Saturday, November 15, 2008

Does trade-off between MW and employment levels apply to All?

The debate is going interesting. Though I used textile industry (not the whole economy) as my basic argument, the industry is still important as an indicator of formal employment. Prior to the crisis, employment in the textile industry was accounted for around one-third of all jobs in manufacturing.

Ape in his comment argued that “the wage-formal employment trade off is apparent” but paradoxically this is not the case of textile industry-one of labor-intensive industry and supposedly is much more sensitive to minimum wages (MW). Based on Sakernas data, such trade-off is absent indeed. From the figure below, we can clearly visualize that the percentage of formal employment followed closely MW.

MW is left axis & % of formal employment right axis (sakernas)

However, if we juxtapose real value added of textile industry and % of formal employment in the textile industry, it becomes obvious that output determines employment levels. Putting technical change together, it seems that the change in factor intensity affects employment levels.

Real value added (trillion Rp)

If the formal sector employment starts to grow amid stringent EPL, it does not necessarilly mean that EPL is not an obstacle (or has less impact). Solid domestic output demand may compensate the impact of EPL on employment. But if we relaxe this, perhaps we may see that formal employment grows faster. But it is better for me to say that i don't know exactly which one is the main obstacle (MW or EPL) on employment. But based on my study in textile industry, the employers are concerned much more on the latter (EPL) rather than the former (MW).

The impact of MW on employment levels seems to vary within formal jobs. I don't say that MW does not bring an adverse impact on employment levels. Yet growing output demand recently is likely to compensate the impact of MW. MW and EPL are determinants affecting input cost of firms and in turn labor demand. But output demand is another driver affecting labor demand as well. Another issue is about data reliability-well I don’t know exactly how to get around this issue.

this is one more


a.p. said...

I think we are not disagreeing on anything. I agree with you, as you wrote, that the impact of MW and EPL may vary across sector. I haven't been able to confirm but perhaps EPL matters more in the textile industry.

I also don't reject that many employers state their concern over EPL (subjective indicator). A note -- when you said employers concern more on EPL, did they say which EPL in specific? The most repeated ones, based on my several interviews, are severance pay. Then there are two things: 1) the hiring/firing tax index, and indicator that was used to measure the impact of severance payment (read Armida Alisjahbana's paper), basically it has been constant lately; 2) compliance rate is low.

So, although EPL has been stated as a big concern, it doesn't seem to be a binding constraint in reality. Also remember that, and I think this is true especially for textile industry, when employers concern over EPL, their reactions could be employing more contract and outsourced workers instead. This means, formal employment may not be affected that much.

Meanwhile, if they face higher MW, contracting out/outsourcing will not be an effective strategy since they must pay MW anyway. They will either not complying or 'go informal'.

But there are more devils in the detail. I am not defending that the methodology I've been using was the best one. We can elaborate this in the Cafe Salemba-Ruang 413 next off air session... :-)