcement.

Second, employers may respond to increases in minimum wage by reducing other forms of nonwage compensation that are not covered by minimum wage law. e.g. holiday, vacation, sick-leave pay, health insurance and retirement benefits are now a large and growing share of total compensation. There has been recent evidence of this in Indonesia where employers have been withholding holiday bonus payments in response to higher minimum wage imposition. Therefore minimum wages that are set too high can paradoxically have smaller costs and employment effects.

In conclusion it will be argued that any likely disemployment effects of minimum wage laws that are set too high will be countered by non-compliance and downward adjustment of other benefits. However, introducing unrealistically high minimum wages and the inevitable non-compliance that will accompany it will be associated with higher costs associated with worker unrest and protest. While it may be politically impossible to eliminate minimum wages, reliance on minimum wages as a poverty reduction tool should be reduced, focussing on alternate poverty reduction measures, particularly given the limited evidence on the impact of minimum wages on poverty and its success in targeting the poor. Moreover, collective bargaining procedures may in any case establish wages above the minimum.

# C. **Non-Wa2e Compensation: Emplover Mandated Benefits and Social Insurance Systems**

In Indonesia, the Jamsostek law was enacted on February 17 1992 in Law No. 3 of 1992 on Workers' Social Security. Subsequent government regulations laid down implementation instructions for the law (Government Regulation No. 14, 1993, Minister of Manpower Regulations Nos. Per05/Men/1993 and Per-04/Men/1993).

Jamsostek provides the following social security benefits to workers: (a) life insurance; (b) retirement (provident fund) benefits; (c) free health care for workers, their spouses and upto three children; and (d) workers compensation insurance for work related accidents and illnesses. Every worker is entitled to Jamsostek coverage, although there is provision for participation to be phased in over time. The current implementation regulations restrict initial participation to firms with 10 or more employees or a payroll of more than one million rupiah. For the health insurance program, employers who already have health maintenance programs with superior benefits need not participate initially.

40/ln the U.S. limited resources spent on enforcement and penalties are small. Similarly, in Indonesia, although the government is stepping up enforcement regulations and penalties, they are clearly inadequate as witnessed by the recent strikes and stop-work actions to protest non-compliance with minimum wages.

41/Goldin, 1990, Bell 1994
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i000-000-lttoiaI ii;000000'l-' de for 0ioYEnlm en rol for orviin or madain beetw ' ,ive In000 _mos:-;tcu rbmi0es;_ **_t_** workes r legll _etitld to_ miim evelsofcetai _o-wae_ beefts meritya sickness benefits,: health,; _old age peSnsions,_ ;etc.).0 Thesle are eiter gprovided publicly (.g. public sciail 0seuity programs: tyitpically funded ithough: a payroll **tax although:** width arg -degreesof governmenit subsldy).o oth coul t-ake the Sformgt: _ttof Elegl mandaates; ftha_ employers ;provide; aiminumn1m anmountefthes benefits(privately jor ibycotributing0 to pdFvate.0 0i iii:g;$0i0000:evrll S arguments,0 soneic oftenf hotly! debated, are Usull put forward;- abotwy ;governet should **bte** involved 0 ; in th i-fe market -for empoyee benefits for e3atnple by providing sovial: insurance.The aruensar enee arowd imarkst:: _!0:0failures tarising ou:t of_ insdividual irrationality: (merit goods rationale),Xexternal-ities, |incomplete markets ii thet- isric -againEst disabil...ity, certain risks toE etirchot,: deth longevity)........... Th aeistu aidverse: selection, o ntoa hat and 0moral: hamdt). For eiamp nurnesstm hc cudsrv le,according to he ternalsmi ohrditiuv ; ofaatrpi heathxene or of susainedleverqird deto a chiled's illness tb exaple Poaliv ""erite may :E!C:be associated; wi:t **h** elth insurance, ffor exaple throughl its impact on the peventio of ntgius diseaaes.: In kpartcua,:i - i esocieties may be unmwilling o°runable to dey care tothose in desperate ned e en if tycantpa'i the US. thse costsassociated with te:;~ uninue areepassed on 0;to :the 0insure inthe: formof ighercots. Paly, advrs electio00: ::considerationsi mayf discoulrage the iprovision ;of- frinsge beefitsi: ifor esaple, if :emEployeesg have umoe- ifwaioi, abouit t;whether they Swill n0eed :parenta **l** : eave or Cfacehigh medical bills _:than teir_ employersido, then emplotyers- that provid*Ie ths benefitswill rseeve disproortionael more application f ro employeeswho reqire eeft. In **aditb** gbiotoIeventino on ieffciency grounds, government social: insunc gprograms also have incomei redistribution go:als.: Poti eJtapl:-the::g : pension :system -in- mostt countries aim :to _facilitate_ :income :transfers ovr ti' svia.t red::-istibutle icm cletive - at::;ion to redistribeincom Xto the; por :who 0do no t- ear enog durin their worknglivesl to n.inainaqate consuwmption levels in>their old age) and **t o** provide insurance against _ nadequate _ ncome fo. age-related eve.. s l . ag.., tiand inlsurance pEurposes.0 : 0 :itti-it7 ;i i: .... .. .. .. ..ad.ditio, non-wage n benefits.often are- inctive devices in labo. contra.n (e.g. ar a : workers, ;etc.) ;as iwell as un0intetoa csqt.ne (ca dinscrae mob0*0gi ilty shirkingon the -o- at$-aivl enouag trement, etc.. on. laor a.t in eti es.. .. ..... lAnl alternative argument towards thie same conclusion iS thlat in a n-opetielabor market uc aS one with _effciency_ :wages or monopsony power, there is -no tassurance thiat efficient compensation :packaes: will b attine.:00X ;i::::000000 E::V::::000-:-:-

Most of the cost of the new social security program is to be funded by contributions from employers, with a much smaller contribution (2% of wages for the old age provident fund program) from workers. These are fully funded programs, without any provision for government subsidy. The legislation requires the entire program to be administered by PT Astek, a state-owned enterprise, which has thus far been responsible for administering the previous program which was more limited (there was no health component; contribution amounts were smaller).

The Indonesian old-age program is a fully funded, contribution defined program. The benefits to be received at age _55_ are the total contributions paid in plus accrued interest. In 1991, Astek (on the original program) reported a gross rate of return of only 14.4% on its investment fund (i.e., before allowing for administrative costs) while the average return from State Bank time deposits ranged from 20-22 % depending on maturity42/. Employer contribution is 3.7 % of payroll and employee contribution is 2% of payroll. The health insurance program provides comprehensive medical benefits for the worker, spouse and three children. The employer contributions are independent of the number 42/Chapter by Ross McLeod in Indonesia Assessment 1993. See also, PT Astek, 1994 for investment returns and prospects.
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- 26 -

industry. It medical benefits as well as disability pensions defined as a proportion of earnings varying with the degree of disability.

Tables 8-10 compare the legislated social security program with those in the other five countries. in the case of old-age pensions, the U.S. has a payroll tax financed, pay-as-you-go, benefit defined, mandatory social insurance system as do Mexico and Korea. Malaysia, like Indonesia, has a contribution defined provident fund systems provided publicly, while Chile has contribution defined, mandatory private insurance. Schemes such as those in the U.S. are likely to have a large wedge between benefits and costs and therefore could induce distortions in the form of lower employment and output (see box). These problems are aggravated by an aging population and a higher ratio of beneficiaries (current old) to contributors (current workers). Financial viability even in the short run, therefore would call for relatively high contribution rates which are even more out of line with the benefit rates (lower for successive generations). High contribution rates in pay-as-you-go benefit defined systems are likely to he seen as a tax by workers, not the price for a service received. High tax rates could potentially lead to evasion which further undermines the financial viability of such a plan. Employers who cannot pass on taxes workers, cut back on employment, reducing output43/. There is also considerable evidence of early retirement effects in the U.S, system.

In the provident funds in Malaysia and Indonesia, which are contribution defined, at least in appearance the wedge between costs and benefits does not exist. The Malaysian system requires a much nigher level of contribution (employee 10% and employer 12%, compared to 2 and 3.7% in Indonesia). On the other hand, publicly managed mandatory saving plans or provident funds have a record of inisuse44/ and are often associated with low or negative returns for the pension funds. They can therefore essentially be a hidden tax on labor, subject to misuse precisely because they are hidden. To the extent that employees do not value these at their cost employment losses will result. The new Chilean system on the other hand is a contribution defined mandatory private insurance scheme where the insured verson contributes 10% of wages. There is a small redistributive component to the Chilean program.

Table 10 shows that the other countries all have similar work-injury programs primarily funded by employer contributions. Malaysia has a publicly provided and primarily publicly funded (although fees are charged according to ability to pay) health care program. In Chile, workers may opt for and contribute towards a public or private provision. The minimum benefits which consist of cash and iiiedical benefits are defined in the public system; benefits in the private system vary although they must provide benefits at least comparable to the public system. The U.S. has programs targeted to the elderly and poor with different degrees of government contribution. Chile, Mexico and the U.S. also have unemployment insurance and family allowance programs.

To summarize, new legislation in Indonesia has introduced a social security program that is ambitious in coverage and compares favorably to those in the more developed APEC countries. Disemployment and income distribution impacts of such a program will depend on the extent to which it constitutes a tax on employers and the extent to which employees value the benefits. The greater the extent to which the benefits are out of line with their costs, the higher is going to be the extent of evasion 43/ These impacts are likely to be stronger in developing countries which have limited tax enforcement capacity, imperfect labor markets, and large informal sectors.

_4Ainternal Draft Bank Report on Old Age Systems.
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or non-complianice. Public provision of the prograrn necessarily raises questions of efficiency, returns, corruption etc45/.

# D. Other Labor Standards: Hours of WN'ork, Leave, Minimiuni Age of Employment

Table 1I conmpares Inidoniesiaii minimumn standards with those in the other 5 countries. The table illustrates that they are at least as generous as those in the other five countries. In Malaysia, pioneer companies cannot negotiate collective agreements that grant better terms and conditions than those provided in the Employmenit Act; in other words, these miniimlum standards are actually "maximum" conditions of work in these companies. In the U.S., there are fewer federally mandated standards: states may have thleir own laws, but nmost terms and conditions of employment are established by free collective bargaining between labor organizatioins and employers or by agreement between individuals and employers if no union has been certified/recognized. Federal law does lay down the minimum age of employmenlt however. In addition to ainual leave, Indonesian law mandates leave with pay on 12 official holiday. With the exceptioni of Federal legislation in the U.S., legislation in all other countries specifies public holidays. Indoilesian law is particularly generous relative to the other countries, in laws mandating materniity and mzenistrua **l** eave for women.

# IV. CONCLUSIONS

Current labor legislationi in Indonesia is a mixed bag of protectionist legislation and controls over organized labor; the forme r a result of the immediate post-independence protectionism as vell as governmnent response in recent years to increasing criticisimi, and the latter, as seen in the monolitlhic government run trade union structure, a result of responses of subsequent regimes to a perceived threat from organized labor to econorrmic and political stability.

Whatever the motivation for the interniationial criticisms, a conparison of Indonesian labor legislation with those of five otlher APEC couiltries showed that Indonesian laws do indeed restrict the ability of workers organizatio(is at the plant level to effectively represent workers to management. In this respect, they comlpare with Malaysian laws and to a lesser extent the new Korean legislation. In part, this is because Indoniesiaii laws, like Malaysian laws, have restricted the ability of workers to legally establish such organizatiorns (although some legislative changes have taken place this year). Lack of clarity in the written law on union security, unfair labor practices etc. have left room for considerable interventioni by employers (and the state) **in** industrial relations practice. Restrictions on the right to strike, apparent inefficiencies, delays and partiality in the process of resolving disputes between workers and management, and the intervention of the inilitary in labor affairs have further undermined the ability of workers to organize and act collectively. In all these respects, Indonesian legislation provide a stark conitrast from current legislation **i** n Chile and the IJ.S. where legislation appears to be more favorable for plant level collective bargaining.

**Oin** thie other hand, Incdontesian policies on millillmumn wage, mandated non-wage benefits and other labor standards appear to be quite generous for a country at its level of development; indeed, on the whole, they appear to be at least as generous as the countries studied here, which have (purchasing power corrected) per capita incomlles of at two and a half times thlat of Indonesia. Minimum wage legislation,

45/discussed in greater (letail in the chapter by Ross McLeod in Indonesia Assessment, 1993.
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which has been the reason for the majority of the recent labor unrest in Indonesia, has broader coverage (fewer exclusions) and appears to be at a higher level (relative to average manufacturing wages) in Indonesia and is now indexed to the consumer price index to maintain its real value. Yet, Indonesia has the largest informal sector employment, very few resources for inspection and enforcement, and very few well functioning plant level worker organizations and grievance mechanisms; factors which make enforcement of such legislation difficult. These factors and management practices of reducing non-wage compensation in response to increases in minimum wages raise questions about the reliance on the minimum wage as a poverty reduction tool. On the one hand, minimum wage legislation if enforced, could potentially benefit better off workers relative to less advantaged workers. On the other hand, lack f compliance with the legislation defeats the purpose of such legislation. Increased expectations on the part of workers, on the other hand has been associated with growing unrest.

A similar message emerges about other labor standards where lack of compliance is likely to be significant. The implications of the generally protectionist standards for potential labor costs suggests that low labor costs are probably not the motivation for government policy and controls in the labor market. Further, relatively low wages are more likely to be associated by the labor supply conditions rather than controls over organized labor. Indonesian standards compare favorably with those in other countries and compliance will increase as the country develops further. Care must be taken not to increase reliance on centrally mandated standards over those established through negotiations between workers and employers.

Indonesia is under pressure to ease restrictions on unions. This paper has tried to emphasize that there may be a positive role that effective, democratic plant level worker organizations can play by providing "voice" at the workplace. However, changing such industrial relations practices in a way involves more than legislative changes. In order for such a move to be mutually beneficial, appropriate and responsible changes in behavior from employers and workers in addition to government are called for. Evidence from developed (and some developing) countries have shown that unions can have both positive and negative impacts on the economy and that the potential positive role may have been understated in traditional approaches to unions. Careful changes in legislation, industrial relations practice and increased deregulation and competition in product markets could improve the positive role that unions can play while controlling the "negative" role.

Finally, it should be noted that at least two of the countries (Chile and Korea) studied had legislation that was far more repressive of labor organizations until relatively recently. At least one of these, Chile, has taken a clear policy stance to reverse the anti-labor bias in its policies and has done this by emphasizing democracy and representation by worker organizations at the plant level.