Flexible labor market to solve manpower issues<\/p>\n
Mohamad Ikhsan<\/p>\n
Indonesia is facing several serious labor issues viewed both in
\nthe short and long-term. While some of these interrelated
\nproblems can be partially settled, they will need comprehensive
\nsolutions that should not be limited to the labor market.<\/p>\n
Total as well as well as what is called "open" unemployment
\nhas increased. Since the economic crisis in mid-1997, the amount
\nof jobless has risen significantly -- in terms of both the old
\nway to calculate unemployment and the expanded benchmark.<\/p>\n
In 1997, the rate of unemployment using the old definition
\nonly reached 3 percent, while based on the new definition it rose
\nmore substantially from 5.4 percent in 1997 to 9.5 percent last
\nyear. Quarterly data indicated stabilizing and marginally
\ndecreasing unemployment.<\/p>\n
The rate is higher if the definition is expanded to include
\n"disguised" unemployment -- people who are technically unemployed
\nbut survive on odd jobs done for family members, friends and
\nassociates. The 1997 total, including disguised unemployment,
\ninvolved 15.5 million people or 17.4 percent, but this rate
\nsoared to the economic crisis-level of 20.5 million people (21.3
\npercent) in 1999.<\/p>\n
Total unemployment declined in 2000, but it went up again in
\n2002 and last year. Analysts say the unemployment rate has begun
\nto stabilize and with the accelerating economic growth from this
\nyear, the level of unemployment as a whole is expected to
\ndecrease.<\/p>\n
Table 1
\nUnemployed People and Rates of Unemployment in Indonesia
\n(in millions, as a percentage)<\/p>\n
Year\/Period Openly Disguised Ttl Rate of Open Rate of<\/p>\n
Unemployed Unemployed Unemployment Unemployment<\/p>\n
Pre-Crisis<\/p>\n
Crisis<\/p>\n
Post-Crisis<\/p>\n
The growing rate of open unemployment today is not only
\nassociated with poverty increases, because many of the jobless do
\nnot belong to what would be called poor families.<\/p>\n
But based on the characteristics of poor households, 50
\npercent of Indonesian households are vulnerable or prone to a
\nchange in status -- either becoming poorer or better off.
\nConsequently, a continually weakening economy over a long period
\nor the appearance of certain risks causes these households to
\nbecome easily trapped in poverty.<\/p>\n
This is supported by a quantitative analysis in which the
\nprobability of a household being ensnared in poverty rises with
\nthe declining rate of participation of family members in the
\nlabor market. Moreover, the educational composition of "openly
\nunemployed" people is increasingly shifting toward unskilled
\nworkers, who face more difficulty competing in the labor market
\nand a greater chance of being dragged into poverty.<\/p>\n
This change in the educational composition of openly jobless
\npeople indicates that a work force with a better education tends
\nto be more capable of getting jobs and earning higher wages. A
\nquantitative analysis shows the more people are educated the less
\nthey will likely be unemployed.<\/p>\n
A worker's wage level, as demonstrated in Table 2, has a
\nstrong association with their level of education.<\/p>\n
Unemployment among youth and women has also risen, with about
\nthree out of 10 members of the work force aged from 15-24 being
\njobless. This youth group constitutes two thirds of the
\nunemployed.<\/p>\n
By gender, jobless women are greater in number than male
\ncounterparts. Adult unemployed women have no better educations
\nthan three years ago. The growing proportion of female
\nunemployment implies economic growth is not high enough to absorb
\nuniversity graduates and school leavers.<\/p>\n
Traditional attitudes to women may prompt companies to employ
\nmales; raising female unemployment. Sociologists note that a mass
\nof jobless educated youths, both female and male, is a good basis
\nfor further social unrest.<\/p>\n
It is also important to note that the total of job
\nopportunities in the formal sector has decreased since 2000,
\nreducing a million since 2003. In general, low-skilled and poorer
\nworkers have lost these jobs.<\/p>\n
In the informal sector, job opportunities have gone up in
\nnumber but only 400,000 new ones were created in last year. As a
\nresult, the burden of agriculture in labor absorption increased
\nfrom 40 percent (1997) to almost 47 percent (2003).<\/p>\n
The rate of work force participation has dropped by 2 percent,
\nsuggesting a surge of discouraged workers who see dwindling
\nprospects of winning the labor market contest have effectively
\ndropped out of the job market (see Chart 3).<\/p>\n
When the economy regains its vigor, these workers will reenter
\nthe labor market and cause the unemployment rate to decline more
\nslowly. Even higher levels of economic growth are needed to
\naccommodate these workers.<\/p>\n
Chart 1
\nJob Opportunities in the Formal Sector, 2001-2003<\/p>\n
Chart 2
\nTotals of Workers in the Manufacturing Industry<\/p>\n
Chart 3
\nRate of Participation of the Work Force, 1997-2003<\/p>\n
Chart 4
\nCompetitiveness Index based on Effective Exchange Rate and Unit
\nLabor Costs, 1993-2003 (1993=100)<\/p>\n
Table 2
\nIncrease in Productivity and Wages in Real Terms
\nIncrease in productivity rates
\nIncrease in wages in real terms<\/p>\n
Another pertinent factor is the decoupling that has taken
\nplace between productivity increases and wages in real terms.
\nSince the economic crisis, wages in real terms have risen beyond
\nproductivity growth. The wage hikes have in turn been due to
\nregional minimum wage rises, reaching nearly 10 percent in the
\nperiod between 2000 and 2003.<\/p>\n
The implication is a significant slide in the competitiveness
\nof manufacturing commodities by the unit labor cost standard.
\nThis also in part explains why job opportunities in the formal
\nsector have been shrinking.<\/p>\n
Although these higher wages were estimated to contribute to
\nconsumption increase during the 2000-2003 period, they have
\nprompted a lot of investors to relocate their plants from
\nIndonesia (Harrison, 2004) and caused a slower investment
\nrecovery while only favoring a small group of workers in the
\nformal sector at the expense of wages in the informal sector, now
\nunder strong downward pressure.<\/p>\n
There is also increased wage disparity between the formal and
\ninformal sectors -- notice the comparison between industrial and
\nagricultural wages. Wage disparities between male and female
\nworkers are continuing but they are decreasing.<\/p>\n
In general, these gaps will further worsen income distribution
\nand reduce the prospect of higher and sustainable economic growth
\nas well as poverty relief.<\/p>\n
Role of labor market<\/p>\n
The conclusion drawn from experience during the economic
\ncrisis is how to create economic growth that produces employment.
\nVarious factors and policies will certainly influence economic
\ngrowth such as savings, participation of the work force,
\ntechnology and policy measures affecting the three variables, as
\nwell as policy-variable interaction. For instance, savings will
\nhave no effect unless it is efficiently channeled into
\naccumulated capital stocks.<\/p>\n
Here the financial market has a central role because it will
\ndetermine resource allocation.<\/p>\n
Without diminishing the importance of the other factors that
\nwill affect economic growth, the labor market has a crucial role
\nin achieving employment goals. In the case of Indonesia, as
\ndescribed above there has been labor market rigidity that renders
\neconomic growth potential unrealized, or if any growth occurs, it
\nwill only be of the jobless type. Therefore, labor market reform
\nbecomes one of the important agendas in restoring economic growth
\nto its potential rate of around 7 percent a year.<\/p>\n
But one should remember the experience in other countries,
\nwhere labor market reform is not easy to carry out in terms of
\npolitical economy. In Brazil, only the Cardoso government has
\nsucceeded in the reform. Under the present transition toward
\ndemocracy, changes to bring back labor market flexibility will be
\nmarginal, by redefinition, coverage expansion and rationalization
\nof dismissal cost.<\/p>\n
The changes are specifically:
\n- Redefining contracting work as it is set out in Article 65 of
\nLaw No.13\/2003. The application of Article 65 of this law harms
\nthe interests all companies be they small- or medium-scale
\nenterprises or large ones, because under the laws these firms are
\nforced to handle main jobs or undertake them indirectly,
\ndepending on the sector. Mining companies, for instance, normally
\ndo not do their drilling work because this is a specialized high-
\nrisk industry. A change to this law can be introduced by a
\nministerial decree. The article's redefinition would benefit
\nsmall and medium enterprises through expansion of job
\nopportunities. To prevent violations in wage payments or labor
\nconditions, the government should strengthen the rules of its
\nenforcement.
\n- Expanding the coverage of jobs under working contracts of a
\ncertain period designed for certain projects that based on their
\ntype, nature or activity will be finished within the period
\nspecified in Article 59 of the law. Today only four kinds of
\nproject activity are allowed by the law with a three-year time
\nlimit. But the article's job coverage can be amended through a
\nministerial decree, so that labor-intensive manufacturing
\noperations can be included in contracting work.
\n- The rationalization of labor dismissal costs as stipulated in
\nChapter XII of the law by making it equal to what applies in
\nrival countries like Thailand. This change can be made through a
\ngovernment regulation or presidential decree.<\/p>\n
If the three changes can be introduced, the labor market will
\nbecome more flexible. By continuously striving to boost
\nproductivity, Indonesia's work force will become more competitive
\nas economic growth hopefully results in a higher degree of labor
\nabsorption.<\/p>\n
The writer is head of the School of Economics' Economic and
\nSocial Investigation Institute at the University of Indonesia<\/p>",
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