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