[Kajian Post] Increasing Labor Welfare: A Lesson from China

Oleh:  Nathaniel Rayestu | Kepala Divisi Kajian Kanopi FEUI 2012 | Ilmu Ekonomi 2009.

Still fresh in our memories the day when the capital’s traffic went mad thanks to labor protests blocking the Jagorawi toll road in Bekasi, demanding a raise in their minimum wages. In the minds of many Indonesians, increasing labor welfare equals increasing their minimum wage.

This view is dead wrong, it doesn’t. Minimum wage laws are an unsustainable way of increasing welfare. If firms  feel that they are not getting good return on their money, they might close down and move to another place. When that happens, even the very laborers pressing for higher wages will lose their jobs and earn zero rupiahs instead.

If we are serious about increasing labor welfare, let us look at China. Wages in China have increased exponentially over the past decade and half. They did this not through increasing wages single-handedly, but by rising productivity. Chinese labor productivity rose 10 percent a year in the 1990s, and a little more quickly in the 2000s, due to technological progress, increased capital investment, and rising human capital. Large infrastructure spendings did nothing but help, as the more roads, bridges, harbors, make them a very efficient hog in the global supply chain.

The way wages have increased in China happened in a pseudo labor economics textbook fashion. As they become more productive, more and more firms invest heavily in China on labor abundant industries, and they have to compete for the best workers. Also, as more companies invest in building factories in inland China, a lot of workers choose to move there because of their proximity to home. Both of these increase wages in a sustainable manner because it happens through market forces and is justified by the workers productivity.

This Chinese productivity I am talking about is no gimmic. The New York Times wrote an article in January telling the story of how 8000 workers at a FoxConn factory in Shenzen were woken up and immediately put back to work on 12-hour shifts at midnight due to a last-minute design change on the iPhone 4S. Within four days, the plant was producing 10,000 iPhones a day. This kind of productivity tough to match.

China does though, have minimum wage laws. The difference is that the laws are put in place not to increase the general welfare, rather to make sure that no firm is paying workers much below everyone else.  The thing to take note of is that the increase in market wages is always higher than the Chinese minimum wages.

So the next time we see a labor rally demanding an increase in minimum wage laws, think again before supporting them. The only way we could increase wages is by inducing more investment in capital to Indonesia, by investing in human capital, building better infrastructure, cutting down on corruption and ‘pungli’s that create our high-cost economy, and other many other things that can be done to create a healthier investment climate. This is no capitalist thinking either, just common sense. Minimum wage laws are like a shortcut that leads to a dead-end.

One last thing that needs to be said. I’m not anti labor. To quote Milton Friedman: “I am on their side. They are not”.