Final Presentation OA - Group 4 by Lydia Ashton

Article Background

2024-12-08 06:03:53 UTC

Indonesia Minimum Wage to be Raised by 6.5% in 2025, Prabowo Says

-Date published: November 29th, 2024

-Authors: Chandra Asmara and Norman Harsono

-Source: Bloomberg

Supply, Demand, and Equilibrium

2024-12-08 06:16:37 UTC

-Increase in minimum wage will result in a decrease in the demand for labor in this market.

-At this higher price point the supply of labor will increase in this market.

-The "equilibrium" price will be higher because of the minimum wage increase but the equilibrium quantity demanded and supplied will ultimately be lower.

-Gap between quantity of labor supplied and demanded in this market.

Elasticity

2024-12-08 06:25:57 UTC

-Results are dependent on elasticity of supply and demand.

-Labor supplied will change significantly when supply is elastic.

-Labor supplied won't change much when supply is inelastic.

-Labor demanded will change significantly when demand is elastic.

-Labor demanded won't change much when demand is inelastic.

Taxation and Redistribution

2024-12-08 06:33:01 UTC

-Income tax funds many social programs in the U.S. and Indonesia.

-Both the U.S. and Indonesia have a progressive income tax structure.

-Higher income from the minimum wage increase will result in more money derived from taxes.

-Effects of taxation and redistribution are based on elasticity of supply and demand of labor.

Private Information

2024-12-08 06:34:10 UTC

-Higher cost of labor based on increase in minimum wage.

-Potential employees hold private information about their quality of labor.

-Employers take on a higher level of risk based on this high cost.

-Decrease in estimated value of employees based on this presence of private knowledge.

-Potential for decrease in supply of high quality labor.

Equlibrium after Minimum Wage Increase

2024-12-09 00:08:13 UTC

Article Link

2024-12-09 01:26:13 UTC

Check out the original article!

What Do You Think?

2024-12-09 01:28:39 UTC

Non-Standard Factors for Consideration

2024-12-09 01:42:20 UTC

While raising minimum wage by 6.5% and providing free school meals may sound like two positive implementations, unintended consequences could present themselves in the future. Higher costs for labor could worsen the already trending string of factory closures across Indonesia, hence leading to worsened unemployment rates. Additionally, the implementation of free school meals would escalate the government's deficit by $30 million. Not only does this contradict the President's previous pledge to keep a modest budget, but an increase in the national deficit could lead to inflation, economic instability, reduced national savings, and more unintended consequences. Furthermore, market power of the factory industry could have unintended impacts, even if a new minimum wage increase of 6.5% does pass legislation. If the factory industry is highly concentrated it is possible that they will continue to simply employ workers at minimum wage, and push additional costs on consumers; hence, reducing the benefit of the wage increase on employees. While we cannot be certain of the precise consequences of an increase in minimum wage and free school meals, it is certainly possible that the aforementioned consequences may occur in tandem, independently, or not at all.

Concluding Remarks

2024-12-09 02:11:05 UTC

With the Indonesian government's proposal to increase the minimum wage by 6.5%, an unemployment gap is likely to occur/worsen with the decrease in labor demand as a result. As such, the market being unable to define an equilibrium leaves the economy to run inefficiently. The extremity of this issue will be dependent on the unknown elasticities of the supply and demand of labor. Furthermore, this elasticity also determines how the redistribution of wealth and use of social programs will be affected. The current predicted consequences could be economic instability, inflation, increased budget deficit, and more. Alternatively, we propose investments in infrastructure, driving tourism, and creation and support of a competitive business environment.

Main Points

2024-12-09 13:26:14 UTC

-President's goal is to increase purchasing power of consumers and countries economic growth.

-The president has collaborated with the labor leaders to raise the minimum wage by 6.5% although he initially argued for a 6% increase.

-High unemployment in Indonesia after COVID-19.

-Workers were requesting an 8-10% minimum wage increase and are predicted to push back regarding the further decision of “sectoral minimum wage”.

Check Out This Article On The Harmful Effects Of Raising Minimum Wage

2024-12-09 13:32:31 UTC

Check Out This Article About The Indonesian Tax Structure

2024-12-09 13:38:11 UTC

What Do You Think?

2024-12-09 13:45:01 UTC

Considering Non-Standard Factors

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Concusion

2024-12-10 01:59:53 UTC

Comparative Analysis and Real-World Examples

2024-12-10 02:19:54 UTC

-In 2023, a similar wage increase of 3.38% caused mass protests and a labor strike of 50,000 workers.

-The minimum wage issue is still a struggle and has impacted many families this year as their buying power becomes less. This year's increase is set for 6.5%.

-Based on past results, the upcoming 6.5% increase is likely to frustrate citizens and not contribute to Indonesia's goal of 8% economic growth.

-The announcement of this year's increase has already created unrest; the country's Employer Association and other business groups are not in favor of bigger increases as it creates uncertainties for investors, disrupting the economy. However, most citizens are calling for change. According to the South China Morning Post, the middle class makes up over 65% of Indonesia and is likely to hurt the most from the small increase.

-Union President Said Iqbal initially wanted a much higher increase but settled for 6.5% as the government must balance between long term sustainability and short term relief for those that have still been struggling in the years after the pandemic. Indonesia's President values the minimum wage as the country's safety net, as middle class families make up a majority of the population.

Sources:

https://indonesiabusinesspost.com/insider/kspi-twelve-percent-vat-hike-low-wages-severely-burden-low-income-people/

https://www.scmp.com/week-asia/economics/article/3277786/indonesias-middle-class-struggle-could-hurt-economy-highly-likely-trigger-unrest-experts

https://www.thejakartapost.com/indonesia/2024/12/01/reluctance-as-govt-pledges-6-5-wage-hike-next-year.html

Introducing the Labor Market Impact

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The 6.5% minimum wage increase sets a price floor at P2, above the initial equilibrium wage at P1, as shown in graph.
This disrupts the labor market, altering the supply and demand balance.
As a result:
- Employers reduce the quantity of labor demanded.
- More workers are attracted to the higher wage, increasing the quantity of labor supplied.
This creates a gap between the supply and demand at P2, leading to unemployment.

Economic Impacts of the Policy

2024-12-10 03:25:32 UTC

Consumer Surplus (Employers): Shrinks because employers pay higher wages while hiring fewer workers.
Producer Surplus (Workers): Increases for workers who retain their jobs but decreases overall due to unemployment.
Deadweight Loss: The purple triangular areas represents inefficiencies caused by the policy.
These changes highlight the trade-offs between higher wages and reduced employment opportunities.

How Elasticity Influences Outcomes

2024-12-10 03:26:42 UTC

Elasticity determines how much the labor market responds to the wage increase:
- Elastic Demand: Sectors like manufacturing may see significant job cuts, widening the unemployment gap.
- Inelastic Demand: Essential services like healthcare experience smaller reductions in employment.
Over time, businesses may adopt automation or other cost-saving measures, further reducing labor demand.

Model Prediction's Alignment with Article Content

2024-12-10 04:30:35 UTC

The model’s predictions align well with the article's content.

Both highlight the trade-offs of minimum wage increases, such as higher wages versus increased unemployment and market inefficiencies.

The articles also underscore the importance of productivity and economic stability, which the model incorporates through elasticity and market dynamics.

Economic Impact of the policy (Video)

2024-12-10 04:59:38 UTC

Elasticity (Video)

2024-12-10 05:05:29 UTC