Indonesian President Prabowo Subianto announced a 6.5% increase in the national minimum wage for 2025 – a move that has sparked both praise and concern.

The decision, according to Subianto, is aimed at protecting workers’ purchasing power amid rising living costs and global economic fluctuations.

“We cannot allow our workers to bear the burden of rising prices alone. This wage increase is meant to support their welfare while ensuring economic stability,” Subianto said during a media briefing.

The latest wage hike is considered moderate when compared to previous years. In 2023, Indonesia saw an average increase of 7.5%. Some provinces implemented hikes as high as 10%.

In contrast, 2024 saw a more conservative 3.38% increase in Jakarta, from 4.9 million rupiah, or about US$299, to 5.067 million rupiah, or US$324.

Labour unions initially demanded an 8% to 10% increase, citing inflation and economic growth factors.

While Said Iqbal, president of the Confederation of Indonesian Trade Unions (KSPI), welcomed the government’s proposal as a positive step, they are still hoping for a higher increase.

On the other hand, the Indonesian Employers Association (Apindo) earlier expressed concerns over the potential impact on business operations. Shinta Kamdani, Apindo’s chairwoman, stressed the need for stability in wage-setting mechanisms to maintain investor confidence.

The Subianto administration believes this moderate increase strikes a balance between protecting workers and maintaining Indonesia’s attractiveness to foreign investors.

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The impact on small and midsize businesses

Small and midsize enterprises may face challenges due to higher labour costs, potentially leading to staff reductions or increased automation to maintain profitability. Without proper support, many SMEs risk reducing staff or increasing product prices, which could further fuel inflation.

Meanwhile, upskilling the workforce will also be crucial in enhancing productivity. Programmes that provide free training for Indonesian workers allow employees to develop technical and digital skills that can increase output and efficiency.

Ultimately, government support will play a key role in helping SMEs adjust. Accessing tax incentives, low-interest SME loans, and subsidies provided by the Indonesian government can ease the financial burden caused by higher wages.

Optimising supply chain management by sourcing materials locally and negotiating better contracts can help lower production costs. Expanding into online marketplaces such as Tokopedia and Shopee can also open new revenue streams without significantly raising overhead expenses.

Focusing on employee retention is equally vital, especially in today’s highly competitive job market. Offering flexible work, performance-based incentives, and additional benefits, such as extended paid time off, can boost employee satisfaction and reduce turnover.

Lastly, closely monitoring cash flow and expenses allows businesses to identify inefficiencies and make informed decisions to maintain profitability.

Indonesia wages still on par with ASEAN neighbours

While some labour unions argue that the increase is insufficient to address the rising cost of living in urban centres like Jakarta, Indonesia’s minimum wage remains competitive within the region.

It is close to, or on par with, Malaysia’s monthly minimum wage, which stands at 1,500 ringgit (US$337), and Thailand’s 10,620 baht (US$315).

Indonesia sits well above the Philippines, which offers about 13,000 pesos (US$227), and Vietnam, which pays 5 million dong (US$200) minimum.

The wage hike occurs against a backdrop of global economic volatility. The International Monetary Fund (IMF) projects a modest 3.3% global GDP growth for 2025, with emerging markets like Indonesia expected to outpace this average, driven by robust domestic consumption and infrastructure development.

However, inflationary pressures resulting from geopolitical tensions and persistent supply chain disruptions have eroded real income worldwide. In response, several Southeast Asian nations, Indonesia included, have adjusted their minimum wages to protect workers’ living standards.

Also Read: Preparing Indonesians for a digital future

But economists in Indonesia warn of potential inflationary effects if businesses pass the higher labour costs onto consumers. Moreover, the wage increase may accelerate the adoption of automation in manufacturing and logistics as businesses seek to offset rising costs.

“For businesses that anticipate difficulties in meeting the new minimum wage regulation, organisational restructuring may be a necessary course of action. Restructuring enables businesses to optimise resources, increase efficiency, and align their financial capabilities with regulatory obligations,” said labour lawyer Morales Sharoz Sundusing.

With the new wage policy taking effect, the Indonesian government faces the challenge of spurring economic growth while ensuring social welfare. By implementing targeted support programmes and fostering innovation, Subianto aims to create a more equitable and resilient economy.

While the wage increase is a step forward, achieving financial security for workers will also require investments in skills training and job security to thrive in a changing world.