A worker removing corn from cobs. Low-wage workers in Indonesia are mostly women. (Antara Photo/Oky Lukmansyah)

ILO Warns Indonesia to Invest in Skilled Labor or Lose Out

BY :ANDREYKA NATALEGAWA

JULY 09, 2015

Indonesia must strengthen its labor institutions and invest in skills development, the International Labor Organization said in a report released on Thursday, with officials warning that the country should boost skill levels if it wants to benefit from regional economic integration.

In its latest Labor and Social Trends in Indonesia Report, the United Nations agency also says Indonesia should find new engines for growth as it faces economic slowdown.

“The institutions in the Indonesian labor market area are underdeveloped,” said Robert Kyloh, the ILO’s senior specialist for multilateral cooperation. “Indonesia has now reached a level of development where we should be trying to expand these institutions, like the labor inspection system, collective bargaining, and labor courts.”

The report, which focused on the theme of strengthening competitiveness and productivity through decent work, found that Indonesia’s labor market continued to expand over the 2014-15 period, with employment growing and unemployment remaining low despite highly fluid market conditions.

Estimates from August 2014 found that 121.9 million Indonesians were part of the national labor force, just over 48 percent of Indonesia’s total population of 252.7 million.

Minimum wage, or less

Wages remain a crucial issue in the Indonesian labor market, as the number of Indonesians in wage-earning jobs increased to 38 percent of the entire employed population, a significant rise from past years.

“Wage-earning employment and the wages earned during that time, have become very important factors for the Indonesian economy,” said Emma Allen, economist with ILO’s Jakarta office and author of the Labor and Social Trends report. “As the share of people in wage employment increases, wages will begin to play a very critical role.”

Despite increases in the number of individuals earning income from employment, the growth in average wages has lagged, as one in three regularly employed Indonesians receive a “low wage” of less than Rp 950,000 ($71) per month.

“In terms of this low-wage statistic, Indonesian workers are among the lowest-paid in the world,” said Allen.

The ILO also found that low-wage workers in Indonesia tended to be disproportionately female.

“Productivity has been increasing at a rapid pace in Indonesia, but we need to have mechanisms that ensure wages move parallel with prices and productivity gains if we want to secure equitable growth,” added Allen.

Employer compliance with minimum wage regulations has also been a challenge, as 51.7 percent of Indonesian workers earn less than what they should based on provincial laws.

“What happens at the moment in Indonesia is that most employers rely on the minimum wage, and there isn’t much collective bargaining to push wages beyond that,” said Kyloh. “We should be seeing discourse between employers and workers on wages, but what happens here is that people are paid either the minimum wage or less. That’s a long way from the type of approach that we’d like to see in a middle-income country with a strong democracy.”

In addressing issues of wage disparity, Allen recommends strengthening local labor institutions.

“We must work towards building the capacities of labor inspectorates in the Ministry of Manpower, and support the development of a better collective bargaining system in Indonesia.”

Slowdown

Progress must be made in strengthening the responsiveness of Indonesia’s labor system, as rapid changes in regional markets bring about a new global economic status quo.

“The Indonesian economy has long benefited from trends in the global economy, but these trends have begun to slow down somewhat,” said Allen.

On Tuesday, the Asian Development Bank revised its forecast for Indonesia’s GDP growth this year to 5 percent from 5.5 percent, due to significant delays in infrastructure spending and fuel subsidy cuts not having the desired effect.

During the January to March period this year, Indonesia’s GDP grew by only 4.7 percent, the nation’s slowest since 2009. Meanwhile, the rupiah has experienced a period of depreciation, falling 7.4 percent this year against the US dollar.

Changing landscape

The need for Indonesia to innovate and improve its labor sector has become increasingly clear in the face of changing economic circumstances in Southeast Asia, particularly the establishment of the Asean Economic Community, which is set to come into force at the end of the year.

According to a 2014 joint study conducted by the ILO and the ADB, the implementation of the AEC could generate up to 14 million additional jobs, improving the livelihoods of the 600 million women and men living in the member states of the Association of Southeast Asian Nations.

“ILO economic modeling and analysis has shown that the AEC will result in the creation of an additional 1.9 million jobs in Indonesia,” Allen noted. “The AEC is going to bring a lot of positive changes, but Indonesia must be ready to take hold of these changes, and make sure the local economy benefits.”

According to ILO and ADB figures, demand for high-skill employment under the AEC will increase by an additional 55.7 percent during the 2010 to 2025 period, compared to increases of 26.1 percent for medium-skill employment and a contraction of demand of 3.2 percent for low-skilled jobs.

“We know that the AEC is going to increase demand for skilled labor, so now is the time to invest in education, meaning universities and vocational training systems,” Allen said. “There must be a productive dialogue between employers and educators, to make sure the curriculum is in line with what the economy is demanding.”

A failure to respond to changes in labor demand could have have significant impacts on the local economy, representatives from the ILO said.

“If skills investments don’t happen, then Indonesia will not be well placed to take advantage of the AEC. We currently have a large supply of low-skill labor, which is a sector that will contract under the AEC,” said Michiko Miyamoto, the officer in charge at the ILO office in Jakarta.

“Something has to happen quickly, because 2015 is already here. We need to see a larger volume of investment, and concerted efforts between employers and workers to prepare for the future.”

Allen agreed that frameworks like the AEC would bring swift changes.

“The big thing the AEC is going to do is accelerate structural changes, accelerate demand for highly skilled workers and decrease demand for unskilled workers.”

“We’re going to see the agriculture sector contract, while capital intensive sectors like manufacturing and service should expand,” she said.

Engines for growth

Concerns about Indonesia’s competitiveness in the global market have led to calls for the exploration of new avenues of development, the ILO report says.

“It’s a fact, growth is going to be slower this year. So the key for Indonesia is to find new engines for growth. One of these engines for growth could be the manufacturing sector,” said Allen. “Manufacturing is one of the most dynamic sectors in the local economy. It provides a lot of Indonesian workers with quality jobs.”

According to the Labor and Social Trends report, the overall contribution of the manufacturing sector to Indonesia’s GDP has declined steadily in recent years, dropping by 2.9 percent from 28.4 percent in 2004 to 25.5 percent in 2013.

“The manufacturing sector grew very rapidly in the decade leading up to the 1997 Asian financial crisis, but since the crash it hasn’t made significant progress in growth,” said Kyloh. “But with global commodity prices falling, we need to think about what Indonesia can do to bring growth back to these sectors.”

“Wages have been increasing in places like China, and a lot of manufacturers are staring to make decisions on where to go next. It could be Indonesia,” Kyloh said.

Earlier this year, South Korean tech giant Samsung opened a cellphone factory in West Java, in compliance with national regulation requiring that all 4G smartphones sold in the country as of 2017 include 30 percent local content.

Faced with a changing economic landscape, Kyloh said he remained optimistic about Indonesia’s future as developing nation.

“There’s a lot of potential here, but that potential can only be realized if there is action,” he said.

“Just sitting back and doing nothing is not going to work. We see many of these developments as positives, so long as the government can take action soon.”

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