IMPROVING WORK

AND WELL-BEING FOR ALL

IN INDONESIA

21st May 2014

FKP Seminar, World Bank, Jakarta
MOTIVATION 1: JOBS ARE KEY FOR REDUCING
POVERTY AND SHARED PROSPERITY
Jobs have been an important engine for reducing
poverty in developing economies, especially in
East-Asia Pacific

More and better jobs are needed to accelerate

economic transformation and achieve shared
prosperity (improve well-being of the bottom 40%)
 MOTIVATION 2: IT IS IMPORTANT TO PUT “JOBS” AT
THE CORE OF INDONESIA’S DEVELOPMENT STRATEGY
It is the right thing to do:
 Indonesia is part of the G20 and its remarkable growth
since the ’97-’98 crisis is a success story
 Aspiration of becoming high-income country
 Needs to address high inequality and vulnerability
It is the right time for action:
 Macroeconomic outlook is still favorable
 The demographic bonus will expire soon
 OUTLINE

Main facts about Jobs in Indonesia

Main challenges of the Indonesia labor market

Ways forward: how Indonesia can address its

challenges
3 SALIENT FACTS
ABOUT JOBS IN INDONESIA
 Indonesia’s economic performance is a global success
story
• In a bit more than a decade, Indonesia went from deep crisis
to G-20 member
– Growth averaged 5.7% in 2003-2012; total GDP almost doubled;
and GDP per capita jumped from US$2,737 to US$4,272
(constant 2005 $, PPP)
Percent

15 Average growth of
1990-96: 8.0% Average growth of
10 2003-12: 5.7 %

-5

-10

-15
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

5
Fact #1: Thanks to high growth, Indonesia has created over
20 million jobs since 2001, mostly in the formal sector.
124
122
120
118 Informal Employment
116 growth since 2001 (%)
114
112
110
108 Formal Employment
growth since 2001 (%)
106
104
102
2001
100
= Total Employment growth
98 since 2001
100
96
94
92
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012
Urbanization has been a driving force of formal job creation

Decomposition of employment growth in Decomposition of employment growth in rural

urban areas: formal vs. informal sector areas: formal vs. informal sector
(Urban Employment in 2001=100) (Rural Employment in 2001=100)
Informal 150
150 Informal rural
urban
145 145 employment
employment
12.6 growth since
140 growth since 140
2001 (%)
2001 (%)
135 135
130 Formal urban 130 Formal rural
employment
125 125 employment
6.8 growth since
9.2 growth since
120 2001 (%) 120
2001 (%)
11.8 115 115
8.2 8.6 6.2
110 Total urban 8.2 110
Total rural
3.8 7.0 employment 6.9 7.4
105 105 employment
5.4 3.2 8.9 7.9 15.6 19.9 33.2 growth since 1.5 4.0 3.1 2.8 4.5 6.9 9.0 8.2
4.7 4.0 4.5 4.6 3.6 3.6 100 growth since
0.8 100 2001 0.4 -1.8
-1.0 -1.9 -0.8 -0.6 -1.7 -2.7 -0.4 -0.3 2001
95 95
90 90

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: Statistics Indonesia (BPS), Sakernas

7
Indonesia’s performance has been among the strongest in the region since
2005, but the employment rate is still lower than in other economies…
Employment rate in EAP region
(population aged 15+)
85 85

Cambodia
80 80

Vietnam
75 75
China
Percent

70 Thailand 70

65 65
Indonesia

60 Philippines 60
Malaysia

55 55
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: WDI and Statistics Indonesia (BPS), Sakernas

8
Fact #2: Despite successful job creation, most jobs created
are in low productivity service sectors.
Sectorial relative to
Total Value added per Employment and labor productivity growth by sector
worker growth rate (bubble area = sector share in total employment in 2012)
2001-2012 (%)
140
Transport 4.5%
120
Total employment growth rate 2001-2012
100

80

60
Benchmark: Total economy value added
40 Agriculture 35.1% growth rate 2001-2012
Trade & retail 20.9%
20
Soc. & pers. services
0 15.4%
Construction 6.1%
R² = 0.3327
-20
Electricity, gas 0.2%
-40 Manufacturing 13.9%

-60 Mining 1.4% Finance 2.4%

-20 -10 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140
Employment growth rate 2001-2012 (%)
At the sector level, employment growth has been largely driven by the
services sector…
3 Main Sectors' Contribution to Total Employment Growth (2001-2012) Total % increase
24 122.0 since 2001
22
119.2 119.8
20 Services 40.7%
18 115.5
Industry 41.1%
Percentage points

16 15.3
112.9
14
12 110.0 Agriculture -2.2%
10
8 Total employment growth since 2001
105.1
6
103.2 103.5
4 102.2 7.7
100.9
2
2001=100 0
-2 -0.9
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

120 % contribution to total employment growth (2001-2012)

(However, Soc.&pers.svcs
most jobs 100
Trade & retail
have been 30.3
Manufacturing
80
created in Construction 68.6
low- 60 28.5 Finance Employees
productivity Mining
40
sectors) 16.3
Transport
Casual workers
20 14.9 Electricity,gas 27.3
7.7 Agriculture Self employed 4.9
0
Sector Employment status
-20

10
The largest sectors are still low productivity ones

Sector VA per worker

relative to total VA per
worker in 2012 Sectors' relative productivity and employment share
600

500 Mining

400 Finance

Electricity & gas

300

Transport R² = 0.5827
200
Manufacturing
Construction
100
Wholesale trade
Soc. & pers. Services Agriculture
0
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0
Sector share of total employment in 2012
Fact #3: More than 50% of all workers are still employed
informally, and many formal workers have no contracts.
% of informal workers: total % of informal workers by sector Employment composition by
(2012) (2012) contract type (2008)
0 10 20 30 40 50 60 70 80 90 100 Permament
contract
Employers employees
Informal Agriculture 2% 3%

Construction Fixed-term
contract
54% employees
Transport 3%

Wholesale &
retail Informal
agricultural
Mining 27%
46% Employees
Manuf. with no
contract
Formal 38%
Pers.
Services
Informal
Finance non-
agricultural
Electricity & 27%
gas

Source: Statistics Indonesia (BPS)

12
In addition: Labor market participation of women and youth
remains low
• Low Female LF participation rate • High non-participation among youth
Labor participation rate, female % of NEET (not in employment,
(% of female population aged 15+) education or training) among youth
(15-24)
90
50
80 2011 2000 Male Female

70
40
60 53.4

50 30
79.2

76.5

40
75.0

73.2

71.6

70.6

67.7

63.8

20
30
54.3

53.2

50.0

49.7

43.8

39.3

38.4
20
10
10

0 0
And, youth unemployment is high, especially for the high-
skilled
30%
Unemployment rates by level of education
(age 20-29)

25%
Unemployment rate

20%

15%

10%

5%

0%
Primary or less Basic Senior Secondary Tertiary
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
As a result, the benefits of growth have not been enjoyed
equally by all: the poorest 40% are left behind...
12% 40% 80%
Annualized growth (%)

Average Growth for all Households

4

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99

Household Per Capita Consumption Percentile

….which means that Indonesia is facing the risk of a
middle-income trap:
 Escaping the middle-income trap requires first and
foremost fast growth
 Current trend growth is 6% per year, but to achieve high
income status ($12,000), Indonesia needs to grow at 9%
annually between 2014 and 2030!
 Challenges: The era of easy access to external capital and high
commodity prices is over
 Rapid growth needs to be driven by productivity growth:
accelerating economic transformation

16
The reallocation of workers from low to higher
productivity activities could dramatically boost
productivity growth
Large productivity gaps across sectors remain to be exploited
Sector 1990-96 2000-2003 2005-2008 2009-2012

Agriculture 1.0 1.0 1.0 1.0

Low-end services 2.5 2.4 2.5 2.2

Manufacturing industries 5.6 5.7 5.8 5

Transport and communication 3.3 2.8 3.5 5.5

Financial services 37 21.5 20.5 14.6

Mining and quarrying 43.6 46.8 26.7 18

But increased prosperity needs to be shared

 No country has made it to

high income status with high
inequality in recent times
 Unlike in other MICs,
increased prosperity has been
unequally shared in Indonesia
 Of policy concern: A large and
increasing share of inequality
is due to personal
circumstances—Inequality of
opportunities
Jobs can be central to shared prosperity by…

 Enhancing productivity through the reallocation of

workers to higher productivity activities
 Increasing living standards, particularly among the
poorest 40% of the population, through the provision
productive job opportunities
 Improving workers’ protection ‘responsibly’ (i.e. in a
way that ensures fiscal sustainability and job creation)

19
3 MAIN CHALLENGES FOR
THE LABOR MARKET IN INDONESIA
Challenge #1: Indonesia should learn how to…
Make new
things
Make things
better

Innovation
Make things Process
cheaper
Quality
upgrading

Access
to inputs
However, doing business and being competitive is more
difficult than in other countries.
• Key for firms to enter best performers Ease of Doing Business Rank low performers
and grow, compete 180
163
169

globally 160 150

2005 rank* 133 138
(manufacturing) and 140
2012 rank**
128
117
111
attract FDI 120
2013 rank*** 99 101 104
100 91 92
• Indonesia among the 76 79 80
80
low performers 57 60 62
60
• Large regional 40
variation 20 8 12 16
18
1 2
– E.g. Construction 0

permit: 44 days
(Bandung); 158
days (Jakarta)
* based on revised calculation in Doing Business 2007
** Doing Business 2013
*** http://www.doingbusiness.org/rankings
And, labor productivity is lagging behind, particularly in
manufacturing.
Value Added per Worker (constant 2005 US$) Value added per worker Index (1997=100) MANUFACTURING
18,000 250

16,000 Indonesia
14,000 1995
200 Malaysia
12,000 2000
Korea, Rep.
2005
10,000 150 Thailand
2011
8,000

6,000 100

4,000

2,000 50

0
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Since most of firms in Indonesia are small…

Small (5-19 employees) Medium (20-100 employees) Large (>100 employees)

Philippines 64.6 28 7.4

Vietnam 59.5 27.4 13

Brazil 36.6 46.5 16.9

Indonesia 93.4 5.1 1.5

0 20 40 60 80 100

24
 …however, they are also less productive than large firms
Comparison of Total Factor Productivity,
by select firm characteristics (2012)

Exporter
17 (threshold
10%)/Non-exporter
Plants that will
exit/Continuing -7

New -5
Plant/Conti
nuing Importer (threshold
16
10%)/Non-importer
Foreign (threshold
33
10%)/Domestic
SME (below 100
-28
employees)/Large

-40 -30 -20 -10 0 10 20 30 40

Source: World Bank, 2012
Starting up a new business is also more difficult than in
other countries.
50
TIME TO START UP A BUSINESS

40

Procedures Days
30

20

10

0
Singapore Malaysia India Thailand Philippines China Vietnam Indonesia Source: Doing
Business, 2012

26
Innovating is difficult because of low R&D expenditure.
Measures of national innovation capacity

1.6 1.5 1,200

1.4 1,070
1,000 Low levels of firm
1.2
sophistication,
800
1.0 weak innovation
0.8
0.8
0.64
600 environment
0.6
400
constrains firms to
372 311
0.4 improve quality and
0.12 0.25
0.2 137
200 invest for long-term
0.05 81
0.0 0 0
competitiveness
Bangladesh China India Indonesia Malaysia Philippines Thailand

Research and development expenditures (% GDP)

Researchers in R&D (per million people) (right axis)
Source: World Bank Enterprise Surveys,
World Development Indicators

27
Challenge #2: Indonesia must improve the skills of the
workforce beyond educational attainment.
Age 25+ Age 25-34

Labor force % composition by educational attainment

Although tertiary educational attainment is increasing there is still a need to
improve the quality of education: student performance scores in Indonesia lag
behind those of other countries…

100
Percent of 15 year-olds
enrolled

80

60

40

20
Percent of 15 year-olds enrolled and
able to locate information that
needs to be inferred from a text
0

Source: calculations by K. Macdonald, using OECD PISA 2009 Reading, Enrolment and Population estimates

29
…and Indonesia is still performing poorly with respect to other middle-
income countries in creating highly skilled workers
Labor force with tertiary education (%)
70

60
US
Russian Federation
50
% of total labor force

40
Estonia New Zealand

30 Spain
Philippines

20
Mexico
Turkey
10
Indonesia
0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
2007 Real GDP per capita (constant 2000 US$)

Source: WDI

30
Many new labor market entrants don’t have the right skills
despite being more educated.
Almost ¼ of newly employed senior secondary Meanwhile, employers find it hard to find
graduates are employed in unskilled jobs. semi-skilled production workers.

Percentage of new jobs for senior secondary Share of firms identifying the task of finding workers
education by type of job, 2001-2010 Very or rather hard, by type of job
100%
78 Directors
90% 17% 16%
56
80% 14
Service (non-
education) Professionals
70% Skilled 25
60% 23
59% Administrative
50% 65%
Semi- workers
skilled
40%
84 Sales workers
30%
Unskilled 69
20%
11 Production workers
10% 23% Manufacturing
19% 29
0% 29
All labor force 15-30 year olds Unskilled workers

Note: skilled is manager and professional jobs,

semi-skilled is sales and skilled production, and
0 20 40 60 80 100
unskilled is blue-collar and agricultural laborers
For these reasons, employers report that they are finding it difficult to source
workers with the right skills, in particular professionals and manager
Share of firms identifying the task of finding workers hard or very hard, by
type of job

• High level of skills are very hard to find (Higher

Education)

• Skilled production is hard to find for exporting firms

(senior secondary & vocational education)

• As Indonesia moves up the value chain, finding

skilled production workers will be more difficult

Source: Indonesia Skills Survey (2010)

32
Challenge #3: high de jure labor regulations deliver little de
facto protection for workers, due to low compliance, resulting
in a lose-lose scenario, especially for:
SEVERANCE PAYMENTS MINIMUM WAGES

Percent of employees who report earning less than the

Receipt of severance pay, as reported by terminated workers
minimum wage
60
Partially Compliant: 50
Employees received less
than entitled amount
Non-Compliant: 40
Employees

Percent
27%
received no 30
severance pay
20

Fully Compliant: 10
Employees
66% received full 0
7%
entitled amount or
more Bottom 2nd 3rd 4th Top
Predicted Per Capita Consumption Quintile

Source: Statistics Indonesia (BPS), Sakernas 2008

33
Non-compliance with Minimum Wage laws is still high and
has not been declining.
Percent IDR
60 5,000
Average hourly minimum
wage (RHS)
50
4,000
Non-compliance rate
40
3,000

30

2,000
20

1,000
10

0 0
1990

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011
Tight regulation of temporary contracts and labor disputes
can discourage the expansion of permanent formal labor.
Employment Protection Legislation Stringency, by Country (score from 0 to 6)

Most
4.0
Specific requirements for collective dismissal
Stringent
3.5
Regulation on temporary forms of employment
Protection of permanent workers against (individual) dismissal
3.0

2.5

2.0

1.5

1.0

0.5
Least
Stringent 0.0
United Kingdom

Switzerland
New Zealand

Brunei Darussalam

***China

Mexico

ASEAN+
Denmark

Sweden

***Thailand

Austria

Germany

Portugal
Australia

Slovak Republic

***Philippines
Japan

Luxembourg

Greece

Spain
***Mongolia
Korea

***Cambodia
Poland
Hungary

Belgium
***Vietnam

Norway

ECA
France
Canada

Ireland

Netherlands

Turkey
United States
***Singapore

Finland

***Lao PDR
***Malaysia

Iceland
Italy

***Indonesia
Czech Republic

OECD-30
Source: Countries’ labor regulation, surveyed in Del Carpio, Pabon and Remeyni for the EAP Jobs AAA program.
OECD and ASEAN unweighted average. OECD average includes a sample of 30 countries. OECD figures are for
2010.

35
3 WAYS FORWARD FOR
INDONESIA’S LABOR MARKET
1. REMOVE THE BARRIERS TO
COMPETITIVENESS AND GROWTH
A. Indonesia should improve access to finance for productive
firms. Top 10 Business Environment Constraints for Firms
47.9
Access to finance 17.9
14.8
13.7
Practices of the informal sector 13.3
12.8
6.9
Political instability 8
8.4
6.5
Electricity 9.7
14.2
Constraints

4.3
Inadequately educated workforce 11.3
7.7
Indonesia
4.3
Transportation 5.7
EAP regions
3.3
3.9 Low-Middle Income Average
Access to land 3.8
4
3.3
Business licenses and permits 2.8
3
3
Crime, theft, and disorder 5.3
6.1
1.6
Corruption 4.3
8.1

0 10 20 30 40 50 60

% of Firms
Source: Enterprise Surveys (www.enterprisesurveys.org). The World Bank
B. Indonesia should improve infrastructure and connectivity
and reduce congestion and logistics costs.
Comparison of cost and speed of logistics
6.0 2,500
5.4
2,225 5.0
5.0 2,000

4.0
1,500
1,238
3.0 2.8
2.6 2.6
1,000
2.0 1.7
1.4 701
500 500
1.0 397 341 302
0.0 0

Leadtime import for port/airport, median case (days)

Avg charge (US$) for 40-foot container (import+export) (right axis)

C. Indonesia should modernize agriculture.
Through better information
• Seed: Providing access to high quality seeds.
Process improvement and post harvest
infrastructure
• Penyuluhan: Counseling needs to be
redesigned to be more responsive to the
needs of farmers and increase the production
of "high-value" commodities
• ICT: better information on market and
technology can be well delivered by utilizing
innovative information technology and
communication
Through better infrastructure
• Infrastructure for market-based instruments:
such as improving warehouse receipts,
developing weather insurance (weather
insurance)
• Irigasi: need bigger funds to maintain
irrigation systems
• Water Resources Management : Utilizing
the successful model of Farmer Water User
Association.
• Rural road: larger investment to improve
access and road quality from farm to market
D. Indonesia should revitalize the manufacturing sector
Employs over 15 million workers (13.4% of total
employment), and accounts for 24% of GDP

However, its
contribution to
total GDP has
slowed down
since 2004
…productivity growth in manufacturing is stagnating
Average Productivity Growth by Sector in the Last Decade
30%
2002-2007
24.5%
25% 2007-2012

20%

15%
9.3%
10%
5.6% 5.1% 4.2% 4.6%
5% 3.1% 3.5% 3.9% 4.0%
2.9%
1.8%
0.0%
0%
-1.5%
-5%
-5.8% -5.4%
-10%
Agriculture, Mining & Manufacturing Construction Wholesale and Transport, Other Activities Total
hunting, quarrying, retail trade, storage and
forestry, fishing utilities restaurants and communications
hotels

42
…labor productivity gains in manufacturing have been modest compared
to the total economy
Labor productivity % increase in manuf. subsectors in 2013 vs. 1995

43
2. ADDRESS THE SKILLS AND
PRODUCTIVITY SHORTAGE OF
THE WORKFORCE
Developing and enhancing skills
 Improve the quality of basic education, starting with early childhood education. A strong
base of cognitive skills needed (long-term impact)

 Improve quality and relevance of feeders into the labor market

 Improve labor market information (labor market observatories, for example)
 Improve information about quality (quality assurance system)
 Increase incentives for institutions to respond to the labor market (autonomy,
performance based financing, support for private institutions)
 Increase industry-institutions collaboration

 Skills upgrading
 Increase funding and coverage
 Led by employers
 Credible unified quality assurance system
 Additional support for hard to employ (young drop-outs)
Skills upgrading of the current labor force is crucial in
the short to medium run
• 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
Indonesia should promote opportunities for skills
development, which are currently very limited, as few firms
provide training.
Large (100+)

Medium (20-99) Indonesia

Small (5-19) EAP

World

Non-exporter

Exporters (>10% of sales)

Foreign (more than 10%)

Domestic

0 20 40 60 80
Share of firms providing formal training

47
3. IMPROVE LABOR
REGULATIONS AND PROTECTION
FOR ALL
Indonesia should initiate broad and evidence-based
social dialogue and set up a “grand bargain” for
labor regulation and workers’ protection.

• Improve protection and regulation for all workers, not just

formal workers
• Social security reform is a step forward, but it has to be
sustainable.
• Minimum Wage levels should be decided under a more
certain, simple, and fair mechanism

49
 Conclusion: what should the next Jobs Agenda do?
Adopt the appropriate policy mix to create more and better jobs

Protect workers
Provide workers
against risk and
with the right
boost better
skills
jobs

Unlock the
structural
transformation
of the economy

50