Labor Market: Overview Issues

Labor Market: Overview & Issues

Preliminary Findings from the Indonesia Jobs Report Poverty Team World Bank Office Jakarta November 2008

Labor Market Overview

From 1990 to 2007

1990-97: Growing Rapidly

Strong growth in the labor market fueled by economic growth, urban

 employment growth and a supply of better-educated workers.

More workers were finding better jobs and earning higher wages. Rapid  structural transformation out of agriculture. Falling wage inequality.

Source: Sakernas

1997-98: Crashing and Coping 

Employment stability. Farms

and the informal market absorb laid-off workers. Households cope as women enter the workforce.

 Devastating wage cuts

were how workers experienced the brunt of the crisis. Real wages fell by 31% in one year.

Source: Sakernas

1999-2003: Wages recover, jobs don't Steep increases in wages for Availability of formal jobs

  salaried workers, especially decline, alongside a urban and wealthier employees. downsizing of civil servants.

Workers increasingly pushed into agriculture.

Source: Sakernas Reverse structural transformation _66.0 Share of non-agricultural jobs (percent)

64.0 _62.0 Jobless Growth _60.0 Expansion _58.0 Crisis _56.0 Pre-crisis

54.0

_{1990 1992 1994 1997 1999 2001 2003 2005 2007}

Source: Sakernas

“Jobless growth” in off-farm employment

Pre-crisis Indonesia showed solid

 growth in off-farm employment creation. The share of off-farm

employment expanded by 2.1 percentage points per year.

Post-crisis, Indonesian workers still 

pushed into agriculture despite

economic recovery. The off-farm

employment share contracted by 0.8 percentage points per year. All other countries resumed moving workers into non-farm jobs.

Source: Sakernas, WDI, CEIC What caused jobless growth in Indonesia? Minor cause: slowing growth. Slower growth didn't stop

 Malaysia and Thailand from creating off-farm jobs.

Minor cause: slowing industrial sector growth. Industry was only 

responsible for about 12% of the decline in off-farm employment growth between the crisis and 1999-2003.

Major cause: inability of the service sector to create jobs.

 Services were growing while sector employment declined.

Drop in service sector elasticity responsible for 2/3 of the over decline in off-farm employment. What slowed service sector job growth?

Only Indonesia experienced steep wage increases during 1999-2003.



Median real wages increased by 9 percent per year, while only slightly changing in neighboring countries.

Source: Sakernas

2003-2007: Formal Sector Expansion 

Real wages fell in 2005 and

only started showing signs of recovery by 2007.

 Employment began picking up

as more non-agricultural and formal jobs became available.

Source: Sakernas Explaining the job expansion, 2003-07 Lower industrial growth rates have

 stayed constant. Industrial growth

slowed across the region, even in booming China and Vietnam

Service sector elasticity has  recovered. This accounts for

three-quarters of the non-ag employment recovery. Recovery is only partial, a trend common across the region.

Source: National Accounts, Sakernas Understanding Informality

Indonesia has a high rate of informality

Source: LABORSTA, ILO

Formal sector jobs are preferable _8,000 Informal workers face a wage penalty

 _7,000 Median wages (Rp/hour) of over 30% and are less likely to _6,000 _Formal

receive non-wage benefits including _5,000 training, insurance or pensions. _4,000 ^Informal

Only 2.2% of informal workers transition _3,000  into the formal sector annually. Young, _2,000

urban men are the most upwardly _1,000 mobile.

Some informal workers are more likely to earn more in informality than they 

could expect in a formal job: Middle-aged (35-64), university graduates,

working in construction, trade and transportation, casual non-farm workers.

Some indication that women prefer informal jobs for flexibility.

Informality sometimes acts as a safety net for formal sector workers.

 Informal farm jobs helped buffer households from the effects of the crisis.

Labor Policies & Institutions

Hiring & Firing, Minimum Wages, Collective Bargaining, Disputes

Fixed-Term Contracts Source: IFLS 2007 ^80.1 ^8.7 ^10.2 No contract

Permanent contract Fix-term contract FTC workers are more vulnerable than permanent.

 Income insecurity: Lower wages, fewer months of work.

 Problem with non-compliance: 15-22% of contracts over 3 years.

But workers with no contracts are the most vulnerable.

 Lowest monthly wages, least access to benefits and training.

 Limited access to justice through the courts. Severance pay is comparatively high But compliance is low: Only 33% of eligible actually receive severance pay.

The actual amount paid was only 29% of the legally entitled amount.
Source: IFLS 2007

Moderate unionization; clear benefits Source: IFLS4

 Around 3.2 million employees, or 11.2% of all employees, belong to a union. By international standards, the membership rate is moderate.

Source: Sakernas 2007 

Union members receive a wage premium of 18% (compared to non-union employees) and more non-wage benefits.

0% 10% 20% 30% 40% ^Training ^{Health coverage} ^{Meals at work} ^{Transport benefits} ^Pension ^{Severance pay} Employees receiving benefits (percent)

Union member Non-union member ₂ ₄ ₆ ⁸ ¹⁰ ¹² ¹⁴ ¹⁶ ¹⁸ Cambodia, 2000 ^{Thailand, 2005} ^{India, 2004} ^{France, 2005} ^{Malaysia 2001} _{South Korea 2007} ^{Philippines 2006 Indonesia, 2007} ^{United States,} ²⁰⁰³ ^{Mexico, 2004} ^{Brazil, 2002} Union density, select countries (percent workforce) Industrial Relations Courts (IRC)

84% of disputes filed in the Jakarta Without data, difficult to assess

 

IRC were about employment the performance of the IRC. But

termination. However, termination is sample in Jakarta shows IRC is not

often the result of other underlying timely, requiring an average of 77

disputes. days to resolve a case.

Time until verdict, Jakarta IRC (2007) Cases filed at Jakarta IRC, 2007 _{Rights disputes} On-time (< 51 days) _Employment Very late _termination (> 90 days)

Late _{Rights dispute &} (51-90 _{Disputes over interests} _termination _employment days) _{Source: Jakarta IRC (2007); N= 378 Source: sample from the Jakarta IRC (2007); N= 100} Others Approaches to minimum wages

Aims to protect the most vulnerable groups: low-wage

Floor wage earners, pensioners, disabled. or social safety-net In some developing countries social protection benefits (e.g.,

benefits) have been indexed to minimum wages, keeping them excessively low.

Wage-setting

Relatively high minimum wages, effectively covering all private

sector workers.

mechanism.

In Indonesia, a 10% minimum wage increase raises wages of

th th

25 percentile by 2.4%, 50 percentile by 2.9% and 75 percentile by 2.1% Negative potential consequences: higher non-compliance,

hampers formal sector growth.

Understanding minimum wage effects

10% increase in the minimum wage

is associated with:

2.6% increase in non-compliance
3%increase in actual wages for all
No discernable effect on employment but…
1% decrease in industrial employment
1% decrease in formality share

Higher minimum wages are not an effective safety net for the poor.

Poor tend to work informally.
Poor typically in noncompliant jobs

Workers’ Skills

Market for Educated Workers, Vocational Education, Training

30 ⁶⁰ ¹⁸⁰ ¹⁵⁰ ⁹⁰ ¹²⁰ 1990 1993 1995 1997 1999 2001 2003 2005 2007 Millions Adult working population

SMA or higher Lower than SMA More educated workers

Source: Sakerans Supply of more educated workers is growing but still low.

 Tertiary workers tripled since 1990 but still only at 6.2% of workers.

 Strongest gains among women and in rural areas.

Matched by high wage premiums Wage Premium for More-Educated Workers _1.1 _1.2 _1.3 (compared to less-educated counterparts)

1.0 _0.8 _0.9 All Men Percent _0.7 _0.6 _0.4 _0.5 Women

1990 1993 1996 1998 2000 2002 2004 2006 More educated workers earn more than those less educated

Higher for women and urban workers, but men and rural catching up

 Demand driven by higher premiums in the service sector (76% on

 average during 2003-07) than industrial or agricultural sectors. And hampered supply by slight voluntary withdrawal from the workforce.

 Source: Bank staff calculations, based on Sakernas

70:30 Policy MoNE aims to reverse the ratio of the share of SMK students. In



2007 only 25% of SMA students were vocational. The policy aims to increase this to 70% by 2015.

Vocational high schools (SMK) student share (of total SMA)

25 _Percent

15 Predicted

5 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Reconsidering the 70:30 Policy

¹⁰⁰⁰⁰ ⁹⁰⁰⁰ ⁸⁰⁰⁰ ⁷⁰⁰⁰ ⁶⁰⁰⁰ ⁵⁰⁰⁰ ⁴⁰⁰⁰ ³⁰⁰⁰ 1000 ²⁰⁰⁰ ₁₈ ₂₃ ₂₈ ₃₃ ₃₈ ₄₃ ^Rupiah/hour Age Female Wage _{Public SMA} Public SMK

¹⁰⁰⁰⁰ ⁹⁰⁰⁰ ⁸⁰⁰⁰ ⁷⁰⁰⁰ ⁶⁰⁰⁰ ⁵⁰⁰⁰ ⁴⁰⁰⁰ ³⁰⁰⁰ 1000 ²⁰⁰⁰ ₁₈ ₂₃ ₂₈ ₃₃ ₃₈ _Age ₄₃ ^Rupiah/hour Male Wage

Public SMA _{Public SMK} 

Public SMK graduates, on average, are not more likely to be employed or unemployed.



Wages of vocational students are, on average, lower and

deteriorate over time. Effect is especially strong for women.

For more information

Contact the Poverty Team in the World Bank Office Jakarta

Vivi Alatas, Team Leader valatas@worldbank.org

Labor Market: Overview Issues