Jakarta. Indonesia plans to raise minimum wages by about 5% to 7% in 2026 under a new formula signed into law by President Prabowo Subianto, a move that could test the country’s cost competitiveness in Southeast Asia.

The revised regulation retains the existing framework for calculating provincial minimum wages, which ties annual increases to inflation and economic growth, but significantly raises a coefficient known as alpha. The coefficient, which determines how much economic expansion is passed on to workers, has been lifted to a range of 0.5 to 0.9 from 0.1 to 0.3 previously, giving regional wage councils greater room to recommend higher pay.

Manpower Minister Yassierli said Wednesday the rule was finalized after months of consultations, including with labor unions, and is designed to protect purchasing power while allowing flexibility across regions. Final wage levels will be set by provincial governors based on recommendations from local wage councils, expected to be announced by Dec. 24.

Jakarta offers an early indication of how the policy may play out. With the capital’s current minimum wage at about Rp 5.4 million ($323) a month, the new formula would lift Jakarta’s 2026 minimum wage to roughly Rp 5.68 million to Rp 5.77 million.

Even after the increase, Southeast Asia's largest economy's minimum wage remains in the middle of the pack — below Malaysia and far behind Singapore, but comparable with Vietnam, Thailand, and the Philippines. 

“Global investors are becoming more selective as they rebalance supply chains, weighing not just wages but policy consistency, infrastructure quality, ease of doing business and long-term investment certainty,” Shinta Widjaja Kamdani, chairwoman of the Indonesian Employers Association (Apindo) told the Jakarta Globe.

Wages alone do not determine competitiveness, she said, pointing instead to productivity. Over the past five years, Indonesia’s labor productivity has grown by about 1.5% to 2% annually, while minimum wages rose between 6.5% and 10% a year.

“The mismatch risks creating structural pressure on companies and influencing investment decisions, particularly if higher pay is not matched by gains in efficiency,” Shinta said.

Apindo warns that higher wages could squeeze margins in labor-intensive industries such as textiles, garments and footwear, where profitability is already thin. In footwear, for example, average margins hover around 5%, leaving limited room to absorb rising costs. The group cautioned that job cuts could become a risk, especially as many labor-intensive sectors remain in recovery and face weak domestic demand, high operating costs, illegal imports and reliance on imported raw materials, alongside external pressures such as shifting global trade policies.

Data from the Central Statistics Agency (BPS) show that in the third quarter of 2025 several labor-intensive subsectors underperformed the national average or contracted, including textiles and apparel, footwear, furniture, tobacco processing, and rubber and plastics.

Labor unions, however, say the planned increases still fall short. Said Iqbal, president of the Confederation of Indonesian Trade Unions, said the formula fails to reflect the real cost of living. Monthly living expenses in Jakarta can reach around Rp 15 million, covering housing, food, transport, education and healthcare, he said. 

“It is unrealistic to claim that people can live decently in Jakarta on a salary of around Rp 5 million a month,” Iqbal said.