Indonesia: Enhancing Productivity through Quality Jobs

By Asian Development Bank

The book focuses on Indonesia's most pressing labor market challenges and associated policy options to achieve higher and more inclusive economic growth. The challenges consist of creating jobs for and the skills in a youthful and increasingly better educated workforce, and raising the productivity of less-educated workers to meet the demands of the digital age. The book deals with a range of interrelated topics---the changing supply and demand for labor in relation to the shift of workers out of agriculture; urbanization and the growth of megacities; raising the quality of schooling for new jobs in the digital economy; and labor market policies to improve both labor standards and productivity.

• Language: English
• Publisher: Asian Development Bank
• Release date: Feb 1, 2018
• ISBN: 9789292610791

Book preview

INDONESIA

ENHANCING PRODUCTIVITY THROUGH QUALITY JOBS

Edited by Edimon Ginting, Christopher Manning, and Kiyoshi Taniguchi

Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO)

© 2018 Asian Development Bank

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Some rights reserved. Published in 2018.

ISBN 978-92-9261-078-4 (print), 978-92-9261-079-1 (electronic)

Publication Stock No. TCS189213-2

http://dx.doi.org/10.22617/TCS189213-2

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Contents

Box, Figures, and Tables

Box

Figures

Tables

Foreword

Indonesia has recorded respectable economic growth, especially when compared with other Asian peer economies, despite the slow recovery from the Asian Financial Crisis in 1998. Rising commodity prices from 2003 to mid-2008 significantly benefited the Indonesian economy. During the commodity price boom period, Indonesia experienced its highest rate of growth in total exports since the Asian Financial Crisis. The windfall in export revenues increased the country’s trade balance surplus as well as its foreign reserves. The rising commodity prices also increased the government revenues and helped to create more jobs and alleviate poverty. However, as prices of major commodities started to decline from 2012, Indonesia and other major commodity exporting economies have suffered accordingly from the economic downturn.

Today, Indonesia faces the coexistence of old and new development challenges. While challenges to sustain high economic growth remain, with rising income inequality during the commodity boom period, the government has put increased focus on making growth more inclusive. There is a growing consensus among policy makers that better jobs and greater productivity are the fundamental factors needed for sustaining rapid and more inclusive growth. It is widely recognized that improved productivity is essential to maintaining Indonesia’s competitiveness. Meanwhile, better jobs are critical for improving living standards and reducing poverty. A clear understanding of the labor market, demographic and labor force transitions, and investment in education and skills development should help create a basis for sustainable growth for the next generation.

This study, Indonesia: Enhancing Productivity through Quality Jobs, presents findings of thematic analyses of the current development challenges related to employment outcomes and job creation in Indonesia. The study presents data on the growth and structure of the working-age population and labor force. Here it highlights opportunities created by the demographic dividend and some positive signs of female engagement in the workforce. However, the challenge of the labor market is a large backlog of lower productivity labor in agriculture and in the informal sector, which is a drag on improvements in wages and productivity. In recent years, we observe a more rapid trend of labor migration out from low productivity agriculture to the services sector. Given the labor saving effects of modern technology, the economy needs to create a more diversified services sector to absorb the labor surplus. In tandem with the labor migration out from agriculture, Indonesia has urbanized rapidly. While the agglomeration externalities accelerate average productivity growth, urban districts also tend to attract a high share of low-productivity services. Education and training for skills in demand are key for sustaining productivity growth. In this context, the imbalance between the demand and supply of human capital is a major challenge. The quality, not the quantity, of education and relevance of skills training is critically important. The study maintains that moving forward on selected labor market policies and issues, including minimum wages and collective bargaining, compliance with labor regulations, employment protection legislation (including severance payments), and the expansion of nonstandard forms of work, requires a high degree of commitment among stakeholders to implement the reforms in good faith.

I believe that Indonesia: Enhancing Productivity through Quality Jobs will gain the attention of a wide range of readers including policy makers, development stakeholders, and researchers in this field. This book makes a valuable contribution to knowledge among those who wish to promote sustainable growth and the prosperity of the Indonesian economy.

The study was prepared by a team from the Asian Development Bank (ADB) Economic Research and Regional Cooperation Department (ERCD) under the supervision of Edimon Ginting, Director of the Economic Analysis and Operational Support Division, ERCD. The book was collectively edited by Edimon Ginting; Christopher Manning (Australian National University); and Kiyoshi Taniguchi (Senior Economist, ADB). The core study team comprises Valerie Mercer-Blackman, Senior Economist, and Lilibeth Poot, Economics Officer at ERCD, ADB; Emma Allen, Economist at the Indonesia Resident Mission, ADB; Ruth Francisco and Daryll Naval, ADB Consultants; Devanto Shasta Pratomo, Researcher at Brawijaya University; Asep Suryahadi, Joseph Marshan, and Veto Tyas Indrio at the SMERU Research Institute; and Mohammad Zulfan Tadjoeddin, Senior Lecturer in Development Studies at the Western Sydney University. Robert Kyloh provided invaluable insights on industrial relations. Amanda Isabel Mamon (ERCD) provided administrative support. Editorial support for the book was provided by Stephen Banta and Jill Gale de Villa. Michael Cortes did the layout, cover design, and typesetting.

The ADB Southeast Asia Department (SERD) provided useful comments for enhancing the relevance of the report. The study team acknowledges the excellent support from ADB’s Indonesia Resident Mission staff, led by Country Director Winfried F. Wicklein. The study team also acknowledges invaluable comments from Ayako Inagaki, Director, Human and Social Development Division (SERD); Rudi Van Dael, Senior Social Sector Specialist, and Sakiko Tanaka, Senior Social Sector Specialist at SERD, who initially led the study in its inception.

Last but not least, we are heavily indebted to the Government of Indonesia for support and guidance. The study team especially thanks the Government of Indonesia, led by Rudy Salahuddin, Deputy Minister for Creative Economy, Entrepreneurship, and Cooperatives and SMEs Competitiveness, Coordinating Ministry for Economic Affairs, for its continuing support, encouragement, and insightful feedback. Our special thanks go to the seminar participants in Jakarta in October 2016, including Haiyani Rumondang, Director General, Directorate General of Industrial Relations and Social Security Workers, Ministry of Manpower, and other participants.

Yasuyuki Sawada

Chief Economist and Director General

Economic Research and Regional Cooperation Department

Asian Development Bank

Abbreviations

Author Profiles

Emma Allen joined the Asian Development Bank (ADB) Indonesia Resident Mission in 2016 as Country Economist. She prepares the Indonesia chapter of ADB’s flagship publication, Asian Development Outlook. She also supports the design and implementation of ADB loans and technical assistance related to public expenditure management, sustainable development goals, knowledge support, skills development, and financial inclusion. Prior to joining ADB, she was a Labor Market Economist with the International Labour Organization (ILO) and worked in several locations, including Geneva, Indonesia, South Africa, and Tanzania. She has authored over 20 academic and research papers, books, and manuals on issues in employment trends, public works programs, enterprise development, wages and productivity, labor market institutions, skills development, and women in the labor force. She received her PhD in Economics and her Bachelor’s degree in combined Economics and Education from the University of Newcastle, Australia in 2015 and 2004, respectively.

Ruth Francisco is a Social Sector Economist (consultant) at the Economic Analysis and Operational Support Division (EREA) of ADB’s Economic Research and Regional Cooperation Department (ERCD). She has been doing consulting work for various research and operation departments at ADB, the United States Agency for International Development (USAID), and the United Nations Children’s Fund (UNICEF) since 2006. Previously, she was a teaching associate at the University of the Philippines, where she obtained her Master’s degree and PhD in economics. She specializes in education and health economics.

Edimon Ginting is the Director of EREA, ERCD. In his current capacity, he leads the preparation of the country diagnostic studies for ADB developing member countries (DMCs). The studies inform ADB operations and facilitate dialogue with DMC officials on key structural reforms. In his first 6 years in ADB, he led nine large ADB operations to support economic reforms and countries’ responses to the global financial crisis. As Deputy Country Director of ADB in Indonesia, he supervised the delivery of ADB programs for the country, including loans to support structural reforms in the capital market, transport, and energy sectors. Prior to joining ADB, he was an Economist at the International Monetary Fund (IMF); Advisor at the Indonesian Parliament; Research Economist at the Productivity Commission, Australia; Researcher and Lecturer at the University of Indonesia; Postdoctoral Fellow at Monash University; and Research Economist at Gadjah Mada University. He received his PhD in economics from Monash University.

Veto Tyas Indrio is a Junior Researcher at The SMERU Research Institute in, Jakarta, Indonesia. His areas of research expertise are socioeconomics, poverty, and development studies. At SMERU, he is involved in several projects including a unique longitudinal study, poverty map of Indonesia, diagnostic study of child labor in rural areas, entrepreneurship, and economic growth in Indonesia. Prior to joining SMERU, he was a Teaching Assistant at the University of Indonesia, where he was an undergraduate student in the Faculty of Economics Faculty of Economics and Business. His undergraduate thesis is about financial deepening and growth of income per capita.

Chris Manning is an Honorary Associate Professor in the Indonesia Project at the Australian National University (ANU). He was Head of its Indonesia Project from 1998 to 2010. He is author or coauthor of over 30 refereed journal articles and 30 book chapters, as well as several books, research monographs and edited volumes on Indonesia and other Southeast Asian countries, including Indonesian Labour in Transition: An East Asian Success Story? (Cambridge, 1998). He continues to play an active role in supporting the research of the Indonesia Project as well as research for several international agencies on labor markets, migration and regional development issues, from a base in Indonesia since he formally retired from the ANU in 2011. He has a PhD in economics from the ANU.

Joseph Marshan is a Researcher at The SMERU Research Institute. His research projects in Indonesia include estimating poverty rates at the village level, child labor in tobacco farming, and livelihoods of households headed by women. His areas of expertise and interest include labor markets, intra-household allocations, and small area estimations. He obtained his Master’s degree in Economics from the ANU and is currently in the process of obtaining his PhD at the Research School of Economics, ANU.

Valerie Mercer-Blackman is a Senior Economist at the macroeconomic research division of ADB, focusing on regional trends and development of macro monitoring tools. Her research at ADB has focused on diversification, employment and productivity issues in Bangladesh, Indonesia, and Kazakhstan. Her past analytical work includes growth drivers, investment, and fiscal issues in developing countries, specifically investment and taxation of oil and gas. Prior to joining ADB, she worked as a Macroeconomist at the Inter-American Development Bank and