Cracking the conundrum of Indonesian unemployment

Roland Lindenthal, Jakarta

More than 10 percent of Indonesia's labor force are unemployed, a rate that is too high. What makes matters worse is that it has been increasing over time, and that it reflects only part of the problem. Underemployment is another serious concern, affecting a much larger part of the population and causing a high percentage of the workforce to be poor. Working conditions are a third major concern.

These problems are aggravated by some unfortunate, partly more recent developments: The urban labor force is growing at some 5 percent per annum. The informal sector is expanding and creating mainly low quality jobs, while employment in the formal sector is declining. Especially low-skilled workers in the formal sector are loosing their work, and youth employment has become an ever- increasing problem.

Raises in formal sector wages are outpacing productivity, which in turn has recently been declining. Disparities between wages in the formal and informal sectors have been mounting, and regional employment disparities are high and partly rising.

This illustrates that the overall labor market situation is rather difficult and complex. There are no simple solutions. Growth alone will probably be unable to do the trick.

Because of the danger of "jobless growth", economic growth as such is not sufficient. And even if growth would quickly feature a much higher level of employment elasticity, it would not necessarily solve qualitative problems. What is needed is a comprehensive policy and strategy to increase the number of adequate full-time workplaces, based on the best possible options. How could such an employment and labor market policy be designed?

Firstly, sound employment policies including employment- oriented macro-economic policies, sectoral policies and policies for the promotion of particular types of enterprises will be crucial for investment and economic growth, presumably the main pillar of any strategy to sustainably improve the labor market.

Cornerstones of such policies would include proper employment target setting, coherence of macro-economic policies, structural policies and sectoral policies with the Government's overall policy framework, strong links to poverty alleviation strategies and consensus building through regular dialogue between the Government and the social partners.

Secondly, Indonesia's regulatory framework needs to be optimized, the right level of labor market flexibility needs to be found, including a sound mechanism for setting minimum wages.

Thirdly, employment rates and working conditions can be improved through active labor market policies: Strengthen industrial relations, improve the education and skills level, ensure the availability of reliable, regularly updated statistics, develop a comprehensive labor market information system, and promote strategic partnerships with the private business sector.

Further options are to directly create employment by using labor-based approaches for the implementation of infrastructure projects, reprioritizing government spending in favor of (in any case much needed) infrastructure, and reviving job creation programs.

In addition, the government could design and implement complementary programs targeted at the youth, women and migrant workers. These active labor market policies might be supported by passive ones. Considering the potential benefits, it would be worth exploring the feasibility of an unemployment benefit scheme and wage subsidies.

Which of these labor market instruments would be the most cost-effective remains to be assessed in greater detail. In any event, active and passive labor market policies are not substitutes for labor-friendly policies and a sound regulatory framework, but rather complementary. Well-designed programs will improve the employability of job seekers and increase the number of job opportunities available.

In return to those public investments, the private sector would respond as the domestic market expands due to increased expenditure, as production costs become more competitive due to improved infrastructure, and as productivity increases due to a better qualified workforce.

To minimize the risk that public investment for labor market policies becomes a vehicle for corruption and an instrument for vote buying politics, it would be indispensable to build strong institutions that can act as a check on such behavior.

Indonesia's employment problems need to be approached actively; to wait for growth to take care of things is not an option. The magnitude and complexity of labor market problems require all possibilities to be utilized and policy-makers to place the fulfillment of the citizens' right to adequate work at the heart of economic and social policies.

Against this background, the new government has taken a step into the right direction with its Medium Term Development Plan 2005-09. It strongly emphasizes the importance of the quality of economic growth, and recognizes that growth is not sufficient on its own. That is why direct interventions are necessary to maximize people's welfare.

The Plan uses a wide approach to employment, one that goes beyond open unemployment and includes underemployment and qualitative aspects, a crucial step to capture the employment situation realistically and respond with the right instruments. It acknowledges the role of quality economic growth as the main engine of employment growth and improvement.

Public spending shall be increased for social purposes and infrastructure and, in general, be re-prioritized towards development. Labor market flexibility shall be improved, particularly through amendments to the current regulations on severance pay and dismissals, fixed-term contracts, outsourcing and minimum wages.

Supplementary interventions are expected to increase the quality of growth and ensure that poor people, too, do benefit. The instruments proposed include the promotion of an effective trade union system and sound collective bargaining mechanisms, well targeted public works programs linked to infrastructure development, better coordination of employment information for job seekers, and improvements in the qualification of the labor force.

The government's new approach to the divisive subject of employment gives good reason for optimism. It goes beyond the belief that economic growth alone can solve the problems. It needs to include a multitude of active measures to make growth more employment-intensive, and outlines a number of regulatory and active labor market policies to improve people's welfare.

If followed by a more detailed explicit employment and labor market policy that reconciles diverse interests and is implemented in a serious, accountable and effective way, not only the ambitious goal of halving open unemployment by 2009 may be attained, but also a marked reduction in underemployment and an improvement in working conditions, for the benefit of all Indonesian citizens' well-being.

The writer is Social Development Adviser of United Nations Support Facility for Indonesian Recovery (UNSFIR) (UNSFIR is a joint project of the Government of Indonesia and UNDP).

The views expressed in this article are totally that of the author's and does not in any way reflects that of the institutions.