The impact of formal and informal labor regulations on business in Serang district
Donohoe, Jennifer | Anggraini, Novia Cici | Yunarti, Nunik | Nachuk, Stefan | Ginting, Janes Imanuel | Hackett, Julie | Endarso, Gregorius Kelik Agus | Paramita, Agni | Lemargie, Kyle | Rooney, Peter
This case addresses the impact of national and local labor regulations as well as informal labor practices upon business in Serang district. The national labor law, manpower act 13/2003, raised severance rates for long-tenured workers. As a result, there has been a decrease in formal sector permanent employment as businesses have turned to contract labor and outsourcing to avoid severance payments. Though manpower act 13/2003 limits both contract work and outsourcing, these clauses are not enforced in Serang district. Serang district regulation no. 13/2003 on the provision of facilities for private sector workers and after-work accident insurance obliges enterprises to provide after-work accident insurance for workers and workplace facilities such as canteens, prayer rooms, and sports facilities. The law was drafted without significant consultation with local stakeholders, including businesses and labor unions, and includes clauses that worker representatives themselves label unrealistic and unnecessary. Enforcement is extremely selective and the law is either ignored by or unknown to small and medium enterprises. If it were strictly applied, the law would be onerous and without a more certain legal climate, its existence could encourage rent-seeking behavior. Informal recruitment practices include pressure from communities for work share even if community members are less or unqualified, the use of middlemen to secure employment contracts, and the prevalence of small-scale gangsters extracting rent from enterprises. This case study shows that such practices are prevalent in Serang and have a negative impact upon the local business climate.
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