Commentary: Minimum Wage Boost Aids Consumers and Retailers

Jakarta Globe, Eka Kusuma, May 30, 2013 

 

A shopping center in Makassar. (JG Photo/ Yudhi Sukma Wijaya)

At the start of this year, following large demonstrations, the Jakarta provincial government increased the minimum wage by 44 percent — to Rp 2.2 million ($224) a month, from Rp 1.5 million.

Even as other provinces raised their rates, Jakarta continued to offer the most generous minimum wage in the country. The increases prompted the question: how does the minimum wage affect the spending patterns of Indonesian consumers across different social classes?

It appears a wage increase does indeed boost consumption. This sounds like good news for manufacturers as they can harvest more sales from consumers, who may purchase more premium products, or others more focused on needs.

A recent study from Kantar Worldpanel into premium fast-moving consumer goods in Indonesia found that optimism was likely to be positively correlated with income, meaning high-income earners were more optimistic than low- and middle-income earners.

The study of 7,000 households across the country also found that people with higher levels of optimism toward the economy spend more on average than those who are more pessimistic.

With regard to brand preference for fast-moving consumer goods, Kantar Worldpanel found that consumers are more likely to purchase premium brands on personal care categories compared with other segments, like home care or food and beverage.

Food and beverage purchases constitute the bulk of household spending, and is also the sector where the spending gap between the rich and the poor is largest.

During festive periods, such as Ramadan and Christmas, spending on food and beverage represented an even higher share of household income than usual. The average household increased its spending by 16 percent during festive periods, while high-income earners increased their spending by an average of 21 percent.

This suggests the increased minimum wage would likely lead to increased festive spending.

But a note of caution is necessary — a 2011 study of Indonesia’s minimum wage found that increasing the minimum wages led to a fall in jobs, as companies seek to control their costs. Such an outcome would hurt discretionary spending.

Eka Kusuma works for Kantar Worldpanel, a multinational consumer research company.