INDONESIA EMPLOYMENT POLICIES: PROBLEMS AND CHALLENGES

Rahma Iryanti

Deputy Minister for Poverty, Labor, and SMEs

National Development Planning Agency

24 February 2015

BACKGROUND From 2005 to 2014, Indonesia’s economic growth has allowed employment to

growth more than the labor force:

Average economic growth during 2005-2014 was 5.8 percent.

Average employment growth during the same period was 2.0 percent, while the labor force grew 1.7 percent.

Therefore, unemployment rate was down to 5.9 percent in August 2014.

The Government has also raised investment on hard and soft infrastructure by providing labor-intensive infrastructure projects, poverty reduction programs, and skill and competitiveness-enhancement programs.

Structures of the Indonesian Economy:

The economic growth mostly came from service sector, which created most of employment.

The share of manufacturing sector to GDP is declining

Eksports dominated by primary products

Employment in manufacturing sector only around 13-14 percent

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Around 56% of the labor force are low-skilled (primary school or lower background) and most jobs are informal (68%).

Labor force are abundant, but decent jobs are limited.

Skill mismatch is still high. Low recognition of certificates of competency, domestically and internationally.

Very few international competency standards adopted by training institutes.

Our migrant workers are mostly low-skilled and susceptible to cases of human rights violation.

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BACKGROUND

Issues and Challenges in Labor Market

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Demographic Bonus (DB) and it’s Policy Implications

• DB started from 2012 the lowest of dependency ratio will occure between 2028-2031

• DB will increase labor force with productive-age in line with private saving source of economic growth

DB can not be harvest automatically, there must be appropriate policies to support it, such as:

– Increase in health services

– Skill improvement through education and training

– Population growth controll

– Economic policies supporting labor market flexibility, trade openness, and private saving

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Source: BPS & Bappenas

Almost 40% of employment are in agriculture, but around 90% of workers in this sector are low-skilled.

Sectors such as social/personal services; electricity, gas, water; and finance require more skill (higher education). The rest is dominated by people with basic education.

0%10%20%30%40%50%60%70%80%90%

100%

Basic Secondary Higher Share of Employment

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Source: National Labor Force Survey, 2013, (Bappenas Calculation)

EDUCATIONAL BACKGROUND Vs ECONOMIC SECTOR

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≤ Primary22%

Junior High

School25%

Senior High

School28%

Vocational School

17%

Diploma3%

University5%

47% are low educated 53% are educated (higher

than senior high school and above)

If they are educated, why can’t they work?

- Limited opportunities- Limited attracted

opportunities at rural level

Indonesia Youth Unemployment Facts

Source : Bappenas Calculation (Indonesia labour force situation.

Negative growth of several labor intensive industries results from, among others, the high increase of minimum wage. High minimum wage increase has influenced our competitiveness, indicated by low ranking of our labor market efficiency, according to WEF Global Competitiveness Report.

No. Labor Market Efficiency2013-

142012-

132011-

102010-

092009-08

1 Redundancy costs, weeks of salary 137 131 127 119 117

2Rigidity of employment index(firing, contracting, outsourcing)

- 104 100 82 87

3 Hiring and firing practices 52 51 38 34 19

4 Flexibility of wage determination 114 113 98 92 79

5Cooperation in labor-employer relations

61 68 47 42 19

LABOR MARKET EFFICIENCY PILLAR, from 142 countries Redundancy

costs and flexibility of wage-determination concern the private sector the most.

In 2012-13, from 147 countries, Indonesia stood at rank 137 and 114.

Labor market is not yet efficient…

Source: Global Competitiveness Report, World Economic Forum

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Manufacturing Industries:Production Growth

Medium and Large Manufacturing Industries: In general, production of manufacturing industries indicates a positive growth in 2012. However, not all industries show a production increase.

Positive Growth Negative Growth

Types of Industries Growth Types of Industries Growth

Pharmacies 13,19% Basic metal -8,48%

Food 12,75% Textile -8,32%

Tobacco 5,42% Leather and footwear -6,96%

Clothing 4,91% Furniture -6,60%

Transport equipment 3,57% Paper -4,37%

Road vehicles 3,23% Beverages -0,50%

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Over the last decade, poverty rates decreasing but inequality increasing .....

Since 2010, poverty reduction slowed, in absolute terms declined by about 1 million poor

people per year.

Poverty level (September 2013) 11.47% 11.37% up from (March 2013) because of high

inflation dominated by the increase of staple food prices, mainly due to fuel price hike in

June 2013.

GINI ratio & Poverty rate

Population of the poor

Poverty rate Poverty targetPoverty rate GINI ratio

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Source: BPS & Bappenas

Source: BPS & Bappenas

However, we see some improvement…

Formal workers, in terms of number and contribution, have been improving over the years. On the other hand, the number of informal workers as well as unproductive workers, such as casual workers in agriculture and non-agriculture, and unpaid family workers, has been declining.

0%

20%

40%

60%

80%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Segment of Formal and Informal Workers Informal Formal

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Structure of sectoral workers

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Workers in non-agricultural sector has been improving significantly, followed by diminishing number of workers in agricultural sector, despite some deceleration.

However, workers in industry tends to be stagnant. The proportion of workers is relatively steady at 12 percent to 14 percent for more than a decade.

Meanwhile, workers in service sector continues to grow well, reaching more than 50 percent.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Pertanian Industri Perdagangan Bangunan Jasa Kemasyarakatan

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But we have social protection system in place…

SOCIAL PROTECTION IMPLEMENTATION

Social Assistance

• Varied programs to protect the poor and vulnerable

• Prevent irreversible loss of human capital – links to education and health outcomes

• Rapid response to crises

National Social Security System

• Basic insurance coverage for workers against shocks

• Mandatory contributions

• Increases labor mobility

Labor Market Interventions

• Labor policy supporting economic plan and social welfare improvement for the people

• Skill building

• Job search

FUTURE CHALLENGESIndonesia Economic Transformation and

Employment Creation(Medium Term Development Plan-MTDP

2015 – 2019)

Why Economic Transformation?

Escaping from the middle income trap

Responding the global economic challenges

Strengthening competitiveness

Improving economic resilience

Assuring food, energy, and water security.

Improving the quality of development through inclusive growth

Reducing poverty and unemployment

Environmental sustainability

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Medium Term Plan 2 Medium Term Plan 3

GDP Growth 2014:5,02 %

5,7 - 8 % Per year

GDP per capita2013:

USD 3.5002019:

TowardsUSD 7.000

Poverty rate 2014: 10,96 2019:7 - 8 %

Unemployment Rate 2014:5,94%

2019:4,0-5,0%

2015 2020 2025 20352010

Middle Income Trap ThresholdUSD 12.000

DEMOGRAPHIC BONUS2012

GDP Growth, Poverty and Unemployment

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2031

Source: Technocratic Plan and MTDP-Bappenas

CHALLENGES TO CREATE QUALITY EMPLOYMENT

1. Improving productivity, by reallocation of workers to economic activities with high-productivity.

This challenge relates to structural transformation of the economic sector to highly-productive sector. The expected growth is growth that can absorb employment in a large number without lowering productivity.

2. Improving worker’s standard of living, especially those who are among 40 percent of population with lowest income (including working poor), by providing productive employment opportunities.

This challenge relates to: (a) Availability of new employment opportunities as a means to improve income; (b) Creation of new jobs needs new investment, FDI or local; (c) Availability of productive employment opportunities for unemployed and working poor; (d) Working poor’s standard of living is improved by providing jobs to vulnerable workers.

3. Improve Industrial Relations: (a) Rights at work, (b) Promote union-employer collective bargaining processes, (c) new trend/best practice – decentralized system with strengthened union movement and collective bargaining, (d) Dispute settlement.

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4. Extending employment opportunities to educated youth labor force, according to their respective education.

This challenge relates to the increase of educated youth labor force participation rate (19-24 year old). Such “excess supply” at high level of education may continue if structural problems are not solved. This will result in an increasing number of educated unemployment.

High education is not always consistent with the demand, especially if the goal is just to pursue high education degree without suitable qualifications.

5. Increasing labor supply in terms of quantity and quality to support local economic activities.

Uneven distribution of labor force among islands and among provinces/regencies/cities leads to an imbalance of labor production factor. Therefore, investment or local economic development is concentrated in high populated regions.

CHALLENGES TO CREATE QUALITY EMPLOYMENT

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6. Improving the Skills of Workers: Skills upgrading of the current labor force is crucial in the short to medium run

• Building the right skills for work starts from the early ages and basic education

• Even if the quality of basic education could be fixed instantly, the first graduates of the fixed system will enter the labor force in 2025

• Even if the quality and relevance of post-basic education could be fixed instantly, it will only affect 10 percent of the labor force by 2025

• In reality these reforms will take time, while the skills shortage continues to constrain the capacity of the Indonesian economy to growth and create more and better jobs

• Skills upgrading of the existing labor force, particularly new entrants, is a crucial policy to address the skills shortage in the short to medium term

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CHALLENGES TO CREATE QUALITY EMPLOYMENT

THANK YOU

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