Publications

Introduction

With a population over 245 million, Indonesia is the fourth most populous country in the world.  The Indonesian economy suffered severe setbacks in 2004 and 2005, due largely to the Indian Ocean tsunami in 2004.  Currency instability, inflation, and interest rate increases have all plagued the Indonesian economy in the past year.  Nonetheless, GDP growth in 2005 was at its highest levels in ten years.  The current GDP is around $870 billion in purchasing power parity terms.  This makes Indonesia the fifth-largest economy in Asia, behind only China, Japan, India, and Korea. 

Despite economic instability, Indonesia made headlines in October 2006 by paying off its outstanding debt to the IMF.  This sum of $3.7 billion was paid four years early, indicating a desire on Indonesias part to be seen as a competitive and fair player in the future Asian economy.

Recent Labor Trends 

A politically cooperative and economically robust Indonesia will certainly be welcome in the international business world.  While China remains the primary target for foreign investment in Asia by far, Chinese labor costs are quickly increasing and a floating exchange rate threatens to further increase costs.  More and more Western companies are now looking to Southeast Asia for inexpensive manual and IT labor.  Indonesias competitive wages and rapidly improving infrastructure make it a target for future foreign investment, particularly in the IT sector.

Wages in Indonesia continue to be among the cheapest in Asia.  In 2006, the minimum wage in Jakarta was Rp.819,100 (about $89) per month.  In November 2006, the city announced that this would be raised to Rp.900,516 (about $99) for 2007.  These minimum wage figures are similar to those of large Chinese cities.  Average income for workers in Indonesia, however, remains close to minimum wage.  In contrast, average wages are two to three times the minimum wage in Chinese cities. 

Management salaries in Indonesia are also much cheaper.  A sales manager at an FIE in China with 10 years experience and English language skills may expect an annual salary of $30,000.  In Indonesia, an equivalent position may pay only $15,000.  Annual average salary increases of 10% to 15% over the past five years in Indonesia have generally been offset by equal or greater inflation (5%-17% annually).

Expatriate salaries in Indonesia are generally similar to salaries in the US, and are often paid in US dollars.  Compensation usually also includes education and travel expenses for family members.  Housing for foreigners is almost always provided, but can be extremely expensive.  Current rent prices in Jakarta range from $2,000 to $6,000 per month.  There has been a recent trend, however, of decreasing benefits packages for many expats. 

Personal Income Tax

In 2006, the Indonesian government raised the tax-exempt income level to Rp.13,200,000 ($1450) from the previous 12,000,000 ($1318).  Personal income is currently taxed as follows: 

Indonesia Personal Income Tax Brackets

Expatriates working in Indonesia must register to obtain a taxpayer ID number.  Since 2000, this requirement has been enforced more stringently.  While registration used to be the responsibility of the employer, it is now up to the individual employee to complete the process.  Registration should be completed at the Tax Office for Foreign Bodies and Expatriates in Jakarta.  Under Indonesian law, foreigners employed in Indonesia who do not register as taxpayers can be fined heavily or even imprisoned.

Industrial Disputes and Termination

In January 2006, updates to Indonesian law regarding termination of employment came into effect.  The new provisions established a labor court that is meant to settle labor disputes in a fair and efficient way.  The court does not generally deal with claims above $15,000.  The law prescribes three methods of settlement for industrial disputes: arbitration, mediation, and conciliation.  In addition to labor rights and wage disputes, the new labor law also covers employment termination.  Employers intending to terminate a contract must first attempt to reach an agreement with the employee over settlement terms.   If an agreement is reached, documentation must be submitted to the local labor court.  If an agreement cannot be reached, the dispute must move on to mediation with an outside mediator, and finally to the labor court.  This system is still very new to Indonesia, and, despite government efforts, is not yet widely enforced.  It is common for employees to be hired without labor contracts.

Indonesian law requires 30 days notice for termination of a contract.  Termination because of labor activities, religious activities, political activities, marriage, pregnancy, childbirth, or illness of less than one year is prohibited by law.  Termination procedures in Indonesia, when carried out according to the law, can be more expensive than those in other Southeast Asian countries.  Under some circumstances, employers must pay compensation for time worked, severance pay, and service pay.  Severance pay is typically one months salary plus one months salary for each full year worked.  Employees terminated after more than three years of service are also entitled to service pay of at least one months salary per three years of service.

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