Informal Sector and Quality Employment in Asian MICs (Paper)

Towards Quality Employment in Indonesia
Guntur Sugiyartoa), Devanto Pratomob), and Raden Muhammad Purnagunawanc)
Abstract This paper examines the dynamics and characteristics of labor market in Indonesia in the context of a series of economic fluctuations, including the Asian Financial Crisis (AFC) and the Global Financial Crisis (GFC). The main purpose is to see how the labor market reacts to the shocks and what kinds of policy response relevant to address the issue. All are in the context of improving the quality of employment and the condition of labor market. Particular emphasis is given to the effects on different types of workers to have a better picture on the labor market response and its policy implications. Key policy responses adopted by the government will also be examined including in its existing constraints related to gender, urban rural, informality and other characteristics. Overall results show that the labor market in Indonesia is very flexible in its most aspects, including in terms of recruitment or employment, working hours and wage. Workers cannot afford to be unemployed and agriculture and informal sector always act as the buffer during the crises. This leads to a widespread underemployment and informal employment resulted in low quality and productivity of workers. Existing policy responses such as the minimum wage and severance pay contribute little to improve the situation and therefore a better policy response is really needed. The policy must take into account the dynamics and charachetristics of the labor market as well as role of informal and agriculture sectors. The country needs to grow faster and more inclusive to create more quality employment and this cannot be achieved by reforming the labor market only. Instead, it must be done in conjuction with improving the overall investment climate.
___________________________
a) Senior Economist, ADB and corresponding author. b). Brawijaya University, Indonesia. (c) Padjadjaran University, Indonesia. The views expressed here are those of the authors and do not necessarily reflect the views or policies of the ADB.
1.
Introduction Indonesia is the fourth most populous country in the world after P.R. China, India, and the USA with a total population of more than 230 million in 2010. The working age population accounts for approximately 75% of total population and the labor force participation rate was relatively stable at around 66-68%. Unemployment had decreased from 11.2% in 2005 to 7.1% in 2010 but in the lack of unemployment benefits people from low-income background can not afford to be unemployed for a long time and more likely to work at whatever job available including in informal sector: with low wages, short working hours and few or no employment benefits such as job security, health insurance and old-age pension. This is why the long term unemployment for more than one year is only one percent of the total unemployment in Indonesia (Islam 2002). This condition also indicates that labor market in Indonesia is very flexible in most aspects, including in terms of recruitments, working hours and wage rate (Feridhanusetyawan and Gaduh, 2000, Manning 2003). Similar to the other developing countries, informal sector (self-employed and unpaid family workers) contributes to a large portion of the employment. They are mainly in rural areas and the proportion of informal employment has declined from 71.3% in 1990 to 65% in 2000s. The share, however, was increase during the 1997-1998 crisis period when it served as a safety valve by absorbing employment from urban formal sector, which has contracted significantly. The informal sector is associated with low quality job with poor working conditions. On the other hand, formal employment in Indonesian context is mainly in urban and associated with a good job. The rate has increased until 1996 but then decreased until 2003 and remained stable afterwards. Hence, there is no clear tendency of formalization, which is consistent with the failed structural transformation process in the economy showing a stronger role of manufacturing sector until 1996 but to be replaced by service and agriculture sectors afterwards. Increasing formal employment should indicate an improvement in the quality of employment and labor market condition. Underemployment is also a big issue in the Indonesian context, for more than 30% of the workers working less than 35 hours per week with low income. More than 33% of them would like to have a new job given their low pay and poor working conditions (Sugiyarto et al. 2006).
Another key problem is the rigidity of the labor market regulation. In fact, it seen as one of the most rigid in the region making it more expensive to do business (see World Bank publication on Doing Business).1 The regulations on minimum wage and severance pay, for instance, have made the economy less competitive. Theoretically it is very expensive to set up a business in Indonesia, while practicality it is a very different matter that makes workers in the worse off condition. First, the regulations are irrelevant to informal workers. Second, compliance to the minimum wage and severance pay is low due to the lack of enforcement. This can be seen from the fact that the government never issue effective sanctions to employers continuing to pay their workers below the minimum wage and did not pay the severance pay (SMERU, 2003 and WB 2010). Instead, the some firms get around the regulations by making the employment contract more flexible, further fueling the flexibility of the labor market- but in a negative way- at the cost of the workers. The youth unemployment and workers should also cause for concern. There is a significant number of youth unemployed and those with job mostly receive wages below the minimum level due to their lack of work experience as first timer, low skill and working in small firms or in informal sector. Poverty or working poor is therefore widespread given the poor working condition of moat workers. This study sets out to examine the issues by linking the labor market outcome indicators with the economic fluctuations, including the Asian Financial Crisis (AFC) and Global Financial Crisis (GFC). The main purpose is to see how the labor market reacts to the economic shocks and what kinds of policy response relevant to address the issue. All are in the context of improving the quality of employment and the condition of labor market in Indonesia. Particular emphasis is given to the effects of the fluctuations on different types of workers to have a better picture on the labor market responses and their relevant policy implications. Key policy measures adopted by the government especially in response to the crisis will also be examined, including in their existing constraints related to gender, educational level, urban rural, sector, informality and other characteristics. The second section of the paper discusses the key development progress Indonesian economy by highlighting the key changes and failed sectoral transformation. The third section examines the labor market outcomes related to unemployment and employement of different characteristics based on the results of the Indonesian Labor Force Survey (Sakernas). Section
1
In a 2009 cross-country survey comparing labor regulation rigidity, Indonesia ranked 157 out of 181 countries. Compared with its neighbors in the East Asia and Pacific region, Indonesia ranked 23 out of 24 countries with no other country in the region has firing costs as expensive as Indonesia (WB 2011, Indonesia Jobs Report: Towards Better Jobs and Security for All)
four then concentrates on the effects of the two crises: the AFC and GFC on the labor market outcomes, including on looking at what kinds of job created during the crises and who got them. In section four, the focus is on the key policy measures that the government adopted by looking at their impacts on the labor market outcomes. Two major policy measures are examined, i.e. the minimum wage and severance pay regulations. The last section then provides some key findings and their policy implications by focusing on the effort of improving the quality of employment and labor market condition.
2.
Key Development Progress in the Economy 2.1. Main Progress in the Economy Indonesia started its economic development from a very low base. Its per capita income in 1967 was only $50 -about half that of India, Bangladesh, and Nigeria (Hill 1996)- but it successfully maintained its economic growth at an average of almost 7% per year during 1969-95. The growth has raised the populations living standards as per capita income increased by about 4.5% per year. During the early 1980s, however, the country experienced a sharp deterioration in its terms of trade and balance of payments due to the decline in world prices of oil and primary commodities, rising international interest rates and decreasing foreign capital inflows. These external shocks severely hit most highly indebted countries and led to the so called International Debt Crisis in 1982. These external shocks seriously disrupted Indonesian development plans and induced extensive structural adjustments that aimed at improving competitiveness, increasing economic efficiency and diversifying the pattern of industrial production. The adjustments were firstly to restore external creditworthiness, but it then led to a change in the development strategy from a public sector led, import-substitution system with a repressed financial sector, to a private sector led, export-oriented economy with a market based financial sector. During the 1980s, the Indonesias government was also forced to adopt a number of adjustment measures such as massive devaluations, trade liberalization, and domestic tax reform to reduce the distortionary threat of the expansionary policies inherited from the previous oil boom decade. These efforts were intensified in 1986 and afterwards to improve saving mobilization, maintain real exchange rate competitiveness and stimulate non-oil exports. These structural adjustments proved successful in restoring external conditions and providing more favorable conditions for the domestic economy. Despite the impressive progress, export earnings and government revenue remain highly vulnerable to changes in oil and non-oil prices in the world markets. There has also been a reluctant attitude towards economic reform on the government side, so that major changes in the direction of trade and industrial policies, as well as other policies, in Indonesia have been linked to major political and economic crises.
Entering the 1990s, the Indonesian economic growth in the normal times has generally been reasonably well compared to its neighboring countries. In fact, until 1997, Indonesias economy was among the fast growing economies in the region and even in the world context. Overall, the economy managed to grow around 5% over a period of 25 years bringing significant improvements in the welfare of the population. As a result, poverty rates declined dramatically from 40% in 1976 to 11% in 1996, following the transformation of the economy from agriculture to manufacturing and services. The share of workers in agriculture declined from 55% in 1990 to 41% in 1997, while its share in industry increased from 14% to 19% (Sugiyarto et al. 2006). Down then came the first and biggest crisis for Indonesia: the AFC. In the mid 1997 and whole year of 1998, the economy was hard hit and the crisis really knocked the country down, overthrowing the long existing productive growth and other development progress. In 1998, GDP growth contracted by more than 13%, after a relatively lower growth at 4.7 percent in 1997. The industry and services sectors were contracted even larger, while agriculture only experienced a negative growth of 1.3%. Agriculture was the only sector experiencing a positive growth in employment, indicating that the sector acting as a buffer in the crisis period. The AFC also has lead to a substantial change in the relative prices showed by significant increase in the inflation rate and depreciation of Indonesian Rupiah. In the process the government also collapsed, creating a new era of more democratic and vibrant Indonesia. The recovery process took some time so that the GDP growth in 2000 recorded a positive number but still low compared to the previous achievement. The economic growth has regained it momentum during 2001-2007, but still never reach the pre crisis growth level and driven mostly by consumption (Thee 2007). On average, GDP grew by only 5.0% annually with the highest growth rate was 6.3% in 2007. In addition to the economy growing slowly there has been a series of internal crises that led to frequent changing in the government. From 1999 to 2004, there have been three presidential changes and only from 2004 onwards that the presidential term has backed to normal again. From the last quarter of 2008 and some part of 2009, the economy was again affected by the GFC, which was originated from the collapse of sub-prime market in the US and brought negative repercussions to all over the world including Indonesia. The GFC effect on the Indonesian economy was however mild, since GDP and other key variables remain in good shape. GDP still grew by 6% in 2008 and slightly decreased to 4.6% in 2009 and then increased again to 6.1% in 2010. This quick recovery was due to good macroeconomic management, strong financial sector and stable political condition. 6
2.2. Failed Structural Transformation Looking at more details at the sectoral level, the AFC really derails the development progress in Indonesia. During the period of 1993-1996, for instance, Indonesia had experienced a strong economic growth with the annual GDP growth of 7.7%. Manufacturing industry grew impressively at 10.5% per year acting as the main engine of the economic growth. As a result, the contribution of industry to GDP kept increasing from 40% in 1993 to 43.5% in 1996, taking over the service sector, which experienced a slight decrease from 42% to 40%. On the other hand, agriculture grew by only 1.9% annually and at a decreasing rate contributing to around 17% GDP (Figure 1).2 After the crisis, the investment levels as a ratio to GDP still grow positively, but far below the pre crisis level in early 1990s. This is due to the poor investment climate condition, which is also worse compared to its neighboring countries that was also affected by the crisis like Malaysia and Thailand. The main concerns are still the old problems of lack of security, macroeconomic and social stability, underdeveloped infrastructure, unclear regulations and legal system and raising labor costs (ADB 2005). The discouraging effect of the poor investment climate during the Indonesias post crisis was rated as the worst in East Asia, leading to the sluggish growth of private sector investment particularly foreign direct investment (Thee 2007). Accordingly, private consumption remains the most dominant factor in driving the economy, making it depends very much on domestic consumption. As a result, increasing GDP growth does not always mean creating additional employment. The jobless growth (during 1999-2003) and growth with a little employment creation have become the main feature of the Indonesian economy in the early part of the new millennium. Only in 2004 and 2005 that the growths were driven by investments, which grew by 14.7% and 10.9%, respectively. But the investment growth plummeted again to 2.6% in 2006, before picking up to 9.3% in 2007. Moreover, a more serious concern can be seen from the fact that the manufacturing sector growth has continued to slow down and seemed to lose its competitiveness due to the weak investment climate and high cost of labor as mentioned before. The sector has also been adversely affected by the exchange rate appreciation over the last decade without the compensation of high price of its commodity like in the agriculture sector (Basri and Hill 2010). In contrast, agriculture, transport and telecommunication sectors grew steadily given their high
2
Nevertheless, in term of employment, the agriculture sector still absorb the majority of workers (more than 43 percent) compared with the industry sector that absorb only less than 20 percent of the employment.
commodity prices, technological changes and substantial deregulations, while service sector continued to grow far more rapidly with an average growth rate of 7.1% per annum to become the main driver of the economic expansion. Therefore, based on the overall picture during the period of 1993-2009, it seems that there has been a failed structural transformation in the Indonesian economy. From 1993 to 1996, industry sector has grown by more than 10% over passing the service and agriculture sectors (This is shown in the green period in Figure 2). During the crisis years in 1997-1999, the industry sector has plunged significantly and never bounced back again (the red alarming area of Figure 2). In the recovery period from 2000 to 2008, the industry sector has grown below 5% and has been overtaken by the service sector (the yellow warning area of the Figure 2). This marks the era of service led growth in the Indonesia economy that reflects the failed structural transformation. The reason is because it is not intended since the earlier intention is to make the industry as the engine of growth, generating stable employment and good paying jobs like in cases of Japan and Korea in their development process. Worse still, from 2008 onwards, the growth of industry sector has been further declining even lower than the growth of agriculture sector (the reddish warning area in Figure 2). This failed structural transformation obviously contributes to the widespread low employment quality in Indonesia, as the majority of workforce are in agriculture and service sectors with relatively low productivity and poor working condition since most of them are informal and underemployed workers.3
It should be noted however that the growth rate of industry sector seemed to bounce back again in 2010, higher than agriculture sector but still about half of the service sector.
Figure 1. Sectoral Contribution of Agriculture, Manufacturing Industry, and Services to GDP, 1993-2009 (%)
60.0
50.0
40.0
t n c r e P
30.0
20.0
10.0
Source: Author calculation from Key Indicators for Asia and the Pacific 2010
0.0
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
9 0 2
Ag riculture Indus and Services, 1993-2009 S ervices Figure 2. Growth of GDP by Sector: Agriculture, Manufacturingtry (%)
1 .0 5
1 .0 0
5 .0
0 .0
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
t n c r e P
-5 .0
-1 .0 0
Source: Author calculation from Key Indicators for Asia and the Pacific 2010
-1 .0 5
-2 .0 0 GP D A ric ltu g u re In u try ds S rv e e ic s
9 0 2
9
1 0 2
3. The Dynamics and Main Characteristics of the Indonesian Labor Market

This section examines the key trends and characteristics of the Indonesian labor market in the context of economic fluctuations by using the Indonesian Labor Force Surveys (SakernasSurvei Angkatan Kerja Nasional). To serve the purpose, the main data sets used in the analysis are Sakernas 1993 to 2009. In some cases the series is shorter due to a change in the definition of unemployment and hence to maintain the comparability of the variables and indicators across time. 3.1. Working Age Population and Labor Force The working age population or the man-power is defined as the population with 15 years of age and older. In 2010, it accounted to around 172 million people (i.e. 75%) of the 234 million population (result of the Indonesian Population Census in 2010). Even though there is assign of an improvement in their education level, most of them are still less educated. About half of them only have primary education and below, and those graduated from tertiary education contribute only less than 10% of the population (Figure 3a). The number of working age population has grown significantly during 1993 to 2010, i.e. by more than 40% or about 2.4% per year (Figure 3b). This rate is much higher than the growth rate of the total population, which is approximately only around 1.3% per year during the same period. The growth rate of working age population has however tended to decrease over the years due to the falling of total fertility rate as a result of successful implementation of the national family planning program by the government in the previous decades. The success is also reflected in the lower shares of young and prime-aged population in the total population.4
This can also be seen in the comparison of population pyramids across time. See Sugiyarto et al. 2006 for an example.
10
Figure 3a. Working Age Population by Education Levels, 1993-2009 (%)

100%
80%
'000 persons
60%
40%
20%
0% 1997 1999 2009 1993 1994 1996 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010
Less than Primary
Primary
J unior Secondary
Senior Secondary
Tertiary
Source: Calculated from series of Sakernas
Figure 3b Annual Growth of Working Age Population by Age Groups, 1993-2009 (%)
12.0 10.0 8.0 6.0 4.0
15-24
25-49
50-64
65+
Total
t n c r e P
2.0 0.0
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
-2.0 -4.0 -6.0
The big component of the working age population is the labor force, which consists of those who are working or looking for a job. The labor force number in 2010 was about 116 million people and the remaining is the non-labor force that mostly consists of students and housekeepers. The share of labor force in the working age population has also been stable over those years. 11
9 0 2
As the growth rate of labor force is higher than the growth rate of total population, this means that the country could actually benefit from a demographic dividend over those years for the economy can grow faster than populations growth to increase per capita income and reduce poverty. This window of opportunity will not last for long since in the near future the growth rate of the elderly and dependent population will outpace the growth rate of the labor force. In this case, workers need to work harder to just maintain per capita income level, giving strains on workers income security. Accordingly, it is very important that the Indonesian government makes the most of this demographic bonus by boosting the creation of good jobs and increasing the productivity of workers. On the relevant labor market indicators related to this issue, the labor force participation rate (LFPR) also remains stable at around 66%-68%, reflecting the condition that the growth of the labor force in Indonesia is mostly affected by the natural growth in the population (Irawan et al, 2000 and Suryahadi et al, 2001).5 The gender breakdown shows that female participation in the labor force is always lower than male due to domestic responsibilities of woman and other barires that still exist for women to enter the labor market. Compared to males, females at the working age tend to be involved in activities that fall in the border between economic and noneconomic activities (Irawan et al. 2000). Figure 4 shows that male participation rates are relatively stable at 81-84% while female participation rate are about 47-51%. Female participation rate also tends to increase during the crisis times, reflecting an increasing women entering the labor market to help earn some extra money for their households. Comparing participation rates among different age groups, participation among the youth (age 15-24) and elderly (age 65+) are relatively lower than the prime-aged (age 25-49 and age 5064). This is common since some young people need to attend school while the elderly withdraw from the labor market. The labor participation rate by age groups are also relatively stable over time. Putting the labor force participation in the context of economic fluctutaions, one can clearly see that the dynamic of labor market in Indonesia is relatively stable. For instance, there was no big drop in the number of labor force despite the very big contraction in the economy in 1998, where the GDP plunged by more than 13%. Similarly there is also no big increase in the number of labor force when the economy is booming like in the 1993-1996. This further strengthens the notion that changes in the labor force in Indonesia is mostly due to natural growth in the
5
Compared to other South East Asian countries, the LFPR in Indonesia is slightly higher than the Philippines, Singapore, and Malaysia with about a 60% participation rate, but it is lower than Vietnam and Thailand with more than 70% participation rate with a stronger female participation rates (Irawan et al, 2000).
12
population, such as from fertility and mortality rates, and that the labor market adjustment during the crisis is more of price or wage adjustment rather than quantity adjustment. This condition reflect the flexibility of the labor market in Indonesia but also highlights the vulnerability of labor force since in the absence of unemployment benefits workers cannot afford to be unemployed and therefore must bear the adverse effects of economic shocks. During the economic downturns, they must accept lower wages or incomes, together racing to the bottom of the welfare level. This finding also emphasizes that creating more job only is really not enough 6 and that a separate labor market policy is needed to create more and better jobs and to improve the condition of workers.
Strictly speaking, creating job is in fact not very relevant in the Indonesian context since the workforce can always find or create jobs for themselves as part of their surviving strategy.
13
Figure 4a. Labor Force Participation Rate by Gender, 1993-2009 (%)

90.0 85.0 80.0 75.0 70.0
t n c r e P
65.0 60.0 55.0 50.0 45.0 40.0
3 9 1
4 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2 7 0 2
Total
8 0 2 8 0 2
Ma le
Fem le a
T l ota
Figure 4b. Labor Force Participation Rate by Age Groups, 1993-2009 (%)
90.0
80.0
70.0
60.0
t n c r e P
50.0
40.0

30.0
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
15-24
25-49
50-64
65+
9 0 2
14
9 0 2
Figure 4c. Total of Labor Force by Education Level, 1993-2009 (%)

100%
80%
'000 persons
60%
40%
20%
0% 2002 2003 2004 1993 1994 1996 1997 1998 1999 2000 2001 2005 2006 2007 2008 2009
Tertiary
Less tha n P rim a ry rima ry J unio r Seconda rySenio r Seco nda ryTertiary P
Figure 5. Labor Force Participation Rate by Education Level, 1993-2009 (%)

45,040 40,040 35,040 30,040 '000 persons 25,040 20,040 15,040 10,040 5,040 40 1993 1994 1997 1998 2000 2004 2005 2007 2009 2010 1996 1999 2001 2002 2003 2006 2008
Less than Primary
Primary
Junior Secondary
Senior Secondary
2010
15
3.2. Unemployment and Employment o Unemployment The definition of unemployment in Indonesia has slightly changed from 2001 onwards to follow the ILOs new approach of estimating the unemployment, i.e. by including the discouraged group as part of the unemployed group. The discourage workforce are those who are not working but also not looking for a job because they are discouraged, feeling that there is no job available for them. According to this new definition, the unemployment rate in Indonesia during 2001-2010 has been relatively higher and increased, i.e. from 8.1% in 2001 to 11.2% in 2005 but it then started to decline into 8.4% in 2008 and 7.1% in 2010. As pointed out by ILO (2011) and can also be seen in the labor market trend data, the decrease in the unemployment rate in the recent years was due to growth of jobs in non-wage employments, which usually have no benefits such as the permanent job security, health insurance, and old-age pensions.
As can be seen in the Figure 6a, the unemployment rate among the youth (15-24 years) is more than tripled than those of other age groups. Most of them are young people with relatively little work experience entering the labor market for the first time (Agrawal, 1995 and
Figure 6a: Unemployment Rates (New Definition) by Age Groups, 2001-2009
(%)
40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0
t n c r e P

Figure 6b: Unemployment Rates (New Definition) by Education Levels, 2001-2010
(%)
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
Total
25.0
15-24
20.0
25-49
50-64
65+
('000 persons)
15.0
10.0
5.0
9 0 2
16
2006
2007
2008
2009
Less than Primary
Primary
Junior Secondary
S enior S econdary
Tertiary
2010
2001 2002 2003 2004 2005
Feridhanusetyawan and Gaduh, 2000). The higher rate of youth unemployment is also because some of them making their transitions from a full-time education to the labor market, therefore reflecting a transitional unemployment (Dhanani 2004). Moreover, based on the unemployment rate during 1970s to 1996, Manning and Junankar (1998) argue that the unemployment among urban youth in Indonesia was partly related to the job search process and wage structure which led to those from the middle class families seeking work in a long job queue. As can be seen in Figure 6, although youth unemployment rate had decreased from 33.4% in 2005 to 22.2% in 2009, the unemployment rate among youth aged 15-24 were still about 4 times more than the unemployment rate among adults aged 25 years and above. Looking at their education level (Figure 6b), the highest level unemployment rate is among the senior secondary graduates, followed by tertiary graduates. Notice that from 2007 onwards, the unemployment rates among tertiary graduates has over passed those of the junior secondary graduates. Among others, this seems to indicate the increasingly lower quality of jobs available in the market that makes the tertiary graduates choose to be unemployed, so that the jobs are taken by junior secondary graduates, who have no options but to take them given that they are mostly coming from poorer family background (that make them only have junior secondary education. This is the vicious circle of being poor and less educated that keeps them poor). In comparison, Figure 7a and 7b show that the unemployment rates based on the old definition (excluding the discourage group) by age groups and education levels. The results show a similar trend and pattern with those by the new definition despite at their overall lower rates due to the exclusion of the discourage group. This confirms that youth unemployment is really relatively higher than adult unemployment, and those who can afford to be unemployed are the educated groups coming from richer family background. Moreover, comparing the results from the old and new definitions also shows a bigger gap of unemployment rates among the youth. This indicates a relatively high proportion of discourage workforce among the youth. Figure 7a. Unemployment Rates (Old Definition) by Age Groups, 1993-2009 (%)
17
30
25
20
t n c r e P
15
10
3 9 1
4 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
15-24 25-49 50-64 65+ Total Figure 7a. Unemployment Rates (Old Definition) by Education Levels, 1993-2009 (%)
18.0 16.0 14.0 ('000 persons) 12.0 10.0 8.0 6.0 4.0 2.0 1993 1994 1996 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 2010 1997 1998 2007 -
Less than Prim ary
Prim ary
Junior S econdary
S enior S econdary
Tertiary
9 0 2
18
Figure 8: Unemployment Rates (New Definition) by Residences, 2001-2009 (%)

16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0
t n c r e P
Source: Calculated from the series of Sakernas

-
Figure 9 Unemployment Rates (Old Definition) by Residences, 1993-2009 Urban (%) Rural Total
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
9 0 2
12
10
t n c r e P

0
3 9 1
4 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
In terms of their residency, unemployment rate in urban is always higher than in rural areas showing that unemployment is really an urban phenomenon. It is generally assumed that probability of getting a job in urban area is higher than in rural areas that makes the labor force flock to urban to look for a job. In addition, a job opportunity in rural area is also limited (Dhanani 2004). Moreover, wage expectations in rural are also relatively low compared to urban that further lower the unemployment in rural areas. People can just work for some hours in the agriculture that makes unemployment rate low. Therefore, the low unemployment rate in rural areas hides the fact of their high underemployment rate that will be discussed further later in this 19
Urban Rural Total
9 0 2
1 0 2
section. Despite the differences in their characteristics, unemployment rates in urban and rural areas show a similar pattern except during the crises, in which the unemployment rate in urban increases. As presented in Figures 8 and 9, unemployment rates had increased before 2005 but it had declined steadily afterwards. Comparing unemployment rates by gender (Figures 10 and 11), it can be seen that female unemployment rate is higher than male. But, the two show a similar trend, i.e. steadily declining after 2005. The decline was however faster among females, implying that the gender gap in the unemployment rate has become narrow, i.e. it was 5.4% in 2005 and it dropped to only 1% in 2009. This may be due to the strong job growth in the services sector that makes more female looking for the jobs (ILO, 2011). In addition, Sugiyarto et al (2006) also pointed out that the significant decrease in the female unemployment rate was due to increasing number of housewives withdrawing from the labor market to stay at home because of lack of decent employment opportunities and worsening working conditions for female workers. Moreover, comparing the results of the new and old definitions of unemployment also shows that the gap is higher among female group, indicating a relatively higher proportion of discourage labor force among females.
BOX A: Education and Skill Mismatch Many factors contribute to the Indonesias slow employment growth. One of them is problem in the education and training that create job mismatch. Some indicators for job mismatch are average waiting time to get the first job and a match between job specification and workers education and skills. Using a matrix of 63 categories of occupations and 9 categories of workers University/Diploma majors, Alisjahbana (2007) examines the job mismatch by comparing educational background and present occupation. She found that although the mismatch level tends to decrease during 1997-2006, there has been a significant increase in the mismatch rates for some sectors, such as Finance, Transportation and Wholesale. For universitys majors, mismatch occurs in Technical Subject, Business and Public Administration; and Sociology, Law and Communication. Increasing job mismatch is more prevalent among male than female workers. For job applicants, lack of skills and experiences makes filling vacancies much harder that brings some consequences to the increasing unemployment, especially among youth. Therefore, identifying the skill gaps including their compositions, problems and solutions, is really valuable for improving employment situation in the future. In this line, Di Gropello (2011) assesses skill gaps from the demand and supply sides in manufacturing firms and non-education service firms. The demand side reflects the expectation mismatch between employers and employees, and the mismatch arises because the skills required by employers are not matched by the skills possessed by employees. By comparing job position between managers/professional and skilled workers, it is found that the highest gaps perceived by employers are in English and Computer skills. Another significant gap is on thinking skill. In relation to the young unemployment problems, the study also found that teamwork, technical, communication and computer skills are the most needed skills possessed by young workers, while English, problem solving, leadership and creativity are the most lack skills. Some factors behind this are the relevance and quality of education, lack of diversification and recruitment, poor certification process, high job turnover and low starting wages. On the supply side, the ability of educational institution to produce a skilled labor force and to provide relevant skills to the labor market is the most challenging one. The dual education system implemented in Indonesia has its strengths and weakness. For example, at higher formal education level, general high school main weakness is on the provision of specific skills relevant to the labor market and the quality of teaching-learning. Meanwhile, at the higher vocational school the main weaknesses are on the quality of facilities, quality of teaching and learning and provision of generic skills. In this context, one can learn from the successful case of Chemical-Analyst Vocational Secondary Schools to better link the education system and the need of labor market (Di Gropello, 2011). The education institution could conduct approaches such as: (1) implement an industry-based curriculum; (2) use varied strategies to keep the curriculum updated to meet industry needs; and (3) increase the government role in promoting school industry links.
20
Similar findings also appear in Alisjahbana (2008) in assessing the role of vocational education in the labor market outcome. She points out that vocational education have shifted to more demand oriented training and have reformed their training curriculum to better match the skill competency of trainees. However, in addition to quality, equal access to education is also an important factor that is still problematic in Indonesia. For example, the salary of a women with bachelor degree is still lower than men with the same educational background, Moreover, people living in the eastern part of Indonesia has less access to education compared to the others who reside in western part of the country.
Figure 10 Unemployment Rates (New Definition) by Gender, 2001-2009 (%)

16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 -
t n c r e P
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
9 0 2 7 0 2 8 0 2
Male Fem ale Total Figure 11 Unemployment Rates (Old Definition) by Gender, 1993-2009
(%)
10 9 8 7 6 5 4 3 2 1 0
t n c r e P
3 9 1
4 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
Compared to developed countries, the overall unemployment rate in Indonesia is relatively low (see Irawan et al, 2000 and Feridhanusetyawan and Gaduh, 2000). In the absence of any 21
Male Fem ale Total
9 0 2
1 0 2
unemployment benefits provided by the government, labor force from low-income household are unlikely to be unemployed for a long period. Instead, they are more likely to get whatever job available in the market, including in the informal sector with low wages, short working hours with few or even no employment benefits. This is further confirmed by the fact that the long-term unemployment, defined as those unemployed for a year or more, is only around one percent of total unemployment in Indonesia (Islam 2002). In a negative note, this condition further indicates the flexibility of labor market in Indonesia since the workforce are keen to get whatever job and then hold it regardless of its low quality and productivity.
BOX B. Barriers for Young People to find a Job Following the ILO definition, youth employment is defined as those aged between 15 and 24 years old and working. This age group is in the range of ages when people can leave school at lower secondary level7 to the age when most people are expected to complete their tertiary level or university. The youth labor force forms around 20% of the total labor force in Indonesia, with more than 60% of them living in rural areas. Looking at their distribution, most young workers in urban areas work as paid employees, while those in rural areas mostly work in informal sectors as self-employed and unpaid family workers. This situation is related to the scarcity of non-farm and formal jobs in rural areas compared to urban areas. Table B1 : Youth Employment Status by Gender and Location (Pooled Data 1996-2007) Urban Areas Male 1. Self-Employed (%) 2. Unpaid Family Worker (%) 3. Paid Employment (%) 15.64 12.47 44.76 Female 8.64 15.44 47.07 28.86 Total 12.55 13.78 45.77 27.89 Male 24.76 36.10 25.88 13.27 Rural Areas Female 16.74 45.32 19.05 18.88 Total 21.55 39.79 23.14 15.51
4. Unemployed (%) 27.13 Source: Calculated from series of Sakernas
According to the school-to-work transition survey conducted in three provinces of Indonesia (ILO, 2003), there are some barriers for young people to find a job in the labor market. Firstly, they have low education and skills. Secondly, most of them lack of work experience since they enter the labor market for the first time. Only around 40% of them joined in the work experience program as part of their educational program. In addition, the weak linkages between education system and labor market make the problem worse. As pointed out by the Indonesian Youth Employment Network (2003), there is still a large part of education curriculum unrelated to the needs of labor market. Thirdly, in the poor and least developed regions such as East Nusa Tenggara, the job opportunities are really limited. As a result, most educated youths will accept informal sector job or move elsewhere in Indonesia or abroad, or remain unemployed, depending on their expected wage (Jones et al, 1998). Rural-urban migration is also an important factor affecting youth employment, both for educated and less educated youths (ILO 2003). A scarcity of formal jobs in rural areas has forced young people to leave for urban areas, rather than working in informal sector in rural areas (Jones et al, 1998). However, the increasing number of young workers from rural to urban areas will create another problem as labor absorption capacity in the urban formal sectors is also very limited. This is in addition to the fact that young workforce also tend to have limited knowledge of the employment opportunities in their new environment (ILO, 2003). All make the situation more difficult for young workers. As a result, some of them who cannot find a job in urban formal sector have no choice but to work in urban informal sector and to be paid below the minimum wage level. More than 50% of self-employed youth in some urban areas, such as Jakarta, come from poor rural areas.
The lower secondary level (junior high school) is the earliest school leaving level in Indonesia. Since the early 2000s, the Indonesian government has induced young people to finish at least lower secondary level by nine years schooling, although the implementation varies across regions.
22
Employment
During 1993-2010, total employment grew by 41%, i.e. from 76.50 million in 1993 to 108.21 million in 2010. The annual growth of employment however decreased after the AFC until it picked up again in 2006. This reflects a very slow recovery of the economy after the crisis, especially in absorbing the growing number of labor force. In fact, there was a period of jobless growth during 1999-2003 where the economic growth did not create any additional employment. Another key factor in the decrease in employment growth after the AFC is the declining youth employment which decreased from 16.5 million to 14.8 million during 1996-2005. This reflects the fall in the total fertility rate and the lack of good job opportunities in the market since they also have higher reservation wages. Many of them have also become dicouraged for they think there is no job available for them. Figure 12. Annual Growth Rates of Employment by Age Groups 1993-2009 (%)
15.0
10.0
5.0
t n c r e P
0.0
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
Total
8 0 2
-5.0
-10.0

-15.0 15-24 25-49 50-64 65+
The slowdown in employment growth is also due to the decrease in female employment. As the economy recover from the AFC, the female employment had decreased from 34.4 million in 2000 to 32.5 million in 2005. The number then increased again to 40.7 million in 2010 because of the GFC -as the crisis always increases the number of female employment- so that overall, the annual growth of female employment was steadily decreased during 2006-2010. It is important to note that a high proportion of female workers in Indonesia (i.e. about 40% of all female workers), is represented in less productive sectors and low wage occupations, such as retail trade and labor-intensive manufacturing sectors (Manning 2003). Also, the lack of decent employment opportunities and worsening working conditions were more likely to push out 23
9 0 2
females out of the labor force (Sugiyarto et al, 2006). Compared to male worker, the proportion of female workers in total workers remains around 37-38%. In 2010, the number of female workers is around 40 million, while the number of male workers is more than 60 million Figure 13 Share of Employment by Gender 1993-2009 (%)
70.0 65.0 60.0 55.0 50.0 45.0 40.0 35.0
t n c r e P

30.0
Looking at their sectoral activities, agriculture sector is still the dominant sector for absorbing the
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
9 0 2
Male Fem workers, accounting for around 40% of the total employment. However,ale share has decreased its
steadily over time, i.e. from more than 50% in 1990s to only 38% in 2010. The share increased again during and shortly after the AFC, when there was a significant increase in agricultural sector activities. On the other hand, the share of employment in the services sector has significantly increased from 37.2% in 2000 to 41.5% in 2010, growing faster than the agriculture and industry sectors, which remained stable at around 17-18% after showing an increasing trend prior to the AFC. After the crisis, the manufacturing industry sector has never been fully recovered so that the economy has been relying more on agriculture and service sectors for the employment. This feature confirms to what was described in the previous section as the failed structural transformation in Indonesia. It was expected before at the beginning of the development process that the economy was going to be transformed from agriculture to manufacturing sector based, but the reality is that the role of agriculture remains dominant despite its declining trend- and the service sector has become the main source of livelihoods for most workers. Unfortunately, the service sector in Indonesia is not associated with a high productivity sector as it mostly consists of small scale trades and other business activities in the informal economy. Therefore, the dominant role of agriculture and service sectors in the economy only indicates to the prevalent under and informal employments that contribute to low
1 0 2
24
quality of jobs. This will be further confirmed in the discussion of the worker characteristics in terms of education, working hours, monthly income and wage, and productivity. Figure 14. Share of Employment by Sector, 1993-2009 (%)
60.0
50.0
40.0
t n c r e P
30.0
20.0
10.0

-
Figure 15. Workforce by Educational Qualifications, 1993-2009 (%) Agriculture Manufacture Services
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2 8 0 2
45.0 40.0 35.0 30.0 25.0
t n c r e P
20.0 15.0 10.0 5.0 0.0
3 9 1
4 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
Lessthan primary school Prim school ary Junior secondary Tertiary Looking at their educational attainment, there was only a small proportionSeniorworkers who have of secondary
senior high school or tertiary (university) education, even though their share has increased significantly from 23.3% in 2003 to 30.5% in 2010. This clearly suggests that the Indonesian workers have actually become more educated. This is further confirmed by the significant drop in the proportion of less educated workers, i.e. those with only primary or less than primary education level. The drop was induced by the substantial government investments in basic education, including the successful implementation of the nine-year compulsory basic education program (Agrawal 1995). More educated workforce are more likely to be employed in the formal 25
9 0 2
9 0 2
sector and in paid employment, while less educated workforce tend to be self-employed and unpaid family workers in the informal sector (Manning 2003). 3.3. Formal and Informal Employment As indicative from previous discussions, informal sector in Indonesia is very dominant both in terms of economic activity and in providing employment. The large proportion of informal workers clearly indicates the limited job opportunity in formal sector (Irawan et al. 2000). This also show overall low quality of job which will be further discussed in this section. Moreover, the share of informal worker has been increased after the AFC. Before 2001, the informal employment rate was less than 60%, while after 2001 the rate was much more than 60% (Figure 16). However, the proportion of informal employment, decreased in the recent years, i.e. from 64.8% in 2003 to 61.6% in 2009. Accordingly, the share of formal employment has increased from 35.2% in 2003 to 38.4% in 2009. This suggests for a tendency of formalization in the Indonesian labor market in recent years which is in contrast with the trend during 19972003, in which the crisis seems to bring the informalization in the labor market in Indonesia (Sugiyarto et al. 2006). The strong role of informal employment is in line with the increasing role of service sector in the economy and the remaining dominant role of agriculture sector after the AFC. Another factor contributing on this is the strong urbanization that fuels slum areas and the development of informal sector. Figure 16 Informal and Formal Employment Rates, 1993-2009 (%)
70
60
50
40
t n c r e P
30
20
Informal
Formal
10
Similar to other developing countries, gender comparison of informal workers reveals that the 0
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
who are categorized as informal workers, are dominated by female workers. The entry barriers 26
9 0 2
proportion of females is higher than males. One reason for this is that unpaid family workers,
for this job are very low and their home-based locations and flexible working hours fit very well with female workers preferring to work around the house. The shares of both males and females informal workers tend to decrease since 2003 reflecting the formalization of employment in recent years, i.e. from 2003 onwards. The rate of female informal workers decreases faster than males, suggesting an increasing number of females giving up their informal job. Figure 17 Informal Employment Rate by Gender, 1993-2009 (%)
80 70 60 50 40 30 20 10
t n c r e P

0
Informal sector employment is mostly in rural areas, while formal employment is mainly in urban
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
Male Fem ale Total areas. The large proportion of formal workers in urban area indicates that the area has more
formal job opportunities. The highest proportion of formal employment in urban areas is in manufacturing sector, accounting for more than 30% of total formal sector jobs. On the other hand, a large proportion of informal employment in rural and agriculture sector indicates the limited job opportunity of modern sector in rural areas as most of them working as farmers. In addition, the proportion of informal employment in rural areas has decreased faster than in urban areas. This could indicate a falling job opportunity in informal employment in rural areas and increasing urbanization that creates informal employment in urban areas.
9 0 2
27
Figure 18 Informal Employment Rate by Residences, 1993-2009 (%)

90.0 80.0 70.0 60.0 50.0
t n c r e P
40.0 30.0 20.0 10.0 -
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
3.4. Underemployment
Urban
Rural
Total
In addition to unemployment and informality, underemployment is also a big problem in most developing countries including Indonesia. Underemployment in this country is defined as working less than 35 hours per week (BPS definition). Using this definition, underemployment rate was nearly 40% of total labor force during the AFC and decreased to 33.6% in 2009 (Figure 19). Although this figure seems to be quite high, it is actually normal for a developing country like Indonesia with a high proportion of agricultural workers and a significant number of workers living in rural areas (Manning 2003). Sugiyarto (2007) further suggests that a 40 hours per week cut-off point might actually be better to measure underemployment rather than 35 and 30 hours per week cut-off points used by BPS and ILO considering Indonesias country-specific characteristics and if a comparison across countries is needed. He also estimated that a 1-hour increase in cut-off point will increase about 2% of underemployment rate, suggesting that a small change in cut-off point will result in a significant change in underemployment rate. Therefore, there will be a serious problem if people missclasify underemployed workers as fully employed workers for their policy impliocations to address tham are very different. As also presented in Figure 18, using cut-off point of 40 hours per week, the underemployment rate was really high at more than 50% in 1998 and during the AFC. After that, it decreased to 46.2% in 2009. The figures suggest that underemployment in Indonesia remains one of the 28
9 0 2
major concerns affecting many workers. The high level of underemployment also reflects the fact that most workers coming from low income households so that they could not afford to be unemployed due to the lack of unemployment benefits and better job opportunities. Figure 19 Underemployment Rate, 1993-2009 (%)
60
50
40
t n c r e P
30
20
10

0
3 9 1
4 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
workers due to the dominant role of agriculture sector. Female workers tend to work shorter Lessthan 35 hours Lessthan 40 hours hours than male workers because of their domestic responsibilities, while agriculture sector has its seasonal and shorter working hours. The high share of underemployment in rural areas has however declined over time because of the urbanization and the structural transformation from agriculture to the manufacturing sector (Dhanani 2004). Moreover, underemployment in Indonesia is attractive for some specific workers such as women with young children for they have other tasks at home already so they can not work full-time (Smyth 1995 and Dhanani 2004).
9 0 2
The high rates of underemployment are more evident among female, less educated and rural
29
Figure 20. Underemployment (less than 35 hours) by Gender, 1993-2009 (%)

60
50
40
t n c r e P
30
20
10

0
3 9 1
4 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
Figure 21. Underemployment (less than 35 hours) by Residences, 1993-2009 Male Fem ale Total (%)
60
50
40
30
t n c r e P
20
10

0
3 9 1
4 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
Total
8 0 2
Urban
Rural
9 0 2
30
9 0 2
3.5. Nominal and Real Wages In discussing the wage, it is important to note that the wage data is collected only for employee since for other categories of workers such as self-employed and casual workers the data collected are their monthly income. Therefore, the comparison of wages between formal and informal workers can not be made based on their wages but it must be based on their monthly incomes. On the other hand, the comparison of wages between under and fully employed workers are limited only to the employees since the cut-off point between under and fully employed is only based on the number of working hours. Estimate of the average nominal monthly wage of employee in Indonesia was relatively low, i.e. around Rp. 1,300,000 or US$145 per month in 2009. Compared to previous years, the nominal wages have actually been increasing by about 15% per year during 1993-2009. On the other hand, the real average wage (the nominal wage rate deflated by inflation rate) increased steadily only by 2.5% per year, except in 1998 when the real wage dramatically decreased due to the AFC (Figure 22). The average increase of real wage is lower than GDP growth during the same period which is above 5% per year.8 Figure 22. Average Nominal and Real Monthly Wage of Employee, 1993-2009 (000 Rp)
1400 1200
1000
800
) p R 0 ' (
600
400
200

0
Comparing wage rate by gender, male workers in Indonesia generally earn much more than
1 3 9
1 4 9
1 5 9
1 6 9
1 7 9
1 8 9
1 9
2 0
2 1 0
2 0
2 3 0
2 4 0
2 5 0
2 6 0
2 7 0
2 8 0
their female counterparts. On average, maleNominal wages earned 1.5 timesReal wages than female workers higher workers. This is not good news, reflecting a significant overall discrimination against female
8
Compared to the other South East Asian countries, the real wage increase in Indonesia is also much slower than in Singapore and Malaysia, while in contrast the real wage in the Philippines experienced a decrease during the 1990s (Irawan et al, 2000).
2 9 0
31
workers. The better news is that the real wage of female workers has actually increased much faster than male workers (Irawan et al, 2000). This implies that the wage difference between female and male workers tends to become smaller due to an improvement in the education attainment of female workers and a reduction in the market discrimination against female workers (Feridhanusetyawan et al, 2001). Another contributing factor is the increasing number of female workers giving up their informal and low paying jobs that will obviously increase the average wage of female workers (Sugiyarto et al. 2006). Figure23. Real Average Monthly Wage of Employee by Gender, 1993-2009 (000,Rp)
350
300
250
200
) p R 0 ' (
150
100
50

0
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
Comparing wage rate across different sectors reveals some interesting findings. Firstly, the real average wage in service sector is actually the highest, followed by manufacturing and agriculture sectors. Secondly, the real wage in service sector is nearly 2 times of the real wage in agriculture sector, showing the really low of the overall wage rate in agriculture sector given that the real wage in service sector is not high by international standard. The real average wage in service sectors in 2009 was around Rp. 308,000 or US$34 per month, while that in agriculture sector was only Rp. 172,000 or US$19 per month (Figure 23).9 Thirdly, after all the industrilazation, the existing job in the manufacturing sector in Indonesia is not the good paying job as many policy makers and researchers believe to be the case. The average wage in industry sector is significantly lower than the service sector and there is no sign that the gap is getting closer. The average wage in industry sector is also lower than the overall average wage. In fact, it is only around the minimum wage level. Therefore, this brings to a much bigger concern that may link directly to the industrial policy in Indonesia that contributes to the
9 Male Female Total
It is important to note that the wage values presented here have already been deflated using inflation rate so that if one interested in comparing the wage rate with poverty line he/she must refer back the real values to their nominal values before comparing to the poverty lines.
9 0 2
32
problems in the development of manufacturing industry. The existing players in the manufacturing industry now are relatively less productive and less competitive as can be seen from their low exporting and competing capabilities, capable only paying low wages to their workers.10 Figure 24. Real Average Monthly Wage of Employee by Sector, 1993-2009 (000 Rp)
350
300
250
200
) p R 0 ' (
150
100
50

0
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
Total
8 0 2
3.6. Real income o Employee and self-employed
Agriculture
Manufacture
Services
Self employed workers constitute to informal workers while employees represent formal workers. As we can not compare the wage rates of employee and self employed, comparing their incomes shows different level of vulnerability of the two.11 Firstly, they have a different pattern of average incomes over the years (Figure 25). Incomes (and wages) of employees tend to fluctuate following the fluctuations in the economy while the incomes of self employed tend to be stable but at low level of around Rp. 180.000 (US $ 20) per month even during the crisis periods. This is because self employments (and employment in the agriculture and informal sector) act as a buffer during the economic downturns. Secondly, the difference in income between employees and self employed is really significant, i.e. about 50% in 2009. Employees real income per month in 2009 was about Rp 279.000 (or US$31) while self employee real income was only about Rp 189.000 (or US$21). This confirms that informality of employment
10
The most recent World Economic Forum (WEF) Global Competitiveness Report ranks Indonesia 44th in its overall index, behind Thailand at 38 and Malaysia at 26. The ranking is based on factors critical to a country's capacity to produce competitive exports, particularly quality of infrastructure, technological readiness and human capital. 11 Notice that this comparison can only be made from 2001 onwards since the self-employed income has only been available from Sakernas since 2001.
9 0 2
33
status in Indonesia is associated with a low paying and low quality of job, while formal employment is in general much better than informal employment.
34
Figure 25 Real Average Monthly Wage of Employee and Self-employed 1993-2009 (000 Rp)
300
250
200
150
) p R 0 ' (
100 50
Source: Calculated from series of Sakernas Note: Self-employed earning is only available from SAKERNAS 2001 onwards.
0
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
Underemployed and fully employed
Em ployee
Self-em ployed
Comparing average income of under (with a cut-off point 35 hour per week) and fully employed workers shows that underemployed have lower income than full-time employed as predicted and the gap is relatively stable over time. Fully employed group earn about 30% more than underemployed one. In contrast, using a better cut-off points of 40 hour per week, the gap between underemployed and full-time employed is closer. i.e. about 10% difference. This indicates that employees working between 35 and 40 hours per week are paid at a similar or even lower rate than those working less than 35 hours per week. This finding further confirms that those working between 35 and 40 hours per week are really belong to underemployed group for they work for extra time to earn some extra money at similar or even lower rate per hour. Therefore, underemployement in Indonesia is associated with low paying and low quality of employment which is similar to informal employment.
9 0 2
35
Figure 26 Average Earnings of Underemployed (Cut-off 35 hours) and Fullyemployed, 1993-2009 (000 Rp)
350
300
250
200
) p R 0 ' (
150
100
50

0
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2 7 0 2
8 0 2 8 0 2
Figure 27 Average Earnings of Underemployed (Cut-off 40 hours) and Fullyemployed, Underemployed Fulltim e 1993-2009 (000 Rp)
350 300 250 200
) p R 0 ' (
150 100 50

0
3 9 1
4 9 1
5 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
Underemployed
Fulltime
9 0 2
36
9 0 2
3.7. Labor Productivity Labor productivity is measured as output per unit of labor input. The indicator shows how a worker contributes to the production of output. In this context, higher productivity means better quality of employment, and vice versa. Moreover, in a more advance stage and across time, a big improvement in the labor productivity can be intepreted as a tehnological breakthrough as it means that the economy manages to use labor in much more efficient way.12 In calculating the labor productivity, output is represented by GDP while labor input is taken from the number of workers. The results show that labor productivity growth in general remains relatively constant except during the AFC period where the productivity significantly dropped by 15.4% due to the big economic contraction. Before the crisis, labor productivity increased by about 10%. The decrease in the labor productivity is less than that of the real wages (Figure 28). This shows the larger shock in inflation rate (price) and the labor market flexibility, which prevents a massive unemployment to happen during the crisis. The comparison of productivity and real wages trends across time also reveals some interesting findings. Firstly, the labor market seems to be working in a less efficient way since the growth trends of real wage and productivity move in a very diferent way and that the real wage trend tends to be lower than the productivity. Secondly, there seems no big improvement in the quality of employment in Indonesia as reflected in the relatively flat and decreasing trend of labor productivity. Figure 28 Annual Growth of Labor Productivity and Real Wages, 1993-2009 (%)

12
Another interpretation is of course that the industry is getting more capital intensive, requiring less labor to produce the same unit of output.
37
4.
Economic Crisis and Employment Condition This section specifically examines the effect of the economic crises, both the AFC and GFC, on employment condition in Indonesia. The main idea is that the crisis could provide a momentum for the government to introduce a policy reform to improve the economic situation that may involve improving the labor market condition. This is because labor market is always at the main channel of the effects of any macro economic policies so that the successful implementation of the policies mostly depends on the good working of the labor market. 4.1. Impacts of AFC and GFC The AFC in 1997 was firstly characterized by contagion of the financial market problems resulted in large capital outflows as capital moved out of Asia causing local currency depreciation. The closures of 16 domestic banks at the end of the year led to a banking panic that further worsened the situation. The central bank then provided a liquidity support to the private banks on daily basis through excessive monetary expansion that stimulated hyperinflation and drastic depreciation of Rupiah by more than 80%. From the second half of 1998, the central bank responded by introducing a tight money policy through increasing interest rate. Money supply responded to the policy that made the inflation started to decline in 1999. There were, however, massive non-performing loans and credit crunch that made the banking system collapsed (Feridhanusetyawan and Damuri, 2004). Moreover, there was a lack of confidence in the economy due to adverse political effects coming from the downfall of Soehartos political era in 1998. In short, the excessive monetary expansion, high inflation, massive Rupiah depreciation, and political turmoil have made the AFC impact on Indonesia was the worst and very different with other Asian countries also affected by the crisis such as Korea, Malaysia, and Thailand. The AFC actually began with the collapse of Thai Baht in July 1997 that impacted other countries in the region including Indonesia. From mid 1997 to mid 1998, Rupiah depreciated by more than 500% making many companies dependent on imported materials and components collapsed that made economy contracted by more than 13% in 1998. The worst contraction was in the construction sector (-39.8%), followed by financial sector (-26.7%), trade, hotel, and restaurant (-18.9%), and manufacturing (-12.9%). In contrast, there was a significant increase in agricultural and other natural resource dependent sectors. The proportion of agriculture sector in GDP had increased for the first time after 30 years by 0.2%, while utility sector also 38
experienced 3.7% growth. The adjustment from a modern into survival traditional sector however did not last for long due to a limited absorption capacity of the agricultural sector (Feridhanusetyawan and Gaduh, 2000). On the other hand, Indonesia is less affected by the 2008/09 GFC, which was originated from outside the region. Although there was a little decrease in the banking confidence caused by lower growth of bank lending, the capital flight remained modest, inflation was kept under control and financial sector remained intact. The economic growth slowed down to 6% in 2008 and 4.6% in 2009, below than their forecasted figure. This shows that the overall impact on the economy was relatively mild due to good macroeconomic management, strong financial sector and political stability. During the GFC, fiscal policy was better managed as public debt was under control to provide some rooms for a fiscal stimulus package. Monetary policy was also well managed as the Bank of Indonesia has been independent to manage the inflation targeting with a flexible exchange rate. Along with the strong commodity exports and weakening the adverse effects of the crisis, the exchange rate has generally moved in the desired direction. Another key difference between GFC and AFC is that during the GFC the financial sector remained strong as the government responded quickly to the one collapsed bank (Bank Century) by extending deposit guarantee facility (Basri and Hill, 2010). The political climate also remained stable and legitimate. The impact of the AFC and GFC on labor market was very different. Among others, the AFC has increased the growth of female employment by 4.2%, while the growth of male employment has been relatively constant. Hence, the crisis has forced a significant number of females to work for additional income to their households. In comparison, during the GFC, the proportion of females workers only slightly increased, much less than during the AFC that made no significant change in female employment rate. Effects across sectors show that during the AFC, there was a substantial decrease in the construction, financial, and capital-intensive manufacturing sectors and the movement of resources to agriculture and export-oriented activities. As a result, employment in agriculture grew by 13.3%, but then decreased afterwards (Figure 29). In contrast, agriculture sector employment had increased only slightly in 2009 and but decreased again in 2010 (McCulloch and Grover 2011 argued that this was only seasonal).
39
Figure 29 Annual Growth Rates of Employment by Gender, 1994-2010 (%)

12 10 8 6 4
t n c r e P
2 0
4 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
9 0 2
-2 -4
Male
Fem ale
1 0 2
40
Figure 30 Annual Growth Rates of Employment by Sector, 1994-2010 (%)

30 25 20 15 10
t n c r e P
5 0
4 9 1
6 9 1
7 9 1
8 9 1
9 1
0 2
1 0 2
0 2
3 0 2
4 0 2
5 0 2
6 0 2
7 0 2
8 0 2
-5 -10 -15
Agriculture Manufacture Services Overall, the unemployment rate had increased from 4.7% in 1997 to 6.4% in 1999 and this
increase was much smaller than expected, especially given the GDP dropped by more than 13%. The unemployment rate in urban areas increased from 8.0% to 10.5%, while in rural areas the increase was from 2.8% to 3.8%. Unemployment rate in urban areas was three times higher than in rural areas, showing a strong urban unemployment effect. The AFC has hurt male workers more than females as a large number of male workers in the construction sector were affected by the crisis. As a result, during 1997-1998 the unemployment rate among males increased from 4.7% to 5.8% (23.3% increase), while for females the increase was from 5.6% to 6.1% (8.5% increase). In contrast, the unemployment rate had decreased during the GFC which was motsly due to the growth of jobs in informal sector (ILO 2011). Although the overall unemployment rate had decreased after the GFC, the unemployment rate among highly educated (senior secondary and tertiary levels) increased compared to the less educated ones. This suggests that only people with high level of education (usually coming from richer family background) can afford to remain unemployed to wait for a better-paid job, while less educated workforce from poor family background simply cannot manage to be unemployed for a long period. They will find whatever job available including those in informal sector with low wages and poor working conditions. As in the case of agriculture sector, the informal sector has acted as a buffer during the AFC by absorbing new entrances and laid-off workers from formal sector. As a result, the share of 41
9 0 2
informal employment rate has increased to become more than 60% during and after the AFC. This was supported by the increases in the self-employed and unpaid family workers. In contrast, the employment status of workers did not much change during and after the GFC. Figure 31 Status of Employment, 1997-2009 (%)
4.2. New Jobs Created During the Crisis Periods In addition to the overall impact on employment, it is interesting to know the characteristics of new jobs created during the crises and who actually got them.13 Agriculture sector played a major role in creating new job during the AFC and contributed to around 30 percent of the new job (Figure 31). The rise in the price of agriculture products supported the increase in the agriculture activities and employment creation. The wholesale, manufacturing and public services contributed around 22%, 18% and 12%, respectively. On the other hand, the sectoral employment created during the GFC was very different. The dominant sector was shifted to wholesale and public services, while the agriculture sector only contributed to around 16%. The contributions of other sectors, however, were relatively similar. So, who get the new jobs? Table 1 reveals that the characteristic of new workers employed during the AFC and GFC were also different. The portion of new workers with primary and less than primary education was significantly larger in 2000 than in 2009. It was around 47% in 2000 but only less than 30% in 2009. During the GFC, workers with senior secondary education got 36% of the new job, while it was only 25 percent in the AFC. This signals the change in demand for higher educated workers.
13
The new job is defined in SAKERNAS as working in the job for less than a year. Unfortunately, this variable is only available from Sakernas 2000 onwards.
42
The differences in age group and gender are also quite significant. The young workforce aged 15-24 were more recruited during the GFC, i.e. more than 53% compared to 46% for those aged 25-44 years. On the other hand, the young workers absorption during the AFC was slightly lower than 43%. The composition of new job absorption by gender also changed. The percentage of female workers among the newly recruited was higher in 2009, at 42.5%, while it was only less than 38% in 1999. Figure 32 Job Creations During the Crisis Periods by Sector (%)
Table 1. Jobs Created and Characteristics of Workers, 2000-2009

2000 Number of new jobs created (000) 3,904 by Employment status (%) Formal 58.3 Informal 41.7 by Education attainment (%) Less than primary 14.1 Primary 33.3 Junior Secondary 22.0 Senior Secondary 25.3 Tertiary 5.3 by Age group (%) 15-24 42.5 25-49 49.4 50-64 6.8 65+ 1.3 by Gender (%) Male 62.2 Female 37.8 Source: Calculated from series of Sakernas 2009 2,906 57.1 42.9 9.7 19.9 25.9 35.9 8.6 53.1 46.3 0.6 0.0 57.5 42.5
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5.
Key Policy Measures Labor market policies were introduced in independent Indonesia as early as in 1948 and have since undergone significant changes. Some of those were introduced following the AFC as the crisis provided impetus for new changes. As a result, changes in the political and regulation environments after the AFC have led to a sharp shift in the emphasis of labor market policies and institutions in favour of stronger workers rights and welfare protection (Sugiyarto et al. 2006). In addition to ratifying all core ILO conventions, three major Acts were legislated by the Indonesian government during the period of 20002004 (Manning 2006). The three major policies were the Trade Union Act 2000 (Law No. 21/2000), Ministerial Decree No. 150/2000 and Manpower Protection Act 2003 (Labor Law No. 13/2003). The last policy measure and the introduction of minimum wages legislation have become two key concerns that have direct consequences on the quality employment in Indonesia. The two have contributed to increasing rigidity in the labor market regulation that makes hiring and firing in Indonesia are officially very expensive even at the regional or Asian standard. The reality, however, is a very different matter. 5.1. Minimum Wage The minimum wage is one of the most important instrument for labor market policy of the Indonesian government since the end of 1980s (Rama, 2001 and Suryahadi et al, 2003). The minimum wage has actually been regulated since early 1970s, but only limited to selected areas such as for construction workers in government projects. In mid 1970s, minimum wage was extended to all provinces but until the late 1980 it was not being enforced or effectively implemented (Rama 2001). The major changes in the minimum wages legislation began during 1989-1990 with the introduction of legal sanctions for non-compliance and specific guidelines for minimum wages implementation, which was based on a measure of minimum physical needs (kebutuhan fisik minimum or KFM) as a benchmark (Manning 1997).14 During this period, minimum wages in all provinces were significantly below KFM and some provinces even had minimum wages less than 40% of KFM.15 With these significant changes, the minimum wages in Indonesian in 1990s were tripled in nominal terms and doubled in real terms (Rama 2001) that created some
14
Minimum physical needs were calculated from the food bundle that fulfilled the minimum recommended calorie intake of 2600 per day (Suryahadi et al. 2003)
44
concerns on their effects on employment. The minimum wages increases led to a decrease in urban wage employment by 0-5% and an increase in in average wages by 515%. He also found a negative and significant employment effect of minimum wage for small firms, and a positive but not significant effect for large firms. The negative employment effect in smallmedium firms could be due to the large gap between minimum wages and actual wages in those firms. Following Rama (2001), Suryahadi, et al, (2003) also examined the issue by utilizing the significant changes in minimum wages during 1990s and extending the data to cover the period of 1988 to 2000. They found the negative effects of minimum wage increase on urban formal sector, whereby every 10% increase in real minimum wages reduced the urban formal employment by around 1%. They argued that the dis-employment effect in the formal sector will result in relocation of displaced workers to informal sector with lower earnings and poorer working conditions.
Box C: Who Get the Formal Job? To examine the probability of being employed in formal and informal sectors during the crises, a multinomial logit model is employed on Sakernas 1999 and 2009. The model estimation is done using the maximum likelihood method that allows for distinguishing the probability of being employed across several categories of employment. Accordingly, the labor market is divided into three different employment categories or labor market status, which is represented by j where: j = 0: formal sector employment; j = 1: informal sector employment; j = 2: unemployed. Using World Bank definition, formal sector employment includes employers, employees and self-employed with temporary workers in non-agriculture sector, while informal sector is defined as self-employed, family workers, and self-employed with temporary workers in agriculture sector. To obtain the complete picture of the Indonesian labor force, the unemployed is also included as the third category but non labor force are excluded from the sample as they dont need work. A summary of the results is presented in the table below. As can bee seen from the table, there seems a significant ranking of workers educational attainment, particularly in the formal sector. Those with higher education qualification are more likely to get the job in the formal sector. This is reflected by an increase in marginal effect for formal sector workers, i.e. from 0.088 for primary school to 0.728 for university graduates. All are relative to the informal workers who were used as the reference group. Interestingly, those with higher educational qualifications are also more likely to be unemployed and these results are applicable for both Sakernas 1999 and 2009 data. These seem to support the earlier finding that without social benefits, only people with high education qualification and coming from rich family background can remain unemployed in search for a better-paid job. On the other hand, people with lower education level and coming from low income could not afford to
15
For example, in 1990 the minimum wage in Central Java and South Sulawesi was respectively only 31 and 34 per cent of the KFM, while the minimum wage in Jakarta as the Capital City was 75 percent of the KFM (Manning 1998, p208)
45
be unemployed for a long time so that they will find whatever job available including in the informal sector (among others see Feridhanusetyawan and Gaduh 2000). Comparing for different age groups, the marginal effects of youth employment in formal sector, are positive and significant compared to the reference group. This means that younger workers are more likely to work in formal sector, while older workers are more likely to get a job in the informal sector. Interestingly, youth employment also has the greatest risk to be unemployed than older workers. The main reason is that many of the youth are young people entering the labor market for the first time without any previous job experience. Another reason is that the youth are in transition period from full-time education to full-time work, suggesting a slightly longer duration of job search (Dhanani, 2004). On the family characteristics, household heads are most likely to work in formal sector and they are also the least likely to be unemployed. On the other hand, females are less likely to work in formal sector and more likely to be unemployed. The potential reason for this is that women tend to have their domestic commitments that require more flexible working hours. Comparing for different location, workers in urban areas are more likely to be employed in formal sector that is obviously related to the domination of informal sector in rural areas. Table C1. Multinomial logit results for getting job in the formal sector or to be unemployed during the crises 1999 Formal Marginal Primary Junior Secondary Senior Secondary Tertiary Female Urban Household Head Age 15-24 Age 50-64 Age 65+ Married Separated Student Constant Effect 0.041 0.117 0.324 0.718 -0.006 0.216 0.114 0.017 -0.084 -0.146 -0.097 -0.072 -0.297 -0.262 P value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Unemployed Marginal Effect 0.001 0.002 0.005 0.008 0.000 0.002 -0.003 0.003 -0.003 -0.159 -0.005 -0.003 -0.002 -0.008 P value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Formal Marginal Effect 0.088 0.178 0.346 0.758 0.026 0.210 0.098 0.032 -0.044 -0.071 -0.056 -0.073 -0.157 -0.430 P value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2009 Unemployed Marginal Effect 0.002 0.003 0.008 0.011 0.000 0.002 -0.004 0.005 -0.005 -0.202 -0.009 -0.004 -0.005 -0.015 P value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Source: Calculated from Sakernas 1999 and 2009
Using firm-level data in 2003/2004, Sugiyarto and Endriga (2008) examine the minimum wages impact on employment and training provision. They found that minimum wages has a negative employment impact on unskilled worker, but not the skilled one, and the impact was found to be more severe in small firms. They also found that the in-house training provision by firm is also reduced due to the increase in minimum wages. Therefore, the minimum wage increase has forced firm to reduce hiring and training unskilled workers. 46
The new regulation implemented since 2001 has changed the political regime from centralization to decentralization, and the power to set the minimum wage level has also been transferred from central to province and local/district governments. This further complicates the process since the local governments need to work together with the wage commission at regional level to set up the minimum wage. The commission consists of regional manpower office, employer, labor union representatives, and some expert advisors (Manning, 2003a). In practice, the government at provincial level may set the minimum wage floor for the entire province, and the districts and municipalities governments can adopt or set a new minimum wage above the provincial wage level but not lower. The actual implementation varies across provinces with some provinces, such as Greater Jakarta (the capital city) and most provinces outside Java, use the provincial minimum wage level across their districts and municipalities. On the other hand, some provinces such as West Java, East Java, Central Java, and Bali have minimum wages for different cities and municipalities. These different practices have increased the gap in minimum wages between provinces and even among districts in the same province (Manning 2003, 2003a) In determining minimum wage level now, consideration must be given to (a) cost of decent basic living needs; (b) the consumer price index; (c) the capability, growth and continuation of the company; (d) the rate of the minimum wage in neighboring areas; (e) labor market conditions; and (f) economic growth and per capita income (Hendrani 2002). Considerations should also have been given to other economic factors such as the productivity of workers and compettitiveness of the industry (Sugiyarto and Endriga 2007). However, there are still no clear and detailed guidelines on how the criteria might be set up and implemented across regions. In practice, the cost of decent basic living needs and the rate of minimum wages in neighboring areas are still the main consideration to use to set up the minimum wage level (Hendrani 2002 for the case of West Java). The transfer of power to determine the minimum wage level from central to regional governments has increased the minimum wage trends. The combination of local pressures and stronger labor unions at regional level has also significantly contributed to the larger increase in minimum wage. Moreover, the increase is based primarily on the increased cost of decent basic living needs by ignoring the back drop of slow growth of an economy that has not fully recovered from the crisis in 1997-1998. This condition suggests that using only the cost of decent basic living as the benchmark in determining the minimum wage level may not be enough. Some experts have also criticized the condition that the regional governments seem more willing to support a populist approach to economic policy and set the minimum wage level 47
based on workers needs without considering other economic factors (Suryahadi et al, 2003, Widarti, 2006, Sugiyarto and Endriga 2007). Among the local government officials, there seems lack of knowledge and consideration on the effects of minimum wage on employment condition, international competitiveness, and overall economy. The compliance with minimum wage policy in Indonesia, and also in most developing countries, tends to be low.16 More than 18% of employees in urban areas are paid below the minimum wage level, while in rural areas the share is more than 29%. The condition is worsened in recent years as the non-compliance to minimum wages tend to increase and this seems to be influenced also by the introduction of the new severance pay (Labor Law No 13/2003) that makes hiring and firing worker very expensive (see Box C on decreasing compliance to minimum wages). Looking at the factors, there are at least three main reasons for the non-compliance. Firstly, there is lack of enforcement and weak control by the government (Rama 2001, Suryahadi et al, 2001). Although the minimum wage policy is applied to all paid employment without considering firms size and sector, the enforcement focus is still limited to large and medium enterprises and to workers in urban areas. Therefore, there many small enterprises and workers in rural areas are free from the enforcement which is made worse by their ineffective labor unions. Secondly, the government has never issued effective sanctions for employers continuing to pay their workers below the minimum wage (SMERU, 2003) either to set a good example and to deter others to do so. It seems that government still tolerates them to avoid lay-offs and increasing unemployment that is more concern for the government. Thirdly, government regulation actually allows employers not to pay the minimum wage by proposing a temporary waiver that they cannot pay the minimum wage level. However, the requirements to obtain the temporary waiver are difficult and costly, particularly for medium and small enterprises, for they need to have financial audit from a public auditor (Suryahadi et al., 2001). This further encourages them to stay away from a formal employment contract to avoid paying the minimum wage. The data shows that only about 135 of waiver requests per year from more than 20,000 firms (i.e. less than 1%) in the manufacturing sector in Indonesia (Rama 2001). Therefore, there are still a significant number of workers paid below the minimum wage level without the waiver. This suggests that the temporary waiver mechanism does not work.
BOX D: Decreasing Compliance to Minimum Wages
16
In Honduras, for example, 32% of total employment is paid below the minimum wage level, while in Costa Rica, more than 25% of full-time paid employees are paid below the minimum wage level (Gindling and Terrell, 2007).
48
Minimum wage legislation is meant to cover all wage workers in formal sector. In reality, however, it is likely to be enforced only for workers in medium and large firms and in urban, but not for the majority of workers in small firms and in rural areas. To see the coverage and enforcement of the minimum wage, the percentage of workers earning below the minimum wage is shown in figures below. As can be seen in Figure D1, the number and percentage of workers earning below minimum wages are actually increase, especially after 2003. This indicates that enforcement of minimum wages might have been weakened or it could also indicate that more people working in smaller firms that did not fully comply with the minimum wages legislation. In both cases, this shows that the actual compliance to minimum wage is low and getting worse. Non compliance in agriculture sector is the highest while those in manufacturing and service sectors are more or less the same. The non compliance rate is also higher for less educated workers, eldery workers, and young workers. These are related to the widespread informal employment which is prevalent among them. The decreasing compliance to minimum wages was likely due to the high level of minimum wages which keep increasing over time. Figure D2 portray the dynamics of minimum wages in comparison to the mean and median wage during 1993-2009. It can be seen that that the ratio of minimum wages to average (mean) wages in Indonesia was quite high at around 50-60 percent of average wages. The ratio tended to increase from around 35 percent in 1993 to more than 50 percent in 2009. The ratio is even higher if the median wages is used as a comparison. The minimum wages to median wages ratio was around 45 percent in 1993, started to declined after 1996 and continued to increase in 2003 to more than 70 percent in 2007 onwards. One thing to note is that the gap in the ratio of minimum wages to median and to average wages increased after 200517. This suggests that the proportion of people earning lower wages in 2006-2009 increased which could also indicate that the compliance of minimum wages was weaker. Alternatively, it might also suggest that the earnings of those which have high wages were increasing even faster, which might indicate higher inequality among workers.
17
This indicates that the average wage is larger than the median wages and the gap is increasing during the period.
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Figure D1. Non-compliance to Minimum wage 1993 2009
Figure D2. Minimum wage, median wage and mean wage 1993 2009
Source: Calculated from series of Sakernas Source: Calculated from series of Sakernas
Figure D3. Non-compliance to minimum wage by sector

80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 2008 2009 2006
Figure D4. Non-compliance to minimum wage by educational attainment

80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 1994 1996 1998 1999 2001 2003 2004 2006 2008 1993 1995 1997 2000 2002 2005 2007 2009 higher 0.0
underprim ary
prim ary
juniorhigh
highschool
Agriculture
Industry
Services
5.2. Employment Protection Any policy that restrict employer on the way to utilize labor could be described as employment protection, which usually includes dismissal protection, fixed-term and contract worker regulations, and working hours policy (Addison and Teixeira 2001). In Indonesia, the employment protection regulations were already incorporated in the Law No 1/1951, which regulates basic protection for labor. This includes normal and maximum hours of work, annual leave, and restrictions on female and children employment. Regulations related to dismissal process were passed in 1964 and after that only minor changes in regulations were in place. 50
The most recent major changes in regulation in the past 2 decades were the Manpower Ministerial Decree in 1996 and 2000, and the Basic Manpower Act No. 13/2003 which significantly changed the severance pay and long service pay. By implementing the Ministerial Decree No. 3/1996, severance pay and long service pay for dismissals for economic cause and minor offences increased by more than 50% compared to previous law in 1986. In addition, the decree added the coverage of long service pay to include workers who committed major offences, which was very controversial. The Ministerial Decree 150/2000 that regulates dismissal mechanism, severance payments and long service pay, was even more controversial. It increased the already high cost of severance pay and added in the list of the recipients of severance pay and long service pay for those who were dismissed due to major infringements and who left voluntarily. These workers were previously not eligible to receive severance pay. In response to these changes, employers started to complain about the severance pay, especially because of (i) the cost of severance that was increased despite the already large increase in the minimum wages; (ii) the increased cost of laying-off workers in uncertain time due to economic crisis; and (iii) the likely increase of regulation costs due to increasing the likelihood of more disputes with workers as unions become more active in enforcing regulations (LP3E-UNPAD and GIAT 2004). The decree was then replaced by The Manpower Protection Act No. 13/2003, which was very comprehensive but still did not change the expensive nature of the previous severance pay. In fact, it has made it even more expensive. The Act contains 193 articles and almost 500 clauses, covering from general to specific topics such as some basic industrial relationship guidelines. Among the 193 articles, 73 are on employment protection regulations. Although the Basic Manpower Act No. 13/2003 withdrew the right of severance pay for workers committed a major offence, the act increased severance pay by more than 50% for other workers compared to the decree in 2000.18 The implementation of the law significantly increased the severance pay and made it more costly for employer to lay off workers especially in the case of redundancy. Facing this situation, it is more likely that firms try to find a way to overcome the more rigid and expensive regulations. For instance, some firms use more contract workers or outsourcing workers from employment agencies to reduce the increasing cost of directly hiring workers (LP3E-UNPAD and GIAT 2004). Others may change the existing working contract arrangement to make it more flexible so that the firms are free from the requirements to pay the minimum
18
More comprehensive analysis on the Manpower Law can be found in Manning and Roesad (2007)
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wage and severance pay such as moving from daily or hourly rate to output base (see BOX E for another example). The implementation of the Manpower Act 13/2003 is often blamed as one of the main causes of slow employment growth (Manning and Roesad 2007). Alatas and Newhouse (2010) even argue that the law put both employers and workers in a lose-lose situation as it deter foreign investment and employment creation by new entrepreneur. In fact it may prevent start ups of good companies knowing that to remain competitive they must know how to go around with the regulations. The negative externalities can actually be seen from the low level of compliant rate among the existing firms. It is only about 7% of terminated workers received the full amount of severance pay that they are entitled, 27% received less, and 66% received nothing (Figure 33). Therefore, the expensive and rigid regulation is more like de jure or in normative term while in the reality, or de facto, the firms can always get away with it. This confirms the general rule that a rigid regulation without a strict implementation will only create corruption and other rent seeking activities, further worsening the governance situation.
Figure 33 Receipt of Severance Pay, as reported by terminated workers
Source: Alatas and Newhouse (2010, p. 15)
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5.3. Other Regulations and Policies Other regulation and policy to directly support good employment in Indonesia are Trade Union Act (Law No 21/2000) and the government commitment to achieve the Millennium Development Goals (MDGs). The two are directly related to the welfare of workers. The Trade Union Act gives workers the freedom to form, organize, and be a member of a trade union. The Act also sets the minimum size of a trade union (10 members), the rules for forming union federations and confederations, and allows for the formation of multiple unions in a single establishment. As a result, the number of unions has increased significantly, from only one officially trade union federation to 61 union federations (formed from at least 5 enterprise/establishment unions) and more than 11,000 enterprise unions registered by 2002 (SMERU 2002). Unions at the enterprise level are more important in building good industrial relations, since they have a direct relationship between workers and employers. It is also expected that unions play a more important role in negotiating minimum wages through tripartite bargaining processes and having greater control over the implementation and compliance of minimum wages and other labor legislation. On the commitment to achieve MDGs, Indonesia, along with 188 countries, has committed to achieve the MDGs, which are basically a global action plan to achieve the eight anti-poverty goals by 2015. Based on pro-growth, pro-job, pro-poor and pro-environment strategies, the government of Indonesia allocates funds to central and local government to support the achievements of MDGs. In addition, The National Medium-Term Development Plan (RPJMN) for 2004-2009 and 2010-2014, as well as the Annual Work Plans and the state budget have also mainstreamed the MDGs in all phases of development. Related to the improving labor market, the target of the MDGs is to achieve the full and productive employment and decent work for all, including women and young people (Target 1B). The target is a part of the first goal of MDGs which is to eradicate extreme poverty and hunger. In addition, the MDGs targets also specifically promote gender equality and empower women. The MDG labor indicator for Indonesia showed an improving trend. The growth rate of GDP per person employed was around 2.2% in 2010, compared to 3.5% in 1990. Nevertheless, during 1990-2009 the average growth rate was around 2.5%. The employment-to-population ratio was quite stagnant and did not show a significant change. In 2010, the employment-to-population 53
aged 15 and above only slightly decreased. A slight improvement can be seen in the proportion of own-account and contributing family workers in total employment. The proportion decreased from 71% in 1990 to 64% in 2010 that might indicate the improvement of the formal job. While the development in some MDGs indicator was on track, Indonesia still faces three big challenges in creating decent jobs for all. First is to expand good job opportunities in formal sector, which is slowed down by low growth of investment and manufacturing sector development. Second is to accelerate the transformation of workers from low to high productivity sector, and finally is to improve the welfare of workers in the informal sector and to narrow the income gap between female and male workers at the same level of productivity. Table 2. Current Achievement of the MDGs Indicator Related to Worker
Source: The report on the achievement of the Millennium Development Goals in Indonesia 2010.
5.4. Labor Market Regulations and Outcomes As it is evident from the relatively smooth trends of the key labor market outcomes in Indonesia, especially related to unemployment and employment levels, there seems no sign of a big improvement in the labor market outcomes because of the introductions of the regulations. In fact, more complaints and concerns are attributed to them that have also been discussed in many research studies. The regulations on the minimum wage and severance pay, for instance, are a good case in point. Both regulations are introduced to protect the workers but their actual implementations have missed the targets and as a result they have created more uncertainties and additional burdens to the business. This, in turn, contributes to the worsening of investment climate in Indonesia. Moreover, the high cost of the minimum wage and severance pay system will only deter a new good investment away, filtering in instead those who know exactly how to go around with these 54
regulations. The high prevalence of non-compliance to the minimum wage and non-payment of the severance pay are a clear proof for this. At least this shows that the implementation of the regulations is not effective and efficient. In a much stronger note, it shows that the regulations do not really serve their purpose and in fact their adverse effects further contribute to the flexibility of the labor market in Indonesia but in a negative way. This is really against the effort of improving the quality of employment and labor market condition as the workers are actually in the worse off situation. Therefore, this calls for improvements in both the regulations and their implementations.
55
6.
Conclusion and Policy Implication The economic development in Indonesia in the last two decades provides a very good opportunity to study the effects of economic fluctuations on the labor market outcomes in the context of improving the quality of employment and labor market condition. There are some key findings that can be derived from the analysis: Firstly, one a very obvious conclusion that can be derived from studying the labor market in Indonesia is that the country really needs to grow faster and generate more good jobs to cater the growing number of labor force and to improve the overall quality of workers. This will, in turn, increase per capita income and reduce poverty. The country could benefit from its demographic dividend since the working age population has been growing faster than the non-working population in the last decades. This should provide a golden opportunity for the economy to grow and to increase per capita income without requiring an increasing productivity of workers. This demographic bonus will close probably forever in the next decade as the growth of elderly dependent population is outpacing the growth of the workforce, putting a greater pressure to the existing workforce and the economy. The upcoming years will therefore be very critical for Indonesia to boost good job creation to make the most of this one-off opportunity. Secondly, the labor market outcome indicators show that the Indonesian labor market is very flexible in its most aspects such as in the recruitment, working hours and wage rate. They adjust smoothly for any fluctuations in the economy including for big shocks coming from the economic crises. This is really ironic given that Indonesian labor market regulation is among the most rigid, restrictive and expensive in the region, if not in Asia. This shows that implementation is very weak and a separate intervention is really necessary to improve the quality of employment. Otherwise, workers are always the one who bear the cost of economic downturns that make them racing to the bottom by keeping the low quality of jobs to keep alive. Thirdly, the labor market in Indonesia is very segmented due to, among others, the widespread underemployment and informality. The lack of unemployment benefits and lower income in general make workforce can not afford to be unemployed but forcing them to take whatever job available in the market, including in the informal employment and underemployed situation. They receive low wages and have poor working conditions. Improving the quality of employment in Indonesia must therefore involve addressing the informality and underutilization issues. This 56
is in addition to addressing other problems such as gender gaps in many aspects of employment and low quality of workers both at their entry to labor force and during their working span. This links directly to improving education and training. Fourthly, the normative or de jure of rigid labor regulations in the social protection such as the minimum wage and severance pay have failed to provide protection to workers and in the process they have hindered good job creations in the formal sector. In addition to missing the targets, the regulations have created adverse response by (i) driving away new investments from good firms that are more likely to generate good jobs, (ii) encouraging existing and new firms to hire workers in short and less permanent terms and (iii) discouraging existing firms to expand and improve the quality of working relationship. The apparent weak implementation of the regulation also encourages firms to go around the regulations, further worsening the overall corruption and governance situation. Accordingly, both firms and workers are trapped in a loselose situation that discourages further a new and good investment (in addition to discouraging expansion of the existing firms. All these, in turn, will further lower the overall growth in the formal sector and economy. Finally, reform in the labor market only will not solve the problem as it has a root in the bigger predicament of investment climate, which covers overall macroeconomic stability, infrastructure and policies and regulations that make the country less competitive for doing business internationally. The current deadlock in the labor market reform attempts is a clear example of the failure of a one-prong only approach since a multi-prong strategy is needed, including to revamp the industrial policy as the existing industry has in fact generated low paying jobs.
57
Bibliography Agrawal, N. (1995). Indonesia: Labor Market Policies and International Competitiveness, World Bank Policy Research Working Paper No. 1515. Basri, C and Hill, H (2010). Indonesian Growth Dynamics, ANUCollege of Asia and the Pacific, Working Paper in Trade and Development. Dhanani, S. (2004), Unemployment and Underemployment in Indonesia, 1976-2000: Paradoxes and Issues, Working Paper, ILO, Jakarta. Feridhanusetyawan, T (1999). The Social Impact of the Indonesian Economic Crisis: Labor Market Adjustments, World Bank-ISEAS Research Project. Feridhanusetyawan, T., Aswicahyono, H. and Perdana, A. A. (2001). The Male-Female Wage Differentials in Indonesia, CSIS Working Paper No. WPE 059. Feridhanusetyawan, T. and Damuri, Y. R. (2004). Economic Crisis and Trade Liberalization: A CGE Analysis on The Forestry Sector, CSIS Working Paper No. WPE 079. Feridhanusetyawan, T. and Gaduh, A. B. (2000). Indonesias Labor Market During the Crisis: Empirical Evidence from Sakernas 1997-1999, The Indonesian Quarterly, 28(3), 295-315. ILO (2011). Labor and Social Trends in Indonesia 2010: Translating Economic Growth into Employment Creation, ILO Office for Indonesia Irawan, P. B., Ahmed, I. and Islam, I. (2000). Labor Market Dynamics in Indonesia: Analysis of 18 Key Indicators of the Labor Market (KILM) 1986-1999, Working Paper, ILO, Jakarta Islam, I. (2002). Poverty, Employment and Wages: An Indonesian Perspective, Working Paper, ILO, Jakarta. LP3E-UNPAD and GIAT (2004). Indonesias employment protection legislation: swimming against the tide?, Faculty of Economics, University of Padjajaran Bandung and Growth through Investment, Agriculture and Trade (GIAT) Project. Manning, C. (1997). "A New Era of Labor Market Regulation in Developing East Asia? The Case of Indonesia." Asian Economic Journal 11(1): 111-129. Manning, C. (2003). Labor Policy and Employment Creation: An Emerging Crisis? , Partnership for Economic Growth (PEG) Project. Manning, C. (2006). Potential Winners and Losers from Labor Regulation in the Formal Sector. Labor Market Regulation and Deregulation in Asia: Experiences in Recent Decades. C. Brassard and S. Acharya. New Delhi, Academic Foundation: 111-137. Manning, C. and P. N. Junankar (1998). "Choosy Youth or Unwanted Youth? A Survey of Unemployment." Bulletin of Indonesian Economic Studies 34(1): 55 - 93. Manning, C. and K. Roesad (2007). "The Manpower Law of 2003 and its implementing regulations: Genesis, key articles and potential impact." Bulletin of Indonesian Economic Studies 43(1): 59 - 86. McCulloch, N. and A. Grover (2011). "Estimating the National Impact of the Financial Crisis in Indonesia by Combining a Rapid Qualitative Study with Nationally Representative Surveys. SMERU Working Paper. Rama, M. (2001). "The consequences of doubling the minimum wage: The case of Indonesia." Industrial & Labor Relations Review 54(4): 864. SMERU (2002). Industrial Relations in Jabotabek, Bandung, and Surabaya during the Freedom to Organize Era. SMERU Research Report. Jakarta, SMERU. Smyth, I. (1995). Gender, Change and Insecurity Theoretical Issues and Practical Concerns, Gender and Development, 3(3), 6-15. Sugiyarto, G (2007). Measuring Underemployment: Establishing the Cut-off Point, Asian Development Bank, ERD Working Paper Series No. 92. 58
Sugiyarto, G., M. Oey-Gardiner and N. Triaswati (2006). Labor Markets in Indonesia: Key Challenges and Policy Issues. Labor Markets in Asia: Issues and Perspectives. J. Felipe and R. Hasan, Palgrave Macmillan: 301 - 366. Suryahadi, A., W. Widyanti, D. Perwira and S. Sumarto (2003). "Minimum Wage Policy and Its Impact on Employment in the Urban Formal Sector." Bulletin of Indonesian Economic Studies 39(1): 29 - 50. Thee, K. W. (2007). Indonesia. Handbook on the Northeast and Southeast Asian economies. A. Chowdhury and I. Islam. Cheltenham, UK, Edward Elgar.
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Informal Sector and Quality Employment in Asian MICs (Paper)

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Informal Sector and Quality Employment in Asian MICs (Paper)

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Towards Quality Employment in Indonesia

Guntur Sugiyartoa), Devanto Pratomob), and Raden Muhammad Purnagunawanc)

-2 .0 0 GP D A ric ltu g u re In u try ds S rv e e ic s

3. The Dynamics and Main Characteristics of the Indonesian Labor Market

Figure 3a. Working Age Population by Education Levels, 1993-2009 (%)

Less than Primary

Source: Calculated from series of Sakernas

-2.0 -4.0 -6.0

Source: Calculated from series of Sakernas

Figure 4a. Labor Force Participation Rate by Gender, 1993-2009 (%)

65.0 60.0 55.0 50.0 45.0 40.0

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

Figure 4c. Total of Labor Force by Education Level, 1993-2009 (%)

Source: Calculated from series of Sakernas

Figure 5. Labor Force Participation Rate by Education Level, 1993-2009 (%)

Less than Primary

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

Less than Primary

Source: Calculated from series of Sakernas

2001 2002 2003 2004 2005

Source: Calculated from series of Sakernas

Less than Prim ary

Figure 8: Unemployment Rates (New Definition) by Residences, 2001-2009 (%)

Source: Calculated from the series of Sakernas

Source: Calculated from the series of Sakernas

Figure 10 Unemployment Rates (New Definition) by Gender, 2001-2009 (%)

Source: Calculated from the series of Sakernas

Source: Calculated from the series of Sakernas

4. Unemployed (%) 27.13 Source: Calculated from series of Sakernas

Source: Calculated from the series of Sakernas

Source: Calculated from the series of Sakernas

Source: Calculated from series of Sakernas

45.0 40.0 35.0 30.0 25.0

20.0 15.0 10.0 5.0 0.0

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

Figure 18 Informal Employment Rate by Residences, 1993-2009 (%)

40.0 30.0 20.0 10.0 -

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

Figure 20. Underemployment (less than 35 hours) by Gender, 1993-2009 (%)

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

3.6. Real income o Employee and self-employed

Underemployed and fully employed

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

Figure 29 Annual Growth Rates of Employment by Gender, 1994-2010 (%)

Source: Calculated from series of Sakernas

Figure 30 Annual Growth Rates of Employment by Sector, 1994-2010 (%)

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

Source: Calculated from series of Sakernas

Table 1. Jobs Created and Characteristics of Workers, 2000-2009

Source: Calculated from Sakernas 1999 and 2009

Figure D1. Non-compliance to Minimum wage 1993 2009