Just the job: The government is enacting measures to sustain employment gains

Despite having a large labour force of 121m people by February 2013, Indonesia has achieved a consistent fall in official unemployment over the past decade. Growing investment in manufacturing and services has driven job creation, although the most labour-intensive sectors tend to be the lowest value-added. With roughly half the 247m-population below the age of 30 and 63% of working age, the labour market requires sustained rapid economic growth to keep pace with demographic growth, which is seeing 2m Indonesians enter the market annually. Despite the halving of unemployment from 11.2% in 2005 to 5.9% by February 2013, a 15-year low, 54% of workers are employed by the informal sector, and the share of vulnerable employment stood in the 60-70% range in 2012, according to the World Bank. As economic growth slows below 6%, wage inflation gathers pace and interest rates rise, the government is enacting key measures to preserve employment and sustain the gains of recent years.

Labour

With the average 6% annual economic growth in the seven years to 2012 stemming primarily from the high-employment services sector, average annual employment growth of 2.9% has outpaced the labour market’s 2.2% expansion, according to the national planning agency BAPPENAS. Some economists argue that faster growth is needed, however: “Our estimates indicate that Indonesia needs at least 6.7% annual GDP growth to absorb expansion in the labour force,” Purbaya Yudhi Sadewa, Danareksa’s chief economist, told OBG. Since 2010 services have overtaken agriculture as the largest employer, accounting for 43% of employment by February 2013, compared to 35% in agriculture and 22% in industry, according to the World Bank. “The shift from extraction industries towards consumerrelated sectors is helping to drive employment, as they are more labour-intensive,” James Castle, chairman of CastleAsia, told OBG. Yet while unemployment has continued to drop, productivity growth of 4.5% a year on average has lagged regional peers. Indeed, agriculture still accounts for 35% of employment but only 15% of GDP, while 90% of agricultural workers are low-skilled, according to BAPPENAS. A full 56% of the labour force had only completed primary school or lower in 2012. Youth unemployment in particular remained high at 19.6% in August 2012, down only marginally from 20% a year prior, according to the International Labour Organisation (ILO). Meanwhile, 60% of the national labour force is concentrated in Java and Bali.

The shift towards industrial and services jobs was sustained in the year to February 2013, with 13% year-onyear growth in construction, 4% in industry and 3.3% in trade, compared to a 3% drop in agricultural employment. Small and medium-sized enterprises employing 5-49 workers account for the bulk, some 90%, of manufacturing jobs, according to the International Finance Corporation – a similar ratio to China, India, South Korea and the Philippines. Yet with growing foreign direct investment (FDI) in manufacturing, which accounted for 48% of the $24.6bn in non-hydrocarbons FDI in 2012, demand for skilled labour has grown. An American Chamber of Commerce report on the last decade of FDI in Indonesia estimated that every $1m in US FDI generated 242 jobs. This investment in manufacturing is going towards mechanised industrial segments, like agro-processing, and capital-intensive manufacturing such as chemicals, rather than traditional industries now in decline such as textiles, footwear and garments production, even if the latter remains the third-largest employer. BAPPENAS forecasts the services sector will drive employment growth over the next decade: it estimates the primary sector will require 7.8-8.3% employment growth annually, compared to 12.6-13.1% in the secondary and 13.4-13.9% in the tertiary sectors.

Wage Inflation

The 2003 Manpower Act, which imposes one of the highest severance packages, has been a key constraint for employers. Companies have circumvented restrictions by relying on outsourced casual labour, often for core functions. By May 2013 the ILO estimated that some 80% of formally employed workers did not hold a contract. In 2012 the Ministry of Manpower restricted the types of work eligible for outsourcing to six non-core functions, and requires firms to shift temporary employees to full-time contracts. A number of uncertainties remain, including the penalties for non-compliance. Employers have welcomed greater clarity in employment rules but called for more flexibility in the main labour law to compensate. “Some tough decisions will need to be made on the labour law to improve Indonesia’s competitiveness in the long term,” Stuart Dean, CEO of ASEAN at General Electric, told OBG. “The specifics of the law will have to strike a balance between labour rights and the ability of employers to run their businesses.”

Alongside legal constraints, pressure from labour unions, led by the Confederation of Indonesian Workers’ Union, has driven wage inflation in recent years. In the greater Jakarta area alone, the municipal police reported a sharp increase in labour protests from 900 in 2011 to 1050 in 2012. In November 2012 the Jakarta government raised the minimum wage, which is set at a provincial level, by 44% to Rp2.2m ($220), the highest single increase on record. On average minimum wages were increased by 30% in 25 provinces and 18% nationwide, according to the ILO. Meanwhile, average nominal wages grew from Rp1.41m ($141) in 2010 to Rp1.53m ($153) in 2011 and Rp1.63m ($163) in 2012.

Though wages remain competitive in absolute terms relative to peer South-east Asian economies, their growth has outstripped productivity gains over the past decade. A 2013 study by the Jakarta-based Centre for Strategic and International Studies found that wages increased by 5.5% annually from 2000 to 2011 while productivity rose by only 3.4%, compared to China’s 7.2% wage inflation and 10.1% productivity growth. By 2013 the World Bank found the ratio of minimum wage-to-value-added per worker at only 0.42. The 30% growth in minimum wages in 2010-13 was the region’s highest. Concern over rising inflation in 2013, prompted by higher fuel prices from June and food price inflation, has sustained higher wage claims of 50% and as high as 68% in Jakarta. The impact of wage inflation on employment levels is concerning, with the World Bank estimating in 2010 that a 10% minimum wage hike typically spurs a 1 percentage point rise in unemployment, albeit with a lag of two to three quarters.

Flexible Reforms

The administration has sought to cushion the blow of higher wages and employment restrictions by offering one-year renewable waivers for labour-intensive industries, categorised as businesses employing over 100 staff. “The combination of a higher minimum wage and slowing growth could have an impact on unemployment,” Bobby Hamzar Rafinus, the deputy minister for fiscal and monetary coordination at the Coordinating Ministry for Economic Affairs, told OBG. “This is why the government enacted deductions of tax instalments for preserving employment and supports labour-intensive industries.”

A key pillar of the measures is support for labourintensive industries. The measures provide for a 25-50% tax deduction for labour-intensive firms in sectors such as textiles, footwear, furniture, confectionary and toys. They also allow bounded zones, where most labourintensive light manufacturing plants are based, to sell more of their output domestically – from 25% to 50%.

Large job-creating FDI projects, such as those by POSCO and Hankook, can also apply for tax incentives through the Indonesia Investment Coordinating Board (BKPM), although a tripartite commission involving the Manpower, Finance and Coordinating Ministries finally approves these. The government is also seeking to develop a higher-skilled labour force to meet the needs of higher-value-added industries. A $75m loan from the Asian Development Bank that was extended in 2012 to 172 polytechnic schools, of which 140 are private, and a $38m National Skills Fund, is aimed at upgrading the nation’s professional training capacity. “Indonesia needs to move into a non-extraction economy, and to do this it needs knowledgeable workers,” Victor Hartono, the president director of Djarum Group, told OBG.

New System

Aside from tax incentives to preserve industrial employment, the government also proposed a new formula-based bargaining process for minimum wage increases, to be announced yearly in November. The 2003 Act already requires provincial and district governments to set minimum wages. “The responsibility for finding a balance has to be taken by provincial authorities, who must liaise with unions, local government and representatives of the private sector,” Suryo Sulisto, chairman of the Indonesian Chamber of Commerce and Industry, told OBG. Under the new rules, however, the central government introduced district-level calculations for the cost of living and links minimum wage increases to local inflation, as well as proposing caps on wage increases at 10% above inflation. While the attempt to depoliticise the wage-setting process and shift to a more scientific basis may be challenging in an election year, the proposals should prove encouraging to labour-intensive industries in particular. The Ministry of Manpower also requires provincial and district governments to report on efforts to create employment at the local level in a regulation issued in May 2013.