Labor Market: Overview & Issues
Preliminary Findings from the Indonesia Jobs Report
Poverty Team
World Bank Office Jakarta
Labor Market Overview
1990-97: Growing Rapidly
Strong growth in the labor market fueled by economic growth, urban
employment growth and a supply of better-educated workers.
More workers were finding better jobs and earning higher wages. Rapid
structural transformation out of agriculture. Falling wage inequality.
1997-98: Crashing and Coping
Employment stability. Farms
and the informal market absorb laid-off workers.
Households cope as women enter the workforce.
Devastating wage cuts
were how workers
experienced the brunt of the crisis. Real wages fell by 31% in one year.
1999-2003: Wages recover, jobs don't
Availability of formal jobs
decline, alongside a
downsizing of civil servants. Workers increasingly pushed into agriculture.
Steep increases in wages for
salaried workers, especially
urban and wealthier employees.
54.0 56.0 58.0 60.0 62.0 64.0 66.0
1990 1992 1994 1997 1999 2001 2003 2005 2007
Share of non-agricultural jobs (percent)
Reverse structural transformation
Pre-crisis
Expansion
Source: Sakernas
Jobless Growth
“Jobless growth” in off-farm employment
Pre-crisis Indonesia showed solid
growth in off-farm employment
creation. The share of off-farm
employment expanded by 2.1 percentage points per year.
Post-crisis, Indonesian workers still
pushed into agriculture despite
economic recovery. The off-farm
employment share contracted by 0.8 percentage points per year. All other countries resumed moving workers into non-farm jobs.
What caused jobless growth in Indonesia?
Minor cause: slowing growth. Slower growth didn't stop
Malaysia and Thailand from creating off-farm jobs.
Minor cause: slowing industrial sector growth. Industry was only
responsible for about 12% of the decline in off-farm
employment growth between the crisis and 1999-2003.
Major cause: inability of the service sector to create jobs.
What slowed service sector job growth?
Only Indonesia experienced steep wage increases during 1999-2003.
Median real wages increased by 9 percent per year, while only slightly changing in neighboring countries.
2003-2007: Formal Sector Expansion
Real wages fell in 2005 and
only started showing signs of recovery by 2007.
Employment began picking up
as more non-agricultural and formal jobs became available.
Explaining the job expansion, 2003-07
Lower industrial growth rates have
stayed constant. Industrial growth
slowed across the region, even in booming China and Vietnam
Service sector elasticity has
recovered. This accounts for
three-quarters of the non-ag
employment recovery. Recovery is only partial, a trend common across the region.
Indonesia has a high rate of informality
Formal sector jobs are preferable
Informal workers face a wage penalty
of over 30% and are less likely to
receive non-wage benefits including training, insurance or pensions.
Only 2.2% of informal workers transition
into the formal sector annually. Young,
urban men are the most upwardly mobile.
Source: IFLS4
Formal
Median wages (Rp/hour)
Some informal workers are more likely to earn more in informality than they
could expect in a formal job: Middle-aged (35-64), university graduates,
working in construction, trade and transportation, casual non-farm workers. Some indication that women prefer informal jobs for flexibility.
Informality sometimes acts as a safety net for formal sector workers.
Labor Policies & Institutions
Fixed-Term Contracts
Source: IFLS 2007
80.1 8.7
10.2
No contract
Permanent contract
Fix-term contract
FTC workers are more vulnerable than permanent.
Income insecurity: Lower wages, fewer months of work.
Problem with non-compliance: 15-22% of contracts over 3 years.
But workers with no contracts are the most vulnerable.
Lowest monthly wages, least access to benefits and training.
Severance pay is comparatively high
Source: IFLS 2007
But compliance is low:
• Only 33% of eligible actually receive severance pay.
Moderate unionization; clear benefits
Source: IFLS4
Around 3.2 million employees, or
11.2% of all employees, belong to a
union. By international standards, the
membership rate is moderate.
Source: Sakernas 2007
Union members receive a wage premium of 18% (compared to non-union employees) and more non-wage benefits.
0% 10% 20% 30% 40%
Training Health coverage Meals at work Transport benefits Pension Severance pay
Employees receiving benefits (percent)
Union member
Non-union member
0
Cambodia, 2000
Thailand, 2005
India, 2004
France, 2005
Malaysia 2001
South Korea 2007 Philippines 2006 Indonesia, 2007
United States,
2003
Mexico, 2004
Brazil, 2002
Industrial Relations Courts (IRC)
Source: Jakarta IRC (2007); N= 378 Source: sample from the Jakarta IRC (2007); N= 100
84% of disputes filed in the Jakarta IRC were about employment
termination. However, termination is often the result of other underlying disputes.
Without data, difficult to assess the performance of the IRC. But sample in Jakarta shows IRC is not timely, requiring an average of 77 days to resolve a case.
Cases filed at Jakarta IRC, 2007
Rights disputes
Employment termination
Rights dispute & employment termination
Disputes over interests
Others
Approaches to minimum wages
• Aims to protect the most vulnerable groups: low-wage earners, pensioners, disabled.
• In some developing countries social protection benefits (e.g., benefits) have been indexed to minimum wages, keeping them excessively low.
• Relatively high minimum wages, effectively covering all private sector workers.
• In Indonesia, a 10% minimum wage increase raises wages of 25th percentile by 2.4%, 50th percentile by 2.9% and 75th
percentile by 2.1%
• Negative potential consequences: higher non-compliance, hampers formal sector growth.
Floor wage
or social
safety-net
Understanding minimum wage effects
10% increase in the minimum wage is associated with:
• 2.6% increase in non-compliance
• 3%increase in actual wages for all
• No discernable effect on employment but…
• 1% decrease in industrial employment
• 1% decrease in formality share
Higher minimum wages are not an effective safety net for the poor.
• Poor tend to work informally.
Workers’ Skills
0
Adult working population
SMA or higher Lower than SMA
More educated workers
Source: Sakerans
Supply of more educated workers is growing but still low.
Tertiary workers tripled since 1990 but still only at 6.2% of workers.
0.4
Wage Premium for More-Educated Workers (compared to less-educated counterparts)
All Men Women
Matched by high wage premiums
Source: Bank staff calculations, based on Sakernas
More educated workers earn more than those less educated
Higher for women and urban workers, but men and rural catching up
Demand driven by higher premiums in the service sector (76% on average during 2003-07) than industrial or agricultural sectors.
70:30 Policy
MoNE aims to reverse the ratio of the share of SMK students. In
2007 only 25% of SMA students were vocational. The policy aims to increase this to 70% by 2015.
0
Vocational high schools (SMK) student share (of total SMA)
Reconsidering the 70:30 Policy
Female Wage
Public SMA
Public SMK
0
Public SMA
Public SMK
Public SMK graduates, on average, are not more likely to be
employed or unemployed.
Wages of vocational students are, on average, lower and
For more information
Contact the Poverty Team in the World Bank Office Jakarta
