By Rieka Rahadiana and Matthew Bigg
JAKARTA (Reuters) - Indonesia said on Thursday it would improve worker pay and restrict the use of temporary contracts in the face of a vow by union leaders, who staged a national strike this week, to press ahead with industrial action.
Chief Economics Minister Hatta Rajasa said the government would draft a regulation to increase worker pay and would quickly implement rules to improve conditions for workers not on fixed contracts. He gave no details of the pay increase.
"Our workers must get decent and reasonable pay," Rajasa told reporters.
Indonesia's booming economy and sustained annual growth of more than 6 percent has contributed to a rise in union militancy as workers seek a larger share of the cake in Southeast Asia's biggest economy.
Union influence could grow in the run-up to an election in 2014 when President Susilo Bambang Yudhoyono steps down after two terms and as politicians from all parties become wary of falling afoul of labor.
Police said hundreds of thousands of people went on strike on Wednesday in the world's fourth most populous nation. Union leaders said two million workers took to the streets in cities across the archipelago.
The main union grievance is so-called outsourcing, the practice of using contract workers with no non-financial benefits to do jobs that otherwise could be done by staff.
There are 16 million outsourced workers, according to media estimates.
"If the new regulation fails to address our demands then we will strike again," said Obon Tabroni, an official for the metal union in Southeast Asia's biggest industrial park in Bekasi on the outskirts of Jakarta.
"Yesterday was only a foretaste," said Tabroni, vowing more workers would be involved next time.
Last year, workers at Freeport-McMoRan Copper & Gold'sN> Indonesia unit staged a three-month strike at its mine in eastern Indonesia to demand better pay and conditions. That triggered greater labor assertiveness across the country.
Indonesia's labor laws mean retrenched staff get high severance pay, which business leaders say restricts employment and leads to the use of contractors.
Contractors are allowed in the resource sector but are otherwise only meant to be used for support services such as transport and cleaning, not for core business functions.
"I would expect the unions to watch very carefully for any failure on the part of business to start implementing the changes," said Keith Loveard, head of political risk at Jakarta-based Concord Consulting.
"The reality, of course, is businesses are unlikely to suddenly run off and employ everyone on a permanent basis because of the costs that would involve."
Business leaders said more flexible labor laws would foster job creation. At the same time, they say labor unrest makes Indonesia a less attractive investment destination because it exacerbates concern about the rule of law and uncertainty over government regulation.
The country regained investment grade status from two ratings agencies in December and January and is a favorite of emerging market investors because of its large domestic market, stable public finances and low debt.
Under the new rules, temporary workers who move to a different company will be able to count their total period of employment cumulatively if they are dismissed, said Dita Indah Sari, spokeswoman at the Manpower and Transmigration Ministry.
"I hope the regulation can be issued this week or next week at the latest. We have to be careful on this issue since we want to protect labor as well as medium-size companies," she said.
(Additional reporting by Adriana Nina Kusuma and Neil Chatterjee; Editing by Robert Birsel)