Flexible market will solve manpower issues
Flexible market will solve manpower issues
Mohamad Ikhsan
Indonesia is facing several serious labor issues viewed both in the short and long-term. While some of these interrelated problems can be partially settled, they will need comprehensive solutions that should not be limited to the labor market.
Total as well as well as what is called "open" unemployment has increased. Since the economic crisis in mid-1997, the amount of jobless has risen significantly -- in terms of both the old way to calculate unemployment and the expanded benchmark.
In 1997, the rate of unemployment using the old definition only reached 3 percent, while based on the new definition it rose more substantially from 5.4 percent in 1997 to 9.5 percent last year. Quarterly data indicated stabilizing and marginally decreasing unemployment.
The rate is higher if the definition is expanded to include "disguised" unemployment -- people who are technically unemployed but survive on odd jobs done for family members, friends and associates. The 1997 total, including disguised unemployment, involved 15.5 million people or 17.4 percent, but this rate soared to the economic crisis-level of 20.5 million people (21.3 percent) in 1999.
Total unemployment declined in 2000, but it went up again in 2002 and last year. Analysts say the unemployment rate has begun to stabilize and with the accelerating economic growth from this year, the level of unemployment as a whole is expected to decrease.
Table 1 Unemployed People and Rates of Unemployment in Indonesia (in millions, as a percentage)
Year/Period Openly Disguised Ttl Rate of Open Rate of
Unemployed Unemployed Unemployment Unemployment
Pre-Crisis
Crisis
Post-Crisis
The growing rate of open unemployment today is not only associated with poverty increases, because many of the jobless do not belong to what would be called poor families.
But based on the characteristics of poor households, 50 percent of Indonesian households are vulnerable or prone to a change in status -- either becoming poorer or better off. Consequently, a continually weakening economy over a long period or the appearance of certain risks causes these households to become easily trapped in poverty.
This is supported by a quantitative analysis in which the probability of a household being ensnared in poverty rises with the declining rate of participation of family members in the labor market. Moreover, the educational composition of "openly unemployed" people is increasingly shifting toward unskilled workers, who face more difficulty competing in the labor market and a greater chance of being dragged into poverty.
This change in the educational composition of openly jobless people indicates that a work force with a better education tends to be more capable of getting jobs and earning higher wages. A quantitative analysis shows the more people are educated the less they will likely be unemployed.
A worker's wage level, as demonstrated in Table 2, has a strong association with their level of education.
Unemployment among youth and women has also risen, with about three out of 10 members of the work force aged from 15-24 being jobless. This youth group constitutes two thirds of the unemployed.
By gender, jobless women are greater in number than male counterparts. Adult unemployed women have no better educations than three years ago. The growing proportion of female unemployment implies economic growth is not high enough to absorb university graduates and school leavers.
Traditional attitudes to women may prompt companies to employ males; raising female unemployment. Sociologists note that a mass of jobless educated youths, both female and male, is a good basis for further social unrest.
It is also important to note that the total of job opportunities in the formal sector has decreased since 2000, reducing a million since 2003. In general, low-skilled and poorer workers have lost these jobs.
In the informal sector, job opportunities have gone up in number but only 400,000 new ones were created in last year. As a result, the burden of agriculture in labor absorption increased from 40 percent (1997) to almost 47 percent (2003).
The rate of work force participation has dropped by 2 percent, suggesting a surge of discouraged workers who see dwindling prospects of winning the labor market contest have effectively dropped out of the job market (see Chart 3).
When the economy regains its vigor, these workers will reenter the labor market and cause the unemployment rate to decline more slowly. Even higher levels of economic growth are needed to accommodate these workers.
Chart 1 Job Opportunities in the Formal Sector, 2001-2003
Chart 2 Totals of Workers in the Manufacturing Industry
Chart 3 Rate of Participation of the Work Force, 1997-2003
Chart 4 Competitiveness Index based on Effective Exchange Rate and Unit Labor Costs, 1993-2003 (1993=100)
Table 2 Increase in Productivity and Wages in Real Terms Increase in productivity rates Increase in wages in real terms
Another pertinent factor is the decoupling that has taken place between productivity increases and wages in real terms. Since the economic crisis, wages in real terms have risen beyond productivity growth. The wage hikes have in turn been due to regional minimum wage rises, reaching nearly 10 percent in the period between 2000 and 2003.
The implication is a significant slide in the competitiveness of manufacturing commodities by the unit labor cost standard. This also in part explains why job opportunities in the formal sector have been shrinking.
Although these higher wages were estimated to contribute to consumption increase during the 2000-2003 period, they have prompted a lot of investors to relocate their plants from Indonesia (Harrison, 2004) and caused a slower investment recovery while only favoring a small group of workers in the formal sector at the expense of wages in the informal sector, now under strong downward pressure.
There is also increased wage disparity between the formal and informal sectors -- notice the comparison between industrial and agricultural wages. Wage disparities between male and female workers are continuing but they are decreasing.
In general, these gaps will further worsen income distribution and reduce the prospect of higher and sustainable economic growth as well as poverty relief.
Role of labor market
The conclusion drawn from experience during the economic crisis is how to create economic growth that produces employment. Various factors and policies will certainly influence economic growth such as savings, participation of the work force, technology and policy measures affecting the three variables, as well as policy-variable interaction. For instance, savings will have no effect unless it is efficiently channeled into accumulated capital stocks.
Here the financial market has a central role because it will determine resource allocation.
Without diminishing the importance of the other factors that will affect economic growth, the labor market has a crucial role in achieving employment goals. In the case of Indonesia, as described above there has been labor market rigidity that renders economic growth potential unrealized, or if any growth occurs, it will only be of the jobless type. Therefore, labor market reform becomes one of the important agendas in restoring economic growth to its potential rate of around 7 percent a year.
But one should remember the experience in other countries, where labor market reform is not easy to carry out in terms of political economy. In Brazil, only the Cardoso government has succeeded in the reform. Under the present transition toward democracy, changes to bring back labor market flexibility will be marginal, by redefinition, coverage expansion and rationalization of dismissal cost.
The changes are specifically: - Redefining contracting work as it is set out in Article 65 of Law No.13/2003. The application of Article 65 of this law harms the interests all companies be they small- or medium-scale enterprises or large ones, because under the laws these firms are forced to handle main jobs or undertake them indirectly, depending on the sector. Mining companies, for instance, normally do not do their drilling work because this is a specialized high- risk industry. A change to this law can be introduced by a ministerial decree. The article's redefinition would benefit small and medium enterprises through expansion of job opportunities. To prevent violations in wage payments or labor conditions, the government should strengthen the rules of its enforcement. - Expanding the coverage of jobs under working contracts of a certain period designed for certain projects that based on their type, nature or activity will be finished within the period specified in Article 59 of the law. Today only four kinds of project activity are allowed by the law with a three-year time limit. But the article's job coverage can be amended through a ministerial decree, so that labor-intensive manufacturing operations can be included in contracting work. - The rationalization of labor dismissal costs as stipulated in Chapter XII of the law by making it equal to what applies in rival countries like Thailand. This change can be made through a government regulation or presidential decree.
If the three changes can be introduced, the labor market will become more flexible. By continuously striving to boost productivity, Indonesia's work force will become more competitive as economic growth hopefully results in a higher degree of labor absorption.
The writer is head of the School of Economics' Economic and Social Investigation Institute at the University of Indonesia