Labor's Salary and Laws Certainty

Free access to scriptures religious leaders try to censor

A Lot of workers are demonstrating demanding the cancellation of a law draft regulating workers’ in Indonesia.

I am not going to argue against or in favor of the law. It’s just that I think the dispute is wrongly targeted. Those who fight in favor or against the law is penny wise point folly.

I need to point out to all parties of how to improve workers’ salary and income in Indonesia.

What I mean by workers here are any people that work for money. That includes CEO, managers, entrepreneurs, and the self employed people.

We may consider some of those people capitalists. However, they work for money. Hence they are workers rather than capital owners.

However, most of those workers, just like capital owners are pretty flexible. So, better laws in Indonesia will mainly benefit the one least flexible, namely the poorest labor. As we shall see.

My idea came 7 years ago when I was learning micro economic theory in college. It’s a regular undergraduate class. So nothing fancy. It’s a basic economic theory that’s established rather than cutting age.

We were discussing a question whether we should tax smoker or cigarette producers. The conclusion is that it doesn’t matter.

If governments tax smokers, then cigarette price will drop because cigarette manufacturers will have to reduce the price to persuade smokers to smoke.

If governments tax cigarette producers, then cigarette prices will simply go up. The prices include the tax.

Which ever governments tax, both the smoker and the cigarette manufacturer pay. They pay inversely proportional to their price elasticity.

Addicted smokers will smoke anyway whether the price increase or not. Cigarette producers can quickly reduce or increase their cigarette production.

So, flexible the cigarette producers are immune against governments’ intervention. So the smokers effectively pay all the tax.

Have you ever heard someone tell you that if you do not like to live in a country just get the hell out somewhere else? What about if someone tells you that if you don’t like to work for companies just take a hike?

If it is easy for you to take a hike, then you are immune against all form of company’s policy. Company’s policy will not affect your happiness. If the company abruptly reduces your salary you’ll simply move somewhere else. Got it?

The moral of the story is the more flexible you are, the more you are immune against whatever policy your governments have.

Speaking of immunity, capital is the most flexible resources in the earth. It’s so easy to move capital from one country to another.

Hence, whatever rules Indonesian governments implement it will not affect capital owners. It will only affect the fate of workers in Indonesia.

That’s not the whole story.

Cigarette tax is always paid by both the producers and consumers. The same way, good laws and bad laws are always paid by both the capital owners and workers.

Assuming that smoking is good, which is not the case actually, eliminating cigarette tax will benefit both the producers and consumers. The same way increasing cigarette tax will hurt both the producers and consumers.

Because the producers are flexible, producers are relatively immune toward cigarette tax. The one taking the brunt of cigarette tax or cigarette subsidy, if such things exist, will be the inflexible customers that can’t just easily reduce smoking.

Another moral of the story is that what’s good for one tend to be good for the others.

It’s not true that workers can get more by hurting capital owners or via versa. Market mechanism will ensure that those who hurt the other side a lot will be the one paying for it.

Hence, both will be better of to just try to maximize productivity as a whole. The market will split the cake in a predestined way that’ll properly motivate individuals to that productivity maximization.

Because the workers are less flexible than capital owners, the workers will be the one benefited by increase productivity.

In Indonesia, there is a lot of corruption, extortion, “sweeping”, and law uncertainty.

Those work like “tax” against business. When a pig farm, a billiard hall, or a café is destroyed, we will think that apparently it will hurt mainly capital owners.

It will not.

You see, capital owners are flexible. Hence, international capital owners will always have about the same return no matter what the rules in Indonesia are.

For example, United States bond is considered to be the safest in the whole earth. The bond pays about 4% per year. You see, under “normal” circumstances, any capital owners will get about 4% per year.

To be more exact, under equilibrium there is no such thing as free lunch. Under normal equilibrium condition people earn the exact market price of what they deserve. If a capital owner put 4% in US bond, we can bet that’s probably what typical capital owner will get by putting money anywhere.

Now, put your self in the shoes of the capital owner. The capital owner can choose between putting 4% of the money in US bond and putting it in Indonesia.

Will they put money in Indonesia?

Indonesia has a lot of corruption, extortion, sweeping, and law uncertainty. That is equivalent with risk and tax. Capital owners hate both.

So will capital owners put money in Indonesia?

Yes. But they will only do so if the return is higher. Say 30%. Few businesses give 30% return. So very little capital will flow to Indonesia.

Those who do put money in Indonesia will have to be compensated with higher return. So capital owners don’t get hurt with bad laws. Workers are.

Now, what about if we have law certainty, no corruption, less governments’ intervention, and no sweeping. Let’s for simplicity sake, we can make investing in Indonesia as save as US bond.

Let’s for simplicity sake the return in Indonesia is still 30%.

Then, capital owners will be willing to put money in Indonesia. In fact, even if the return is 4% they will sell their US bond and put the money here.

In fact, the Japanese banks lend money at 0%. Many Japanese will borrow money from Japanese bank and put it in Indonesia.

Capitals will pour to Indonesia. But that’s not the best of the story yet. When there are too many capitals, the market price of capital interest drop.

You see, the interest rate is the rate where the amount of people saving money is the same with the amount of people borrowing money.

When there is a lot of money flowing to Indonesia, not only there will be more capital available, in workers’ perspective, the capital owners get less return.

Now, not only workers have more capital to work with, they need to share less to capital owners.

Before the capital owners get 30% but now they get only say 4%.

The one benefiting from better rules in Indonesia will be workers.

Ups… Correction. Before, when there are a lot of corruption and capital destruction, capital owners do not really get 30%.

Remember that before, those capital owners need to share with corrupt officials, and take huge risk. Moreover, the capital owners used to face café burning, pig farm burning, all those are money that just, well, burn.

So, before, the capital owners get 30% return but with all those risk, destruction, and extortion. Most capital owners are indifferent between getting 30% with all those negative consequences and clean 4% money.

In workers perspective, there is no such different. Interest rate does drop.

Then what? We have more capital in our country. We need only to share less money to the capital owners. Where did the rest of the money will go?

You guess it. Workers, namely, productive workers rather than corrupt governments officials.

The inflexible workers that cannot just get a job somewhere else take the brunt of all government’s regulation, good or bad.

Government’s regulations that maximize productivity as a whole, such as less intervention, will increase workers income.

Government’s regulation that hurt productivity as a whole, such as tolerance for anarchist movements will reduce workers income.

Currently, under globalization, many workers in some rich countries are having more salary than workers in poor countries.

If all else is equal and the only difference is salary, then capital owners will want to move all their factory and production to poor country. They will and only will do so when all else is equal.

The problem is poor country often has a lot of corruption, capital destruction, tax, and law uncertainty.

What will be good for workers in Indonesia is to demand governments to fix those problems.

The one that will be benefited will not be the capital owners, but workers.

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