February 22, 2016 / administrator

Policy Brief: Improving Industrial Relations


The 5th Employment Policy Forum was held on August 12th at Gedung MPKP Kampus UI Salemba. The topic of the session was productivity and industrial relationship. The speakers were Mr. I Kadek Artha Dian Sutrisna (LPEM FEB UI) and Mr. Harijanto (PT Adis Dimension Footwear). The discussion was moderated by Mr. Fithra Faisal Hastidi (FEB UI).

Discussions in the forum brought up several key points. The first session discussed LPEM’s research on labor market flexibility, which found that Indonesia’s labor market suffers from a “double rigidity”, both in quantity of labor and wage rate. This double rigidity has a negative influence on innovation and export performance in the country. The second session, a case study of industrial relations from an employer’s perspective, identified five key elements: 1) being adaptable to the Indonesian context, e.g. laws and bureaucracy, low education and work ethic of the workers; 2) investing in worker skills; 3) clear communication between employer and employees; 4) providing for workers’ needs, such as transportation, primary health care, canteen, mini market, employees cooperatives; and 5) solidarity within the company. An open discussion session identified the contribution of two controversial policies in Indonesia’s labor market rigidity: high severance payments and the minimum wage law.


To address the identified issues, the Employment Policy Forum recommends the following: Improving industrial relations

  • At the national level, the government should play a proactive role in facilitating a “grand bargain” between government, employers and employees to propose major overhauls to the labor laws in a way that leaves all parties better off (i.e. a win-win situation).
  • At the firm level, the government should encourage and facilitate collective bargaining agreements (Perjanjian Kerja Bersama, PKB) between employers and employees, spanning not only wage issues but also worker training, benefits, and other incentives. Wage-setting
  • A simple, certain, fair formula-based minimum wage setting mechanism can be more conducive to business and job creation, and at the same time improve workers’ welfare by guaranteeing more certainty and less discretion on the adjustment process.
  • At the firm level, wages should be determined by collective bargaining agreements, through negotiations conducted in good faith by both employers and employees. Severance payments
  • The current severance payment system should be replaced by an Unemployment Insurance system based on workers’ and employers’ contributions. The new system would help eliminate employer’s disincentives towards hiring and firing (currently caused by high severance payments) and would increase workers’ protection in period of joblessness.