New Regional Minimum Wage Framework

On 10 November 2023, the Indonesian government introduced a new regulation amending the regional minimum wage framework.  This is anticipated to increase regional minimum wages that will apply from 2024. In this update we look at these changes and what they mean for employers.

BACKGROUND

In Indonesia, minimum wages are set at the regional level (ie at the provincial or city/regency level) rather than at the national level.

The regional minimum wage framework is regulated by Government Regulation No. 36 of 2021 on Wages (GR 36), which requires minimum wages to be adjusted annually within a region-specific minimum wage band. This band is calculated considering the average household consumption per capita, the inflation rate, and economic growth in that region. 

As the government no longer considers GR 36 to be adequate to guarantee employees' purchasing power and ensure national economic stability, Government Regulation No. 51 of 2023 (GR 51) has been issued to introduce a new framework for calculating regional minimum wages. GR 51 takes effect immediately and is expected to increase the regional minimum wages from 2024.

NEW REGIONAL MINIMUM WAGE FRAMEWORK

Under the updated framework, the regional rate of inflation and economic growth will continue to be relevant in calculating how much the minimum wage will be adjusted, but not average household consumption per capita. However, the rate of inflation will not be considered in regions where the regional minimum wage already exceeds the average household consumption per capita.

Instead, the updated framework will consider a new component (referred to as α) which is to be fixed by the regional wage council and takes into account the regional level of workforce absorption (which in turn is impacted by the unemployment rate) and the average or median wage. 

These changes will strengthen the role played by the regional wage council in setting minimum wages and are intended to prevent the widening of the wage gap across regions. 

MINIMUM WAGE FOR NEW EMPLOYEES

GR 36 provides that regional minimum wages apply to employees with less than one year's service. GR 51 now makes clear that this does not mean that employees with less than one year's service are only entitled to the minimum wage; those with specific qualifications may be paid higher than the minimum wage. 

KEY TAKEAWAY 

The new provincial minimum wages for 2024 were fixed on 21 November while city/regency minimum wages were fixed on 30 November. Employers, particularly those operating in different regions, should regularly monitor the new minimum wages applicable to their workplaces to ensure that they remain compliant.