Essay Title

What is the impact of a rise in minimum wages on the food service industry in
Jakarta ?
Essay title: The Impact of a Rise in Minimum Wages on the Food-Service Industry
in Jakarta
Research question: What is the impact of a rise in minimum wages on the food
service industry in Jakarta?
Subject: Economics
Examination session date: May 2019
Word count: 3661
Candidate code: will go on final draft- leave this for now
1
What is the impact of a rise in minimum wages on the food service industry\ in
Jakarta?
Contents Page
1. Introduction 4
2. Hypothesis 5
3. Methodology 5
3.1. Research Philosophy 5
3.2. Quantitative and Qualitative Research 6
3.3. Literature Review 6
4. Economic Principles of Wage Fixing 6
4.1. Minimum Wage Policy 6
4.2. How does Minimum Wage Work? 7
4.3. What is Marginal Productivity of Labour (MPL)? 8
4.4. Advantages and Disadvantages of Minimum Wage Policy (MWP) 9
4.5. Government Policies in Indonesia 9
5. Literature Review 11
5.1. Study on the Impact of Minimum Wages in the Manufacturing Sector
11
5.2. Recent Unemployment Data 12
6. Market Structure of the Food-Service Industry 13
6.1. Market Size and Segments in Food-Service Indonesia 14
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6.2. Cost Structure of the Food-Service Industry 15
6.3. Card and Krueger study of Minimum Wages and the Impact on the
Food Service Industry 15
7. Research Findings 16
7.1. Results from the Primary Research 16
7.2. Results from Quantitative Survey 16
7.3. Results from Case Interview 17
8. Limitations of Research 18
8.1. Survey 18
8.2. Interviews 18
8.3. Secondary Research 18
9. Analysis & Evaluation: Impact of Rising Minimum Wage on the Indonesian
Economy 19
9.1. Market Failure 19
9.2. Welfare 20
9.3. Stakeholders 21
10. Conclusion 22
11. Bibliography 26
12. Appendices 30
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Introduction
The study of economics looks at a variety of socio-economic issues in order to make
the best decision possible to address the core economic problem of scarcity
(Tragakes, 2011). In cases where opportunity cost is a viable option, that is usually a
straightforward decision- making process. However, when market failure is evident,
then government intervention is inevitable to maintain the nation’s economic
objectives, which, for purpose of this research, are economic (employment and
price) stability and sustainable growth (American Economic Association, 2018).
In the 21st century minimum wage is used as an economic remedy’ by governments
to try to establish a ‘living wage’ for lower income families who fall under the
‘unskilled’ or ‘low skilled’ labour and who normally are paid the least (London School
of Economics, 2016).
The general macro-economic reasons for a minimum wage policy (and for raising
minimum wage) are:
● Improve labour Market failure.
● Reduce inequality.
● Reduce poverty.
● Maintain a minimum standard of material and non-material standard of
living.
Which highlights an important question in this research:
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What is the impact of a rise in minimum wage on the food service industry in Jakarta;
this leads to three sub questions -
a. the implications it (rise in minimum wage) will have on employment
and
b. the effect on profitability
c. market failure, welfare and impact on stakeholders?
This paper is divided into sections and will address the research question above
aimed to evaluate the current employment and wage situation, the importance of the
food service industry in Jakarta and the impact on profitability as a result of rising
minimum wages. It will highlight:
● important business decisions leaders in the food service industry make to
manage the impact of minimum wage
● the potential impact on employment in this sector.
Hypothesis
Continuous Increase in the national minimum wage will lead to fall in profits and /or
rise in unemployment in the food service industry.
As all policies do, the minimum wage policy has its own challenges and its
impact on unemployment and firm profitability is inevitable, in the short run.
Thus, develops the hypothesis, above, and direction this research will take.
Methodology
Research Philosophy
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The research philosophy of this paper adopts a mixed methods approach, with
quantitative and qualitative, and literature review data, collected and collated.
Quantitative data provides an objective (and descriptive) aspect (sample survey) to
the research and qualitative data emphasizes on the subjective aspect
(interviews) (Madrigal & McClain, 2005-2018)
Quantitative and Qualitative Research
In the primary research, I will conduct electronic surveys with a sample size of 45
stalls, cafes and fine dining restaurants. Each survey will incorporate 16
questions. (See Appendix-1). I will also conduct detailed three interviews. Two
with senior leaders of Burger King and Dominos in Indonesia (fast food chains)
and one with the CEO of a fine dining restaurant. These interviews will include
questions targeting revenue, costs, concerns about impact of rise in minimum
wage, business opinion regarding impact of this rise and solutions they may have
to absorb any rising business costs.
Literature Review
The literature review will include information from electronic and hard copy sources
providing an overview of economic theory. With the help of results from
quantitative and qualitative research, analysis of the literature will be
highlighted further in this research paper.
Economic Principles of Wage Fixing
Minimum Wage Policy
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“Minimum wages are the minimum amount of remuneration that an employer is
required to pay wage earners for the work performed during a given period,
which cannot be reduced by collective agreement or an individual contract”
(International Labour Organization, 2015)
The objective is to ensure that the unskilled labour gets a reasonable income to live
on, and manage, and help mitigate income inequality within the labour market
(Dixon, 2017).
How does Minimum Wage work?
Figure 1 Minimum Wage Policy and impact
The market clearing wage We is where demand of labour is equal to the supply of
labour. The minimum wage, Wm, lies above the equilibrium wage, We. Therefore, at
Wm, the quantity of labour supplied, Qs, is larger than the quantity of labour supplied
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when the labour market is in equilibrium (Qe). The quantity of labour demanded, Qd,
is less than the quantity demanded at equilibrium, Qe. This results a surplus of
labour in the market (Qs – Qd). The labour market does not clear when there is a
minimum wage which could result in unemployment and therefore this is one of the
challenges of fixing minimum wages (Tragakes, 2011).
In economic theory, when the wage increase is lower than the marginal productivity
of labour (MPL) workers will continue to be employed. Marginal productivity of labour
is measured as extra unit of output (in this case extra unit of revenue) for every extra
worker who is employed (Social Protection and Labor Global Practice of the World
Bank Melbourne Australia, 2015). When minimum wage is set close to the market
cost of labour, workers earn a standard minimum wage, and continue to be
employed. But increases in minimum wages without increases in labour productivity
will lead to job losses in the formal sector, because poor workers with low skills and
low productivity get pushed out first when overall wages increase.
What is Marginal Productivity of Labour (MPL)?
According to the marginal productivity theory, wages equal labour’s marginal
revenue product, and an increase in labour productivity should be reflected in a
similar wage increase (Babones, 2014). A change in the minimum wage would lead
to an inverse relationship in the employment of unskilled labour. When minimum
wage legislation is set above the equilibrium wage on a demand and supply curve
and is increased, the supply of labour exceeds the demand, which decreases
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employment. This is why firms use both labour and capital to maximize output. If
marginal benefit keeps rising whilst marginal cost remains the same, the firms are
able to continue producing without losing any of their employees. They can use
‘labour-capital’ combinations to decide which resource to add on or cut back on,
ceteris paribus, to maintain levels production. Whichever is more productive and
benefits the firm the most will be added on (Tragakes, 2011).
Advantages and Disadvantages of Minimum Wage Policy (MWP)
The advantages of MWP are:
● Distribution of income gap between high and low income are narrow
● Poverty may be reduced
● Reduction in labour exploitation within the labour market (Economics
Online, 2018)
The disadvantages of MWP are:
● Price inflation may be a problem as producers pass increasing production
costs onto consumers
● Demand for labour contracts as labour prices rise and supply expands
increasing inelasticity of demand
● Could deter foreign investment (Economics Online, 2018)
Government Policies in Indonesia
Indonesia is still considered a middle-income country (World Bank classification) with
a nominal GDP per capita of US$3,570 and a GNI per capita of US$3430. It is
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also a young country of 260 million people and the current labour force is
estimated to be at 127.6 million (Trading Economics, 2018). Therefore, the
government’s aims are to reduce unemployment, and at the same time ensure
that workers have a basic minimum standard of living, keeping in line with the
macroeconomic objectives (International Labour organisation). Minimum wages
have been increasing between 8-10% p.a . The figure below shows the wage
increase in Jakarta which in 2018 is approximately IDR 3.6 million (US$ 265) 8
percent higher than the minimum wage in 2017. This new wage is 54.2% higher
than the minimum wage in 2014, which was IDR 2.4 million.
Figure 2: Indonesia Minimum monthly wages, trading economics.com:
The impact of minimum wages on the economy will depend upon:
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1. How high the wage is set?
2. Elasticity of demand for labour
3. Elasticity of supply of labour (Economics Online, 2018)
Literature Review
Study on the Impact of Minimum Wages in the Manufacturing Sector
A study on the impact of minimum wages in manufacturing in Indonesia reflects that
employment is negatively impacted in small firms with Low skilled workers. Since
there are many more small firms in the sector, the overall impact of job losses is
significant in the formal employment sector. This is because job losses are more
severe in firms which are labour intensive like wholesale, retail, tourism, as they
employ a large number of unskilled labour. This study showed is that wage increases
greater than productivity increases leads to unemployment as firms will try and
remain in business (Carpio, et al., 2012).
Small firms tend to have lower average wages so when minimum wages are greater
than average wages, firms retrench low skilled workers, because the marginal
productivity of labour per unit of revenue is low in small firms. In comparison larger
firms have economies of scale even when marginal productivity of labour is closer to
minimum wages.
In another study in Indonesia’s export sector in apparel, trading, manufacturing,
Harrison and Scorce (2010) highlights a 10% increase in real wages resulted in a
1.2% decrease in employment. However, this research did not cover informal
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employment which is 63% of Indonesia’s workforce. Therefore, actual employment
may be unchanged as people move to the informal sector, which is primarily
agriculture and other informal enterprises (Asian Development Bank BPS Statistics
Indonesia, 2015)
Recent Unemployment Data
Figure 3: Indonesia unemployment rate, trading economics.com
Though the monthly minimum wages in Indonesia relative to the country’s GDP per
capita is higher in Indonesia than in Thailand and China (Trading Economics, 2018).
unemployment in Indonesia is at 5.13% (International Monetary Fund, 2018) .
But discrepancies exist because in reality:
● More than 50% of workers are still engaged in informal employment.
● Informal unemployment is at 58 percent of total employment
● Unemployment among youth is high at 20 percent
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● Unemployment in urban areas is 6.8% vs national average of 5.5%
● Nearly 40 % of regular employees have job tenure of 36 months or less.
● Those employees in the retail and trade sector have
the shortest job tenure reflecting short labour contracts (Asian
Development Bank BPS Statistics Indonesia, 2015).
Market Structure of the Food-Service Industry
The various segments in the food service sector fall in varying degrees of
monopolistic competition, with dine in restaurants being able to differentiate their
products more significantly compared to the kiosks and stalls.
In monopolistic competition there are many firms who produce a slightly
differentiated product, resulting in firms having some degree of price making
power. As a result, in the short run firms can make abnormal profit, but in the long
run they make normal economic profit.
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The graph above shows the long-run equilibrium of the monopolistically competitive
firm. At the level of output where MR = MC, P = ATC; therefore, economic profit is
zero and each firm is earning normal profit (Tragakes, 2011).
Each firm therefore works to ensure it is able to maintain economic profit.
The explicit costs of the firm are labour, rental and cost of materials. In the short run,
in the food service industry, firms will need to control variable or explicit costs.
Normally when output increases, the firm adds more variable cost in the form of
additional labour to produce this extra output. If the cost of wages increases, unless
the output increase is greater than the cost of wage increase, firms will need to
reduce variable cost to maintain economic profit (Tragakes, 2011).
Market Size and Segments in Food Service Indonesia
There are over 200,000 individual restaurants in Indonesia (Chen, 2016) and close
to 30% are in Jakarta. Predicted growth at 8-9% in 2018, considerably higher
than national economic growth at 5.5%. This industry also contributed to 34.95%
of the national economic growth in 2017 (Temp Co, 2018). This sector is
extremely labour intensive and employs close to 150,000 workers nationwide
most of whom are minimum wage earners. Each individual restaurant is like a
small firm and its aim is to make at least economic profit (Global Business Guide
Indonesia, 2017). The industry is segmented into full service restaurants,
cafes/bars, fast food, kiosks /street stalls. Of this 45.5% are small kiosks or stalls
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and the remaining are more formal in the form of cafes, fast food and dine-in
restaurants (See Appendix 2).
Cost Structure of the Food-Service Industry
The food service sector has 3 large buckets of variable costs- labour, cost of raw
material (food and beverage) and rental. Labour alone is between 14-22% of the
total cost (See Appendix 3).
Card and Krueger Study of Minimum Wage and the Impact on the Food Service
Industry
Card and Krueger’s (1994) study on the impact of minimum wages and
employment in the fast food industry examined the effect of minimum wage
imposition on the fast food industry in New Jersey (USA) and compared this
against wages and employment in Pennsylvania. The results of this study
showed that wage increases in New Jersey did not (necessarily) reduce
employment. Minimum wage critics such as Neumark and Wascher (1995)
refuted this and through their research contested that minimum wage
increase did impact employment of low wage workers. Card and Krueger’s
study was contested until Dube and Reich’s (2012) study on restaurant
employment between 1990-2006 also indicated that higher minimum wages
had no effect on employment, supporting Card and Krueger in this sector
(Dube & Reich, 2012).
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This is different from the results in section 5.1, where the analysis of
employment in the manufacturing sector in small firms shows that increases
in minimum wages reduces employment in small firms across manufacturing,
retail, and trading.
Research Findings
Results from Primary Research
Quantitative survey and further in depth case interviews were done to understand
what the impact truly is of the increase in minimum wages in the food service
industry . Is there no impact, which is what Card and Krueger’s study showed or
does it impact unskilled labour as shown in the earlier study done on the
manufacturing sector in Indonesia?
Results from Quantitative Survey
The survey showed that kiosks employ an average of 3 or less workers per shift. All
are on contract and primarily unskilled. Local and international chains employ more
than 10 workers per shift, and 75% are unskilled. Dine in restaurants have 50% or
more skilled labour.
The local kiosks or ‘warungs’ seem unaffected with the increase in minimum wages.
This is because they don’t seem to adhere to minimum wage regulations and have
primarily unskilled workers. When pushed they claim they are willing to work with
lower profits.
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All firms in other segments are unwilling to compromise on revenue and profitability
due to minimum wages in the short run. They said they would do the following:
● Reduce labour
● Increase contracted labour
● Replace staff with machines to increase profitability
● Cut back on full-time work opportunities
● Concern was highest amongst firms which employed a large number of
workers with higher minimum wage, their main solution was to offload some
labour
Results from Case Interviews
The survey showed that kiosks employ an average of 3 or less workers per shift. All
are on contract and primarily unskilled. Local and international chains employ more
than 10 workers per shift, and 75% are unskilled. Dine in restaurants have 50% or
more skilled labour.
The local kiosks or ‘warungs’ seem unaffected with the increase in minimum wages.
This is because they don’t seem to adhere to minimum wage regulations and have
primarily unskilled workers. When pushed they claim they are willing to work with
lower profits.
All firms in other segments are unwilling to compromise on revenue and profitability
due to minimum wages in the short run. They said they would do the following:
● Reduce labour
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● Increase contracted labour
● Replace staff with machines to increase profitability
● Cut back on full-time work opportunities
● Concern was highest amongst firms which employed a large number of
workers with higher minimum wage, their main solution was to offload some
labour
Limitations of Research
Survey
The survey only covered employers, and could not reach other stakeholders:
employees and consumers. Additionally, kiosks did not follow minimum wages and
therefore did not have many solutions as they do not see a problem. The execution
of this type of primary research took a lot longer than predicted and surveys were
reposted in order to gather more accurate information and complete the ones that
came back unfinished.
Interviews
The interviews were only three and excluded cafes and kiosks. These interviews
were done via telephone conversation. It was difficult to schedule face-to-face
interviews because the interviewees who had information or opinions on impact of
rise in minimum wage, were senior management and did not always have the time to
have a sit down for a face to face interview.
Secondary Research
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Some journals and articles were old and therefore some theory and data were
irrelevant to this study. A majority of journals and articles written more recently
studied minimum wages in other countries and some of their analysis was not
relevant. Most journals and reports have contradictory points of view on the impacts
of wages.
The benefits of increasing minimum wages for the economy as a whole in the form of
higher income resulting in higher consumption, leading to higher demand and
therefore greater employment has not been covered adequately.
Analysis & Evaluation: Impact of Rising Minimum Wage on the Indonesian
Economy
The overarching question is - Who benefits and who loses out when minimum
wages rises?
From the literature review, the purpose of minimum wage is to address market
failure, i.e. addressing poverty and inequality in income distribution and
narrowing the gap, as best as the economy can, between low, middle and
high-income earners. In doing so, the Indonesian government will need to
manage potential market failure, address welfare issues that may arise and
consider the impact this will have on stakeholders.
Market Failure
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Whilst market failure is a topical issue, the overall adverse effects of rising minimum
wages, from the data, seem to have little effect on unemployment numbers.
The literature highlights that:
● higher levels of minimum wage, in the long run, tends to increase
productivity and demand for labour, thus lowering labour turnover in most
industries. Firms somehow cope (Romer, 2013).
● Higher minimum wages seem to attract higher skilled, efficient, and more
productive labour who in the long run could take over jobs from low skilled
labour. (Tragakes, 2011).
● Some firms tend to pass along cost of higher minimum wage to consumers
by increasing their prices (Dixon, 2017)
Welfare
From the literature, Indonesia’s welfare system is a work in progress. The
standard of living in this economy adheres to a 20 year development plan, which
commenced in 2005. It is focusing on a number of macroeconomic initiatives
aimed to improve public welfare and income distribution. The minimum wage
policy is an important initiative by the government to improve material and
non-material standard of living in the economy. However, only if there is strong
government and welfare support then the rise of minimum wage will:
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● curb low income earners from falling below the poverty line through
government funding such as monetary payments, subsidies, vouchers,
housing assistance and medical care (International Monetary Fund, 2018).
● reduce welfare payments and enable the Indonesian government to
redirect government revenue into other areas of the economy such as;
infrastructure, education, health care and training programs.
● enable low skill workers to improve or upgrade their skills. enabling them
to acquire work (Trading Economics, 2018).
● improve the mental and physical health of the nation providing
opportunities for economic growth and development.
On the flip side, the adverse effects see, no reduction in welfare payments and an
increase in welfare programs to assist with the downfall of even more. So, in this
case, impact may be severe (Employment Policies Institute, 2015). Thus, the
Indonesian government may need to investigate further tax-payer implications and
outcome on low-skilled labour and low- income earners.
Stakeholders
From the data and the literature review, the stakeholders that were affected by
rising wages were employees, employers, consumers and everyone who has an
interest, personal or business, in the fast food industry. The impact on stakeholders
from rising wages (minimum wages) were:
● Dissatisfaction on government wage policy
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● Loss of jobs in the short run for employees
● Rising costs for business owners
● Consumers, are burdened with rising prices (International Labour
Organisation, 2015)
Overall, in the short run, rising costs due to the rise in minimum wage, could have
adverse effects on the government trying to manage the repercussions of jobs
losses, increasing welfare contributions across different sectors of the economy.
The benefits, on the other hand would see improved living standards, increase
business competitiveness and decrease in income inequality (Tragakes, 2011).
Conclusion
Minimum wages are an important macroeconomic policy tool by the government to reduce
inequality, poverty and maintain a material and non -material standard of living. The
Indonesian government has increased minimum wages by more than 8-9% per
annum recently, exceeding GDP growth of 5%.
The food service industry is very labour intensive and an average 70% of the labour
employed is unskilled (as per survey). A lot of research has gone into understanding
the impact of minimum wages in this sector with contradictory conclusions on the
impact of minimum wages on the labour intensive small firms. My conclusions from
the survey and interviews mostly echo that of the research by John Schmitt (Feb
2013) .
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In general, firms are not willing to work with less profit. However, as labour costs
form between 15-22%, they use this as a lever to manage profit. (appendix-3) There
are real costs involved in hiring new workers or firing existing workers. Workers may
not find new jobs easily. Because firms will are not willing to pay more for workers,
they work with some vacancies, make the existing workers more efficient and pay
minimum wage for employed workers.
The important cost metric for firms is pay per hour, and to reduce this firms.
• Increase part time positions
• Engage in older/experienced employees to train their colleagues
• Reduce work hours
• Outsource and automate some functions
• Push part of the cost burden to consumers
( see Appendix 4)
I believe there are positive outcomes with wage increases for all stakeholders-
labor, firms and the government if done correctly.
Labour :
● who continue to be employed, have a higher standard of living because of higher
pay
● they have productivity because of continued employment .
Firms
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● Operate labour in a more efficient ways, through automation, upskilling and
overall cost efficiency.
● With reduced turnover of labour , they save on re-training costs and re-hire costs.
Finally as minimum wages continue to be important as a policy for the government, it
could do the following (E.A Allen)
● Try and close the gap of wages between permanent and contract workers. In
the last 4 years the gap has reduced from 60% to 25% and the government is
now mandating that contract workers also get all benefits. Through this,
government hopes to close this gap. This will ensure that all workers get the
same opportunity to employment, pay and skill upgradation. (See appendix
4a)
● Allow for minimum wages to be fair and competitive and not fixed. (Endriga,
2008)
● Increase investment in education to expand pool of skilled workers . In 2015,
52% of employed population was underqualified and McKinsey estimates that
by 2030, demand for semi- skilled and skilled workforce will be 113 million
and this will result in further skill gaps.
● Ensure that growth in minimum wages is not more than growth in average
wages to avoid impact on employment.
● Provide unemployment benefits so that people can retrain and reskill
themselves.
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● Finally, bring in more investment and invest in infrastructure development in
the country, so there is more jobs, more consumption and higher GDP
growth.
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https://en.tempo.co/read/news/2018/01/31/056915336/Food-Beverage-Industry-to-Grow-in-2
018-Political-Year
The Economist, 2014. Why some economists oppose minimum wages?. [Online]
Available at:
https://www.economist.com/the-economist-explains/2014/01/22/why-some-economists-oppo
se-minimum-wages
Trading Economics, 2018. Indonesia GDP 1967-2018. [Online]
Available at: https://tradingeconomics.com/indonesia/gdp
Trading Economics, 2018. Indonesia Unemployment Rate. [Online]
Available at: https://tradingeconomics.com/indonesia/unemployment-rate
Tragakes, E., 2011. Economics for the IB Diploma. 2nd Edition ed. s.l.:Cambridge University
Press.
UK Essays, 2015. Pros & Cons of Mixed Methods Research. [Online]
Available at:
https://www.ukessays.com/essays/psychology/a-study-on-using-mixed-methods-in-research-
psychology-essay.php
Wage Indicator Foundation, 2018. Minimum Wage in Indonesia - frequently Asked Questions.
[Online]
Available at:
https://wageindicator.org/salary/minimum-wage/indonesia/faqs-minimum-wages-in-indonesi
28
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a
Guntur Sugiyarto and Benjamin A. Endriga, Do minimum wages affect employment and
training , ERD working paper 113. Asian development bank, may 2008
Available at https://www.adb.org/sites/default/files/publication/28371/wp113.pdf
29
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Appendix 1
30
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31
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32
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Appendix 2
Segmentation and size of the food service industry in Indonesia
The food service industry in Indonesia is expected to be USD 56 billion by 2019 ,
growing at 9% p.a and are segmented into full service restaurants, cafes/bars, fast
food, kiosks /street stalls. Of this, restaurant's form 80% of revenue, cafes are 10%,
fast food is 5% and street stalls are 3%.
As per the Euromonitor 2016, the following is the estimate of numbers and value for
the segments. (canada, n.d.) (canada, n.d.)
2019 Number of outlets Average sales per Average sales per
outlet per year in USD transaction in USD
102,937 441,274 10.48
Restaurants
Fast food 8080 364,047 5.81
Cafes/bars 5514 1043,888 17.04
Kiosks/stalls 98,255 18,534 1.19
total 215,906 260,718 8.29
33
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Appendix 3
34
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Appendix 4a
Summary of the Interview with Ashwini Dhanuka, Head of Operations,
Dominos , Indonesia
The Indonesian government has been increasing the minimum wages every year by
10-12%. Ashwini spoke about the impact of the wage increase from 2014 to 2018.
The monthly wages in Jakarta have gone up as below between 2014-2018 and on
an average it is 10% p.a
35
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Domino's has not been able to increase prices at the same level as the increase in
minimum wages as this will mean declining revenues in a highly competitive market
for Pizzas.
As a result, Domino's has done the following :
In 2014, each restaurant of Dominos employed 14-15 people of whom 10-11 were
full time employees (who get min wages or other benefits such as insurance ), and 4
were part time employees (these people get minimum wages , but do not get other
benefits).
In 2018, each restaurant now employs 10 people of whom 5 are Full time and 5 are
part time.
This is a cut of 33% of the total labour per restaurant or a cut of 8% per year on an
average.
So Domino's has done two things to manage the wage inflation and to increase
profitability
1. Cut the total number of employees and are squeezing employees to give
higher productivity per person.
2. Specifically cut the full time employees
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Part time employees are atleast 25% cheaper than full time employees because they
are easy to roster which means they need to only be on duty for the hours when the
restaurant needs them, as they are paid by the hour and they can also be told to
leave jobs on a days notice. Full time employees have to be present and are paid
monthly, have to be given a notice of at least 1 month and it is difficult to let them go.
As a result , according to Ashwini, while the living standards of employees may have
increased, the impact of minimum wage increase by the government means that
there is more unemployment in the quick service restaurant sector unless the
employment also increases by 8% every year.
Unemployment in Indonesia is as follows over the last few years
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Jakarta?
This shows that overall unemployment however has been the same over the last 4
years. This is an average for all Indonesia and may not reflect the specific
challenges of employment in Jakarta.
Domino's has however been able to increase its profitability on a store wise level by
being labour efficient and also by cutting its food cost
Dominos Indonesia – firm profitability at a restaurant level 2015-2017
IDR Million
CY2015 CY2016 CY2017
Revenue 255 390 636
No of stores 78 110 160
Cost of food and 43.2% 41.4% 39.5%
drinks sold as %
to revenue
Employee cost as 17.2% 17.4% 16.7%
a % of revenue
Store profitability 5.7% 10% 12.9%
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Employees per 15 12 10
store
39
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Appendix 4b
Summary of the Interview with Vaibhav Punj, CEO Burger King Indonesia
Fast food chains, especially burger chains work on a store profitability of 12-13% per
store.
On an average the labour cost per store is between 11-12% of the total revenue.
With a profit margin which is low, any cost increase puts pressure on the profit of the
firm.
The Indonesian government has been increasing the minimum wages every year
and they took a big hike in 2014 of close to 14%. The wage increase of 7-8% p.a in
the last 2-3 years has been close to the inflationary increase of 6.7-7% in CPI over
the last 2 years.
Burger King has not been able to take the entire wage inflation through price
increases as this operates in a low monopolistic competition, closer to perfect
competition and can only influence prices very slightly.
Burger King has therefore managed to maintain the store profitability by cutting food
costs and increasing prices marginally.
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In addition to this, the company has also become more labour efficient. On an
average it has cut 5-6 people per restaurant from the rate of 20-25 people per
restaurant over 2-3 shifts in 2015 by doubling productivity per person.
The company has had to do this, because while the wage inflation has been 7-8%,
the government has included bonus on top (which is the 13th month salary) + total
health insurance from last year. This has added more pressure to the real cost of
labour.
In order to manage the future cost of wage inflation, Burger King is already testing
new technologies such as self service kiosks which will further reduce 3 people per
restaurant and will continue to look at technology to enable it to maintain profitability.
In summary, Burger King will want to maintain profitability at 12-13% per store and
will not be ready to reduce that. What it will do is
1. employ technology to reduce labour per store
2. cut food costs and make it more efficient because food costs are around 39%
and can be further cut
3. increase prices in line with inflation or do innovative pricing to bring up the
profitability
41
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Appendix 4c
Interview with Ronald Akili of the PTT family, CEO of Potato Head, Jakarta
Summary
There are 3 potato heads in Jakarta . The restaurants are all fine dining with a
revenue of greater than IDR 5 million per day per restaurant. Food cost is 33%,
which gives the restaurant more margin to work with. Labour cost is high at 22%,
but this is because 70% of labour he employs is skilled. He is clear that he will
continue to automate to remove the unskilled labour and will increase productivity of
skilled labour. He is more concerned with the average wages he pays per worker
and as long as minimum wages are below the average wage, he will continue to
keep the number of employees he has currently.
When his average wage per worker is higher than the minimum wage, this is a good
indicator according to him that he is employing more skilled and capable workers.
He also said that for him the productivity per worker is critical and his revenue per
worker should be 50% higher than the wages he pays. He has also reduced the
increases in pay he gives to his high cost skilled staff and therefore there is some
wage compression.
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For the fine dining restaurant sector as a whole, he believes that the following is
happening, there is some wage compression, automation to remove some unskilled
roles like cleaning, increase in training and skilling make the critical roles like service,
kitchen workers more productive, and in some situations increase in contract
workers as a percentage as the wage cost per hour comes down overall.
He also mentioned that he believes over the last 5 years, restaurants in Jakarta have
reduced workers by 20% and many of these workers have now either gone back to
their villages and there is a possibility of under-employment that could be happening
and is not reflecting in the overall statistics released by the government.
The restaurants form 47% of the total sector, and on an average employ 20 people
between two shifts. Earlier they used to employ 26 people, so there is a reduction of
6 people per restaurant over 5 years, but the overall sector is growing at 8-9% p.a.
and therefore the new restaurants and cafes absorb them. Overall till now, he
believes that the overall unemployment has not increased . However in the last 2
years, the growth in this sector has been slowing down and this could impact
employment in the future.
43
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Appendix 5a
Data Tables from the Survey
Restaurant type:
Cafe 7 36.84%
Sit in Dining 3 15.79%
kiosk/stall 7 36.84%
international chain 2 10.53%
total 19
Respondent:
owner/founder/ceo 11 57.89%
cfo 5 26.32%
gm operations/director 3 15.79%
19
Revenue:
less than 500,000 5 26.32%
above 5,000,000 8 42.11%
from 500,000 to
5,000,000 6 31.58%
19
people employed:
less than or equal to 3 6 31.58% 1.5
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On an average 6.7
4 - 10 8 42.11% 7 employees
more than 10 5 26.32% 12.5
19 6.710526316
level of unskilled
labour:
less than or equal to

25% 4 21.05%
Mostly unskilled
26 - 75 10 52.63% workers
greater than 75 5 26.32%
19
permanent vs
contract:
all permanent 8 42.11%
significant contract
50 or more 11 57.89% workers
19
estimated increase in
revenue:
3-5 13 68.42% 4
Estimated increase in
6 - 10 1 5.26% 8 revenue low at 6.5%
greater than 10 5 26.32% 12.5
19 6.447368421
new restaurants per

year:
less than 2 6 31.58% 1
Openings still planned

2-5 8 42.11% 3.5 at 3.8
45
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more than 5 5 26.32% 7.5
19 3.763157895
expected increase in
costs:
less than 5 14 73.68% 2.5
Cost increase
expected low. and
5 - 10 5 26.32% 7.5 lower than revenue
Min wage increase

must be contained to
19 3.815789474 meet expectation
expected impact of
min wage increase:
Only 37% expect

no change 12 63.16% reduction in profit
reduction in profit 7 36.84%
19
are you concerned:
But level of concern is

yes 9 47.37% high
no 8 42.11%
maybe 2 10.53%
19
solutions:
Significant number of
restaurants will cut
lower profit 6 21.43% people
reduce other costs 9 32.14%
reduce people 7 25.00%
others 6 21.43%
46
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Appendix 5b
Username What is What is What type What is your 1.

your the name of designation what is
name? of your restauran ? (e.g. your
brand? t is it? owner, GM) current
revenue
per day
per
restauran
t in IDR
maxmandias@gmai Max burgreens local owner less than
l.com Elnathan chain 500,000
Mandias
na@na.com Na Na local Founder less than
chain 500,000
yogenwijaya@yaho Yogen iVegan sit in Owner 2,000,000-
o.com Pizza dining 5,000,000
michael@sosj.co.id Michael Eatlah local Owner above
chrisyan chain 5,000,000
to
christopher.supit@ Christop BMK cafe and CFO above
capsquare-asia.co her (bakso local 5,000,000
m Supit Malang chain
Karapitan)
christopher.supit@ Christop Platinum cafe and CFO above
capsquare-asia.co her local 5,000,000
m Supit chain
christopher.supit@ Christop Gokana cafe and CFO above
m Supit chain
christopher.supit@ Christop Raa Cha cafe and CFO above
m Supit chain
47
Jakarta?
christopher.suoit@ Christop Chopstix sit in CFO 2,000,000-

capsquare-asia.co her dining 5,000,000
m Supit
ronald@pttfamily.c Ronald Potato sit in CEO above
om Head dining 5,000,000
ashwine.dhanuka@ Ashwine Domino's internatio GM above
dominos.co.id Dhanuka Pizza nal chain Operations 5,000,000
QSR
acottan@yahoo.co Anthony Krispy internatio Director 2,000,000-
m Cottan Kreme nal chain 5,000,000
QSR
pawan.b@ganesha Pawan Ganesha sit in Director above
eksanskriti.com Deep ek dining 5,000,000
Bhatnag sanskriti
ar
test@test.com test Test cafe and Test less than
local 500,000
chain
vpunj@burgerking. Vaibhav Burger internatio CEO above
co.id punj King nal chain 5,000,000
QSR
zevasula@gmail.co Made Ayam kiosk or Owner 1,000,000-
m Suwir one 2,000,000
single
stall
warung@gmail.com Pak Warung kiosk or Owner less than
onyo teteh one 500,000
single
stall
sotojakarta@gmail. Pak tony Warung kiosk or Owner less than
com soto one 500,000
jakarta single
bang udin stall
martabakbandung Pak jeya Martabak kiosk or Owner 1,000,000-
@gmail.com bandung one 2,000,000
jaya
48
Jakarta?
single
stall
pintar@gmail.com Pak Warung kiosk or Owner less than
sayed pintar one 500,000
ciliwung single
stall
alaytebet@gmail.co Pak alay Warung kiosk or Owner less than
m alay tebet one 500,000
single
stall
miedaging@gmail.c Pak yudi Mie kiosk or Owner 500,000-1,
om daging one 000,000
menteng single
stall
yfirdensliu@gmail.c Yeni Calais cafe and Owner 2,000,000-
om local 5,000,000
chain
ayuzuliashafira@g Ayu What's Up cafe and owner above
mail.com Zulia Cafe local 5,000,000
Shafira chain
daisy@yummycorp. Daisy Yummy cafe and Director above
com Harjanto Corporati local 5,000,000
on chain
jessph86@gmail.co Jess ayam sit in owner above
m Prabawa kriwil dining 5,000,000
Hudaya
jessph86@gmail.co Jess ayam sit in owner above
m Prabawa kriwil dining 5,000,000
Hudaya
2. how 3. what is 4. how 5. what is the split 6. what are all the
many the split in many between variable costs in each
people (%) between restaur permanent and restaurant in % of total
do you skilled and ants do contract workers costs? (please write as a
49
Jakarta?
employ unskilled you per store on the % for each: food cost,
per workers? have in year 2014 and labor cost, rental cost,
restaura unskilled is Jakarta 2018? (If you are other expense)
nt in basic labour ? establish after
each 2014, state the
shift number in the
year when you
were first
established)
6-10 10 - 90 4 2014 - permanent food cost 30, labor 20,
0 contract 10. rental 20, other 10
2018 - permanent
10 contract 70.
3-6 50 20 90/10 Na
6-10 80% skilled 1 Established in 34% labor cost, 14%

20% 2018 ...80% rental cost , 8% electric
unskilled permanent 20% cost, 44% other cost
part time
6-10 30 skilled 70 13 All permanent 30, 5, 5, 5 ( others )
unskilled
10+ 25/75. 25 for 20 50/50 Food cost, factory
skilled overhead, delivery cost
10+ 25/75, 25 for 15 50/50 Food cost, factory
skilled overhead. Delivery cost
10+ 25/75. 25 fir 50 50/50 Food cost , factory
skilled overhead , delivery cost
6-10 20/80. 20 for 35 50/50 Food cost. Factory
skilled overhead. Delivery cost
6-10 40/60. 40 for 8 50/50 Food cost. Factory
skilled overhead, delivery cost
10+ 10 percent 3 70 %permanent. Food cost 33, labor 22
basic labour percent, rental 12 percent
50
Jakarta?
3-6 50% 60 70% skilled in Food cost (37%), Labor

unskilled 2014 which is (19%), Rental (7.5%),
50% skilled now 50% skilled Utilities (12.5%), R&M
in 2018 (1.5%), Advertising (6%),
Others (11%)
3-6 80% skilled 25 60% FT All restaurant costs 85%
10+ 75% 2 AS OF NOW WE 35% FOOD COST 25%

SKILLED ARE NOT USING LABOUR RENTALS AND
CONTRACT OTHER 25%
WORKERS, WE
MIGHT START AS
THAT WILL BE
MORE
EFFECTIVE IN
THE FUTURE.
3-6 10-10 20 test test
10+ All workers 60 20% permanent 35 to 40% COGS, 11 to

go through 13% labor , 10 to15%
basic rental , utilities 8% others
training to 5 to 7%
start at BK
and all have
at least high
school level
education.
Managers
are
graduates.
less 100% 3 no contract 30%, 30%, 5%
than 3 inskilled workers
(high school
graduates)
less 33% skilled , 1 2 contract 1 Labour, food
than 3 66% permanent
ubskilled
51
Jakarta?
less 1 skilled 2 1 All contract Labour food

than 3 unskilled
3-6 25 percent 3 10 percent Labour food packaging
skilled permanent
less 1 skilled 1 All contract Food
than 3
less 1 skilled 1 All contract Food
than 3
less 2 skilled one 1 All contract Labour , food
than 3 unskilled
3-6 20-80 8 50-50 30%, 15%, 20%, 15%
10+ Unskilled 5 What's Up Cafe food cost 35%, labor cost

workers is established in the 30%, rental cost 4%
70% while year 2015 with 20
the skilled contract workers
ones is 30% until now What's
Up Cafe has more
than 16.000
contract workers
at the outlets and
20 permanen
workers at the
head office
6-10 30-70 3 In 2016 10-90, In Food Cost 60%, Labor
2017 10-90, In Cost 25%
2018 10-90
10+ 20 skilled 3 all contract 20% employee..cogs 45%
10+ 20 skilled 3 all contract 20% employee..cogs 45%
7 how 8. how 9. how 10.what 11. are 12. what steps do you
much do many much do you you plan to take to reduce
you restaura do you see as concerne the impact of increase
estimate nts do expect the d with the
52
Jakarta?
your you plan your impact of increase in wages - you can tick
revenue to open costs to minimum in more than 1
to per year increas wage minimum
increase e per increase wages in
per year per the
restaurant store? future?
per year
5-10% 2-5 5-10% reduction Yes use automation
in profit
3-5% more 5-10% reduction Yes reduce people;use
than 5 in profit automation;reduce
other costs
5-10% less less no Maybe reduce other costs
than 2 than 5% change
3-5% more 5-10% reduction No more contract
than 5 in profit workers;reduce other
costs
5-10% 2-5 less no Yes reduce people;reduce
than 5% change other costs
5-10% more less no Yes reduce people;reduce
than 5 than 5% change other costs
above more less no Yes reduce people;reduce
10% than 5 than 5% change other costs
3-5% 2-5 less no No Employ qualify people
than 5% change and automate unskilled
workers
3-5% more 5-10% reduction Yes reduce people;more
than 5 in profit contract workers;price
increases
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Jakarta?
5-10% 2-5 less reduction No Productivity

than 5% in profit
3-5% 2-5 5-10% reduction Yes more contract
in profit workers;reduce other
costs;work with lower
profits
3-5% 2-5 less no No work with lower profits
than 5% change
5-10% more 5-10% reduction Yes reduce people;reduce
than 5 in profit other costs;Increase
sales and may be prices
above less 5-10% no Maybe reduce people;more
10% than 2 change contract workers
3-5% less less no No work with lower profits
less than less less no No work with lower profits
3% than 2 than 5% change
3-5% 2-5 5-10% reduction Maybe reduce other costs
in profit
less than less less no No work with lower profits
3% than 2 than 5% change
3-5% less less no No work with lower profits
3-5% less less no No reduce other
than 2 than 5% change costs;Does not affect
much
3-5% more 5-10% reduction Yes use automation;reduce
than 5 in profit other costs;work with
lower profits
less than more 5-10% reduction Yes reduce people;reduce
3% than 5 in profit other costs
5-10% 2-5 5-10% reduction Maybe Can be combination of
in profit any above
54
Jakarta?
above 2-5 less reduction Yes reduce people;use

10% than 5% in profit automation;reduce
other costs
above 2-5 less reduction Yes reduce people;use
10% than 5% in profit automation;reduce
other costs
55
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56
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Conclusion
57
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References
Start the reference list on a new page, center the title “References”.
Double space all entries.
Cite every reference mentioned. Citation generator.
Put list in alphabetical order
This is a very helpful resource
58
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Appendix A- Only if required
Begin each appendix on a new page with the word appendix in the top center. Use
an identifying capital letter (e.g., Appendix A, Appendix B etc.) if you have more than
one appendix. If you are referring to more than one appendix in your text, use the
plural appendices.
The first paragraph of the appendix should flush with the left margin. Additional
paragraphs should be indented.
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What is the impact of a rise in minimum wages on the food service industry in

service industry in Jakarta?

Examination session date:​ May 2019

Word count:​ 3661

Candidate code: will go on final draft- leave this for now

3.1. Research Philosophy 5

3.2. Quantitative and Qualitative Research 6

3.3. Literature Review 6

4. Economic Principles of Wage Fixing 6

4.1. Minimum Wage Policy 6

4.2. How does Minimum Wage Work? 7

4.3. What is Marginal Productivity of Labour (MPL)? 8

4.4. Advantages and Disadvantages of Minimum Wage Policy (MWP) 9

4.5. Government Policies in Indonesia 9

5.1. Study on the Impact of Minimum Wages in the Manufacturing Sector

5.2. Recent Unemployment Data 12

6. Market Structure of the Food-Service Industry 13

6.1. Market Size and Segments in Food-Service Indonesia 14

Candidate code: will go on final draft- leave this for now

6.2. Cost Structure of the Food-Service Industry 15

Food Service Industry 15

7.1. Results from the Primary Research 16

7.2. Results from Quantitative Survey 16

7.3. Results from Case Interview 17

8.3. Secondary Research 18

9. Analysis & Evaluation: Impact of Rising Minimum Wage on the Indonesian

9.1. Market Failure 19

Candidate code: will go on final draft- leave this for now

The study of economics looks at a variety of socio-economic issues in order to make

straightforward decision- making process. However, when market failure is evident,

then government intervention is inevitable to maintain the nation’s economic

price) stability and sustainable growth (American Economic Association, 2018).

In the 21​st century minimum wage is used as an economic remedy’ by governments

minimum wage) are:

● Improve labour Market failure.

● Maintain a minimum standard of material and non-material standard of

Which highlights an important question in this research:

Candidate code: will go on final draft- leave this for now

this leads to three sub questions -

a. the implications it (rise in minimum wage) will have on employment

b. the effect on profitability

c. market failure, welfare and impact on stakeholders?

minimum wages. It will highlight:

● important business decisions leaders in the food service industry make to

manage the impact of minimum wage

● the potential impact on employment in this sector.

rise in unemployment in the food service industry.

impact on unemployment and firm profitability is inevitable, in the short run.

Candidate code: will go on final draft- leave this for now

Quantitative data provides an objective (and descriptive) aspect (sample survey) to

the research and qualitative data emphasizes on the subjective aspect

(interviews)​ ​(Madrigal & McClain, 2005-2018)

Quantitative and Qualitative Research

questions targeting revenue, costs, concerns about impact of rise in minimum

to absorb any rising business costs.

providing an overview of economic theory. With the help of results from

quantitative and qualitative research, analysis of the literature will be

highlighted further in this research paper.

Economic Principles of Wage Fixing

Minimum Wage Policy

Candidate code: will go on final draft- leave this for now

“​Minimum wages are the minimum amount of remuneration that an employer is

which cannot be reduced by collective agreement or an individual contract”​

Examination session date: May 2019

Word count: 3661

In the 21st century minimum wage is used as an economic remedy’ by governments

(interviews) (Madrigal & McClain, 2005-2018)

“Minimum wages are the minimum amount of remuneration that an employer is

which cannot be reduced by collective agreement or an individual contract”

Figure 2: Indonesia Minimum monthly wages, trading economics.com: