Commentary: Investing in Labor-Force Participation

As Indonesia's demographic profile moves to an aging population in the future, the labor-force potential also changes. The proportion of young people available for employment will gradually decrease. (Antara Photo/Ari Bowo Sucipto)

By : JG | on 10:34 PM November 25, 2016
Category : Opinion, Commentary

In the early 1990s, several countries in East Asia, including Indonesia, were considered "economic miracles." Policies that enabled financial market development, supported by stable macroeconomic conditions, were considered key factors in anchoring these extraordinary economic successes. Nevertheless, some advocates believe East Asia's large population, especially the high proportion of young people, also played a significant role in these successes.

The miracle, as we all know, ended with the Asian financial crisis. In the aftermath of the crisis, most East Asian economies did not return to their "miracle" growth rates.

Nonetheless, the population factor is still evident in the region. The populations of East Asian nations (excluding high-income countries) grew 0.7 percent annually over the past 10 years. Moreover, a high proportion of these populations is still of working age (15 to 64 years). Less than 10 percent of the population in the region was aged 65 years or older in 2015, compared to 20 percent in the Euro area and 26 percent in Japan.

Indonesia's population grew by 1.3 percent annually over the past 10 years to around 250 million, according to the latest estimate in 2014. This large population also constitutes a high proportion of working-age citizens (67 percent). The proportion of Indonesians aged 15 to 64 years has grown significantly over the past 20 years. This growth is however, projected to slow down in future.

Labor-Force Participation

An important feature of the Indonesian population, with its huge number of working-age people, is the non-significant increase in the labor-force participation rate. The aggregate labor participation rate estimate for Indonesia in 2014 was 67 percent and it has remained relatively stagnant over the past 20 years. This is lower than Thailand (72 percent) and China (71 percent).

One policy question, in terms of labor-force participation in Indonesia, is what strategies are required to maximize the potential of the large proportion of working-age people.

Many factors influence the labor-force participation rate. These include specific circumstances, such as the tax and transfer system, and social/cultural reasons. Additionally, low labor-force participation rates could also come from a limited availability of jobs, or an overall weakness in the economy. People who cannot find the types of jobs that suit their skills and qualifications, or who are unsuccessful when applying for jobs, often choose to stop actively seeking employment and therefore no longer participate in the labor force. This is called the "discouraged worker" effect.

Aside from those influences, a low labor-force participation rate by woman also creates downward pressure on the aggregate. This is evident in Indonesia. In 2014, Indonesia had a female labor-force participation rate of around 51 percent. This was among the lowest for middle-income countries.

As suggested earlier, labor-force participation is also influenced by conditions in the job market. Much of the Indonesian labor force currently works in the primary sector, such as agriculture, forestry, fisheries and mining (35 percent of the total workforce). This sector also makes a large contribution towards Indonesia's overall economy.

Nevertheless, the primary sector generally correlates with harsher working environments, creating less attractive job prospects, especially for the so-called Generation Z, or those born from the mid-1990s to the early 2000s. Many countries are now adjusting their economies to be more service-sector oriented. Some already show that such efforts to gradually shift away from the primary sector to the service sector have been beneficial not only for economic growth, but also job-creation.

Going Forward

Indonesia is currently experiencing positive political and economic momentum. The current administration has already showed a clear vision by trying to shift the economy away from a reliance on the primary sector. This could lead to a greater potential for labor-market development in the future.

Nevertheless, the challenges in the labor force are far from moderating. Specific issues, such as the labor market and minimum-wage regulations still comprise a significant part of the challenges. It is beyond the scope of this article and the writer's capacity to comment on these issues.

This article discusses labor conditions in relation to Indonesia's demographic development.

It is easy to understand that Indonesia's large population could lead to a large labor-force potential. However, one should also understand that this relation is not set in stone.

As Indonesia's demographic profile moves to an aging population in the future, the labor-force potential also changes. The proportion of young people available for employment will gradually decrease. Therefore, the importance of addressing barriers in labor-force participation will increase. For Indonesia, this could include a greater focus on matching the skills of the working-age population and the skills required in the job market.

It is important to prepare the working-age population to be ready to tap all of Indonesia's potential. It is important to maintain and improve economic conditions. However, investing in skills promotion, innovation and preparing workers to move and participate in the modern sector of the economy should also be a priority.

Bhayu Purnomo is an analyst in the Fiscal Policy Agency at the Ministry of Finance. The views expressed in this article are his own and do not reflect the official stance of ministry.

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