Employment Policy and Labour Markets in Indonesia Chris Manning Australian National University...
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Transcript of Employment Policy and Labour Markets in Indonesia Chris Manning Australian National University...
Employment Policy and Labour Markets in Indonesia
Chris ManningAustralian National University
Presentation at the ILO Workshop on Trade and
EmploymentJakarta June 12 2010
Contents of Presentation
Background Indonesian context International context
Employment protection legislation (EPL) focus on severance pay and contract
work/outsourcing Other labour policies: wage policy and
job creation Conclusions
I. Background a. The Indonesian context
Five issues Look briefly at each
1. Labour demand2. Labour supply3. Surplus labour4. Labour market structure5. Institutions
The Indonesian context
1. Labour demand: past decade Slower economic growth and less
employment friendly growth, by low income East Asian standards pre-crisis Indonesian historical standards
Employment suffer especially
formal sector internationally oriented, labour-intensive
manufacturing
Main challenge: more, higher productivity jobs
-2.00.02.04.06.08.0
10.0
Agric Manuf Trade Serv Other Total Non-Agric
Employment Growth, Indonesia 1990-1996, 2000-2006 (% p.a.)
1990-1996 2000/1-2005/6
Formal and Informal Sector Employment in Non-Agricultural Sectors, Indonesian 1986-2005
0
5000
10000
15000
20000
25000
30000
35000
1986 1990 1994 1998 2002
Empl
oym
ent (
000)
Formal Sector
Informal Sector
Employment in Major Sector of L&M Manufacturing, 1984-2003 (000)
0
200
400
600
800
1000
1200
1400
1600
Food
Text
Chem
Metal+Mach
Other
Employment Elasticities, 1990-96 and 2000-06
0.00
0.40
0.80
1.20
1.60
Manuf Trade Serv Other Non-Agric
Total(incl.agric)
1990-1996
2000/1-2005/6
The Indonesian context
2. Labour supply Labour supply still high (+/- 2%
p.a.) but Indonesia opportunity to take advantage of demographic dividend
though not for long Education expansion impressive
but questions on quality despite some very impressive
developments
Main challenge: raising the level of skills
The Indonesian context
3. Surplus Labour Unemployment intermediate by LDC
standards Trending down in recent years, even despite
WFC Heavily concentrated among HS educated
youth (15-24) Under-employment moderately high
a function of labour market structure -15-30% depending on definition
Main challenge: absorbing young school graduates into better jobs
0.0
5.0
10.0
15.0
Urban Rural Female Male Total
Unemployment Rates in Indonesia, 2001-2006
Aug-01 2002 2003 2004 Feb-05 Nov--05 Aug--06
The Indonesian context
4. Labour market structure Broadly dualistic for unskilled-semi-
skilled workers Low productivity: Agriculture, low
productivity IFS and casual wage labour about 75% of total employment about 40% of urban employment
Higher wages in large, foreign and resource intensive firms
Why a problem: contributes to surplus labour, stifles skill development
Too many people locked into low productivity jobs
Main Challenge: reduce the gap – create more high productivity jobs and raise productivity in low wages sectors
The Indonesian context
5. Institutions Economic policy decisions through
political bargaining in a democratic framework
Hard to get China/Vietnam growth? Under-developed IR after 30 years
of tight political controls Lack of confidence/suspicious of
markets and collective bargaining Compare with China and Vietnam Paternalism?
Main Challenge: Develop collective bargaining
Backgroundb. The international context Living with China: an international
environment dominated by China More competitive environment: domestic
and international If Indonesia wants to create a better jobs
environment, export growth in manufacturing is critical
Global production networks demand flexible responses to changing product demand Fewer stable, regular jobs in manufacturing
At same time lesson from the GFC: services play a bigger role at home and abroad
II. Employment Protection Legislation
Key purposes of EPL: Provide job and income security for workers Provide temporary financial security to workers
while unemployed Policy and political economy challenges
Assess how EPL effects employment (mainly outsiders) versus setting standards for those in jobs (insiders)
Getting the balance right between national standards, and industry and mainly firm-level standards set through collective bargaining
EPL: General
Like many countries with a civil law tradition, extensive legislation of labour standards (Revised Law 13, 2003) Most standards similar to many other
countries: hours of work, child and female employment, health and safety
Legislated by Central Government Two outliers in the Indonesian case and
two other controversial areas Severance pay and contract employment Foreign workers and regional restrictions
EPL: Severance Pay
Many countries have severance regulations Some countries leave severance pay
conditions up to parties to determine within their CLAs
Most countries set low to moderate severance rates
Entitlement generally limited to redundancies/layoffs
Complemented with legal recourse for unfair dismissal claims
EPL: Severance Pay
Indonesian severance strict by international standards (Law 13,2003): High rates of severance Includes voluntary quits as well as
dismissals In combination with extensive minimum
wages, a burden for some firms (especially small scale, competitive?)
No alternative options such as individual worker accounts
Severance Regulations in OECD CountriesSeverance pay for a worker with 4 years service at the firm and dismissed for no-fault. OECD (2004)
Severance Regulations in Asia
0
2
4
6
8
10
India Malaysia Philippines Singapore Thailand Indonesia
Severance pay in no. of monthly wages
A worker with 4-years experience at the firm and dismissed for economic reasons
Source: GIAT-UNPAD (2004)
EPL: Severance Pay
Severance regulations acts like an implicit ‘tax’ on hiring new permanent workers (UNPAD study,2004)
The tax hurts employment of new workers, if wage adjustments are not flexible, for example, due to a relatively high minimum wage Tax is high in Indonesia (UNPAD study)
Indonesia’s ‘Hiring Tax’ is very High Among Developing Economies(Hiring tax in number of months wages)
0 1 2 3 4 5 6 7
Bolivia
Ecuador
Honduras
El Salvador
Mexico
Costa Rica
Argentina
Trid.&Tob
Uruguay
Paraguay
Barbados
Jamaica
Guyana
Belize
Brazil
Dominican Rep
Chile
Indonesia
Venezuela
Nicaragua
Colombia
Peru
Panama
1999
1990
Average 1999
Average 1990
EPL : 2. Contract Work/Outsourcing
Common types of employment arrangements found in countries Permanent employment contracts Fixed term employment contracts Temporary workers hired through
temporary work agencies (outsourcing manpower)
EPL : Contract Work/Outsourcing
Many countries do regulate employment arrangements but ‘regulatory strictness’ varies across countries
In recent years many countries have begun relaxing restrictions on employment contracts
EPL : Contract Work/Outsourcing
OECD EXPERIENCE o Contract renewals: most countries
permit contract renewals more than 2 times (19 of 26 circa 2000)
Cumulative duration of contracts: most countries have no limit on contract duration (only 5 of 26 for 3 years or less)
Temp worker agreements: more countries have restrictions
EPL : Contract Work/Outsourcing
In Indonesia, contract employment outsourcing tightly controlled:
Regulations tightened in MP13/03 Eg: Shorter duration of contracts (2 years,
extendable once to max 3 years) versus 3 years extendable once
Out-sourcing only for non-core activities More restrictive than in other East Asian
countries
Restrictions on Employment Contracts: East Asia
Country Fixed term Contracts Temporary work through
TWAs Indonesia Strict Strict restrictions – non-
core activities Japan No restrictions Restricted to certain sectors Korea No restrictions Restricted to certain sectors Malaysia No restrictions -- Philippines Strict Temp work permitted but
considered direct hires Thailand No restrictions
EPL: 3. Foreign workers and regional restrictions Foreign workers:Indonesian regulations quite
restrictive: more like Philippines than Malaysia or Thailand Negative list, monthly charges, needs tests and
language requirements for foreign workers
Charges on the employment of non-local workers: Raise the cost of employing outsiders (Pekanbaru, South Sumatra, Bekasi, Maluku) One-off or monthly charges, mainly for
professional/skilled manpower Not a major cost, in most cases, but a nuisance and
a departure from Indonesia’s history of an open labor market
EPL: Conclusion
EPL can improve job security of ‘covered’ workers Reduces dismissals in the economy and
increases worker tenure at the firm Promotes productivity
Severance pay provides some financial security for workers dismissed
Increase job insecurity for workers unable to access ‘protected’ jobs (especially among young persons)
EPL: Conclusion
Strict severance pay and regulation of contract work appears to have reduced hiring activity for regular jobs in Indonesia in recent years (a research question) Appears to have mainly affected youths,
females, low educated workers Contributed to a more dualistic labor
market? Insider-Outsider problem Shift of jobs to self-employment
EPL: Conclusion
Increase in temporary employment. Eg:AKATIGA, 2008
“..a direct effect of the legislation has been the introduction of flexible industrial relations practices in the form of contract labour and third party labour recruitment practices on a very large scale.”
Cause or effect of tighter regulations and stricter compliance?
See OECD evidence on employment rates
Strict EPL associated with Lower employment rate (Source: OECD 2004)
45
50
55
60
65
70
75
80
0 0.5 1 1.5 2 2.5 3 3.5 4
EPL index
Em
plo
ymen
t ra
te
US
Tur
PorCan/UK
Aus
KorAut
Bel
GreSpa
Pol
Hun
Slo
Ire
Ita
NZLJap Cze
Ger FraMex
NedDen
Swi NorSwe
III. Other Labour Policies
Wages Minimum wages:
regional, based on needs criteria, annual adjustments and mainly bipartite
High relative to average wage (not just social safety net): high non-compliance?
Public sector wages: increasingly out of step with private sector at upper levels
Job Creation Rural poverty alleviations schemes
such as PNPM create many jobs?
Institutional Framework For Minimum wages in East Asia
Country Tripartite wage council
Jurisdiction Annual Adjustments
Major determinant of MW adjustments
Indonesia Yes Province/Local government
Yes KHM/KHL, inflation
Korea Yes – employers, unions, public interest
National Yes Cost of living survey, inflation
Nepal Yes National Every 2 years
Inflation
Philippines Yes Province/region No Inflation Singapore Yes – wage
adjustment guidelines
National No
Thailand Yes Province No Inflation
IV. Conclusions
Major problems for job creation have been on the demand side Slow growth and uncertain investment climate
Extensive regulations probably contribute to employment problems through: Discouraging new investors in labour intensive
industries a more dualistic labour market: push youth-
women into IFS Unemployment a secondary problem, but
important for educated youth
Conclusions
Reform/Research Issues Assess impact of tight regulations and
compliance How to promote collective bargaining as
the main mechanism for wage setting and conditions?
How to introduce more flexible regulations? Eg: deferred compensation schemes/individual
accounts for severance Relax restrictions on employment
arrangements Permitting contract renewals more than once