Can The 6.5 Percent UMP Increase Break People's Purchasing Power?

JAKARTA President Prabowo Subianto's decision to increase the Provincial Minimum Wage (UMP) to 6.5 percent in 2025 is seen as skeptical by a number of circles. The government hopes that this policy can increase purchasing power, but according to this observer it is more considered a political consideration.

President Prabowo announced the increase in the UMP on Friday (11/29/2024). The former Minister of Defense said the average national minimum wage increase was 6.5 percent next year based on the results of the decision through a limited meeting with labor unions and their ministers.

Prabowo said this increase was slightly higher than Yassierli's Minister of Manpower's proposal, which previously recommended an increase of six percent.

Increasing the purchasing power of chili workers continues to maintain competitiveness as President Prabowo's goal to set an increase in the UMP at 6.5 percent next year.

However, this increase is seen as useless by some circles, considering that many things are charged to workers next year, including the increase in Value Added Tax (VAT) to 12 percent.

The increase in the 2025 UMP by 6.5 percent means almost double compared to this year which is only 3.6 percent. The increase in the UMP is the middle point for workers who demand an increase of 8 percent to 19 percent, while employers ask for a maximum increase of 3.5 percent.

Not without reason, entrepreneurs ask for a maximum increase in this figure. Head of the Employment Division of the Indonesian Employers' Association Bob Azam emphasized that the increase in wages above their calculation could cause domino effects.

If the national minimum average wage increase reaches 6.5 percent, business people are worried about the threat of reducing labor or layoffs. This is because labor-intensive industries are very sensitive to wages.

"The wages take up a larger portion in labor-intensive industries, wages increase by 50 percent, so spending can be even higher," he said.

Jakarta's UMP in 2024 is IDR 5.067.381 and will increase to IDR 5.396.760 next year if calculated according to the provisions said by Prabowo.

However, the increase in the UMP is said to be unable to cover up a number of new policies that burden the working class. Recently, residents were fussing over the increase in VAT to 12 percent next year.

Not to mention the issue of increasing BPJS Kesehatan contributions, the discourse of changing NIK-based KRL subsidies, as well as limiting fuel subsidies. Not to mention the issue of the people's housing savings or Tapera which had shocked some time before.

Director of the Center of Economic and Law Studies (CELIOS) Nailul Huda said the increase in the UMP by 6.5 percent next year still cannot "enliven" the potential for decreased purchasing power due to rising VAT as of January next year. The increase in VAT, said Huda, has a very high impact on demand so that even though the UMP has increased by 6.5 percent, the real wage has very minimal increase.

"Losses to household consumption and GDP are very high," Huda told VOI.

The minimal increase in real wages is due to volatile food inflation which will reach five to six percent next year. Whereas for the lower middle class, the most consumption is volatile food.

Citing the Bank Indonesia page, volatile food inflation is an inflation that is dominantly influenced by shocks in food food groups such as harvest, natural disturbances, or factors in the development of domestic food commodity prices and international food commodities.

Therefore, according to Huda, the increase in the UMP by 6.5 percent is still lower than what workers should get. According to the calculation, the increase in the UMP should be in the range of 8-10 percent because it takes into account inflation and future economic growth.

In line with Huda, the Executive Director of CelIOS Bhima Yudhistira also doubts that the increase in the UMP can stimulate people's purchasing power which has fallen recently.

Bhima even questioned the formulation used by President Prabowo in determining the national average wage increase of 6.5 percent. Because PP 51/2023 was no longer valid following the decision of the Constitutional Court (MK) to grant the judicial review of the Job Creation Law related to manpower recently.

But if the government refers to PP 78/2015 regarding wages, then the minimum wage increase for 2025 should be 6.79 percent.

"So the wage decision is up 6.5%, it seems that this is more about political considerations, not considerations based on rational formulations. In fact, it is rich in negotiations. So that workers are happy and employers can also tolerate it," said Bhima.

Bhima explained that the function of the minimum wage is actually not limited to providing protection for workers, but is an economic stimulus.

Unfortunately, this concept has never been used by the government as a strategy to encourage household consumption and the domestic economic turnover.

So far, according to Bhima, the government often only uses entrepreneurs' glasses in making wage policies, assuming low wages will create more jobs and attract new investments.

Even though the facts are not so. In the last 10 years, low wages have not necessarily boosted the increase in labor absorption.

Bhima also gave an example in 2014 when every IDR 1 trillion of investment entered in the absorption of 3,313 workers. Meanwhile, in 2023, every IDR 1 trillion, the realization of incoming investment is only able to absorb 1,283 workers.

"This shows an indirect correlation between low wages and incoming investments," said Bhima.

Therefore, the government should change the way of view of which is left behind. By increasing the minimum wage higher, households will get higher income, and in the end, more will be spent on domestic business actors.