Cracking the conundrum of Indonesian unemployment

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.