Indonesia: Selected Issues
Author: International Monetary Fund
Publication Date:
29 Jul 2002
eISBN:
9781451818239
Language:
English
Keywords:
ISCR; CR; Indonesia; debt; wage; central government; minimum wage policy; wage employee; employment generation; labor force; employment growth; Real wages; Labor markets; Minimum wages; sector wage
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This Selected Issues paper takes stock of Indonesia’s performance against the original macroeconomic objectives under the IMF’s extended arrangement. The paper compares the performance of the Indonesian economy in the post-crisis period with that of the other major “crisis” countries in the region. It reviews the background to the current extended arrangement and describes the core macroeconomic objectives of the program. The paper also considers Indonesia’s performance against objectives for growth, inflation, the balance of payments, and improving Indonesia’s debt sustainability.

Abstract

This Selected Issues paper takes stock of Indonesia’s performance against the original macroeconomic objectives under the IMF’s extended arrangement. The paper compares the performance of the Indonesian economy in the post-crisis period with that of the other major “crisis” countries in the region. It reviews the background to the current extended arrangement and describes the core macroeconomic objectives of the program. The paper also considers Indonesia’s performance against objectives for growth, inflation, the balance of payments, and improving Indonesia’s debt sustainability.

VI. Developments in the Labor Market1

A. Summary and Introduction

1. This chapter reviews labor market trends since the onset of the Asian crisis in late 1997. It examines in particular how the labor market adjusted to the sharp decline in output in 1997–98 and the extent to which the recovery in economic activity in the postcrisis period has supported employment generation and a rebound in wages and labor incomes. The crisis hit Indonesia particularly hard and, although the economy has sustained moderate growth in recent years, the strength of the recovery has been significantly weaker than in the other crisis countries.

2. The labor market experience in Indonesia during the crisis was in many respects unique. Despite the fact that it suffered the largest output shock in the region, employment actually expanded during the crisis, and despite an increase in the labor force participation rate, open unemployment rose by less than 1 percentage point. Instead, the bulk of the adjustment came through a huge downward adjustment in real wages and a significant shift in employment to the informal sector.2 While a number of factors—notably the fact that inflation far outpaced wage increases during the crisis—contributed to the unusual composition of the labor market adjustment in Indonesia, a number of commentators have argued that the flexibility of Indonesia’s labor market was also a key explanation for why unemployment did not rise more sharply.

3. In the postcrisis period, growth in formal sector employment has failed to regain the momentum it generated in the decade preceding the crisis. Such employment growth is critical for a broad-based improvement in living standards. After a brief recovery in 1999, formal sector employment stagnated in 2000 and preliminary indications are that this trend continued in 2001. While the lack of robust economic growth has undoubtedly been a major factor, some observers have argued that the marked reorientation in labor policy since the fall of the Suharto regime in 1998 has also contributed to the slow recovery in formal sector employment. The chapter therefore also reviews the main changes in labor market policies and institutions since the crisis in 1997, focusing in particular on the extent to which key changes, such as recent minimum wage policy, have adversely affected on employment generation in the formal sector.

4. The chapter concludes that care needs to be taken to ensure that labor reforms are consistent with preserving Indonesia’s capacity to attract investment into labor-intensive industries. While a reorientation of labor policy was clearly overdue, given the repressive policies under the Suharto regime, the chapter cautions that a continuation of the recent upward trend in minimum wages risks undermining Indonesia’s competitiveness and capacity to generate remunerative employment. Early steps to put in place an orderly framework for collective bargaining will also be important to ensure that the long overdue freedoms granted to Indonesia’s labor unions can be deployed equitably and effectively with the minimum necessary disruption to industrial relations.

5. The chapter is organized as follows. Section B reviews the key factors that contributed to the relative flexibility of the Indonesian labor market prior to the crisis. Section C examines the impact of the crisis on the labor market. Section D reviews key labor market trends in the subsequent period through 2001. Section E considers the major changes in labor policy since the crisis and their impact on employment and wages. Section F concludes.

B. Precrisis Labor Market3

6. Two broad sets of factors contributed to the relative flexibility of the Indonesian labor market on the eve of the Asian crisis. First, despite the fact that rapid development in the precrisis era had led to significant changes in Indonesia’s economic structure—notably a major shift of output from agriculture to industry and services—its labor market had retained many of the features of a classic labor-surplus economy (Table 1).4

Table 1.

Structure of Employment, 1997

(In percent of total)

article image
Sources: CEIC database and Central Bureau of Statistics (BPS, Sakernas Survey, 1997).

In particular:

  • the share of employment in agriculture remained high, 2-3 times greater than in the more industrialized East Asian economies such as Korea and Malaysia;

  • the manufacturing sector, which accounted for around one third of output in 1997, still had a relatively small share of total employment (13 percent);

  • wage employment accounted for only 35 percent of total employment—50 percent of non-agricultural employment—compared with closer to two-thirds of all employment in more industrialized neighbors.

7. Second, labor market institutions were not allowed to develop into significant sources of rigidity (see below). The level of unionization in the economy was low—around 5 percent of the workforce—and, although labor regulation was extended in the 1990s, enforcement was relatively weak and the coverage was largely restricted to the modern corporate sector. Employees in most small and medium-scale enterprises continued to be largely uncovered by labor market regulations and casual employment contracts continued to predominate in the agriculture and construction sectors.

8. Wages therefore continued to be highly responsive to fluctuations in labor demand. Piece-rate systems of pay, bonuses linked to firm performance, and flexible employment systems (reflecting a predominance of contract and casual labor) supported a quick adjustment of wages and employment levels to shifts in labor demand. Opportunities for work in the agricultural sector and the urban informal sector enabled workers who had lost jobs in the modern sector to find alternative employment, albeit at considerably lower levels of remuneration. The absence of a meaningful social security system also implied that most displaced workers in an economic downturn were forced to find alternative income-generating occupations (even if only as workers on the family farm) as they were simply too poor to remain unemployed.

9. Labor market conditions nevertheless began to tighten in the early 1990s (Table 2). Growth in the labor force began to slow, despite an increase in participation rates. Urban employment growth picked up, especially formal sector employment in manufacturing and construction, though labor absorption in these sectors was relatively modest in comparison to other regional economies. Real wages rose by around 5-6 percent per annum in the non-agricultural sector over the period 1990-97. The growth in urban employment coincided with a decline in the role of agricultural employment, whose share of total employment fell sharply in the 1990s. The growth in urban employment was also reflected in rising participation rates, particularly among young women who were drawn into low-wage manufacturing jobs following the emergence of labor-intensive, export-oriented industries in the late 1980s. The rapid rise in the urban labor force in the early 1990s resulted in an increase in open unemployment, although the overall level remained low (less than 5 percent). 5

Table 2.

Indonesian Labor Market Indicators (1985-2001)

article image
Source: Department of Labor, and Central Bureau of Statistics (BPS, Sakernas Survey, 1997-2000)

End-period.

End-September

C. Impact of the Crisis on the Labor Market

10. Contrary to earlier expectations, the sharp decline in output in 1998 did not have the catastrophic impact on unemployment that many had predicted. 6 In the event, open unemployment increased by under 1 percentage point to 5½ percent in 1998, despite the displacement of large numbers of workers in certain sectors. In this and other respects, the adjustment of Indonesia’s labor market was unique (Table 3).

Table 3.

Summary of Labor Adjustment in Selected Southeast Asian Countries During the Crisis

article image
Sources: Gordon (2000), and Central Bureau of Statistics Sakernas Survey 1997-98.

Annual average.

Absolute change.

Table 4.

Labor Force Participation, 1997-98

(In percent of working population)

article image
Sources: Central Bureau of Statistics (BPS, Sakernas survey, 1997-98).

11. The key features of Indonesia’s relatively unique experience were as follows:

  • Total labor-force participation rates increased marginally suggesting that the “added worker” effect dominated the impact of “discouraged” workers leaving the labor force (Table 4).7 The “added worker” effect entirely reflected higher female participation, particularly in the rural areas, as women were drawn into the workforce to supplement family income. Male participation rates, on the other hand, were broadly unchanged.

  • Around 2½ million non-agricultural workers (3 percent of the labor force) were displaced during the crisis (Table 5).8 Most of tie displaced workers were wage employees and the job losses were most severe in the manufacturing and construction sectors. About three-quarters of the job losses were in the rural areas.

  • In the urban areas, most displaced workers found jobs in the informal trade and service sectors, albeit at significantly lower levels of income. As a result, net job losses in the cities were relatively limited. Workers in the rural areas did not have the same range of options and most were forced into agricultural labor.

  • Agricultural employment increased by nearly 5 million (5 percent of the labor force). Workers displaced by the crisis accounted for nearly half this increase in employment, with the remainder consisting of new entrants into the labor market, primarily of young workers and women seeking work to support family incomes. The bulk of the increase in agricultural employment consisted of shared work on family- owned farms. Many workers probably failed to find much meaningful work.9

Table 5.

Change in Employment, 1997-981/

(In millions)

article image
Source: Central Bureau of Statistics (BPS, Sakernas Survey, 1997-98).

Aged 15 and over.

Agriculture, manufacturing, mining.

12. The primary impact of the crisis on the labor market was on lower real incomes through reductions in hours worked and a sharp decline in real wages. Under-employment (i.e., those working less than 35 hours) rose, while opportunities to work overtime and earn extra income declined (Table 6). The number of people working less than 35 hours increased by just under 2 percent, mainly because of a substantial increase in the number of family farm workers working shorter hours. In addition, the proportion of the labor force working more than 45 hours declined by 4 percentage points of the labor force, with men bearing the brunt of the lower overtime (women saw their share of overtime increase, primarily because they earned lower wages than men).

Table 6.

Underemployment and Overtime, 1997-98

(In percent of labor force)

article image
Source: Central Bureau of Statistics (BPS, Sakernas Survey, 1997-98).

13. The most striking impact of the crisis was the substantial decline in real wages (Figure 1). Real wages fell sharply in 1998 as adjustments in nominal wages failed to keep pace with the rapid rise in the rate of inflation. Between August 1997 and August 1998, the dates of the respective labor market surveys, real wages declined by close to 35 percent, as nominal wage increases of around 17 to 18 percent were dwarfed by an increase in inflation to close to 80 percent. The decline in real wages affected both the formal and informal sectors with the impact fairly evenly distributed across all sectors. Real wages fell by 32 percent in manufacturing, 33 percent in agriculture, and 32 percent in the urban informal sector.

Figure 1.
Figure 1.

Real Wage Developments

(1997-100)

Citation: IMF Staff Country Reports 2002, 154; 10.5089/9781451818239.002.A006

Sources: Central Bureau of Statistics (BPO) Indonesia.

14. The crisis had a profound impact on household incomes, particularly for those at the lower end of the income distribution. While the flexibility of Indonesia’s labor markets helped to preserve overall employment levels, the sharp decline in real wages and large shift to less remunerative employment in agriculture and the urban informal sector pushed large numbers of Indonesians back into poverty: the headcount poverty index based on the national poverty line jumped from its precrisis low of 11 percent in early 1997 to a peak of 27 percent in early 1999. Moreover, the proportion of the population falling below the broader international poverty line of $2 a day per capita rose to nearly two-thirds in early 1999 from less than half before the crisis.

15. Despite the large devaluation of the rupiah, employment failed to shift toward the tradable sector. Although employment increased overall in tradable goods industries,10 the dominant shift was the reallocation of jobs into agriculture (from both tradable and nontradable industries) and the shift in urban employment to the informal sector. The absence of a clear-cut shift in employment toward the production of tradables was one of the more surprising aspects of the crisis.

16. The lack of production response to the large shift in relative prices is likely to have reflected the across-the-board economic disruption during much of 1998. Some import substitution producers who were not heavily indebted or import dependent received a substantial boost, as did agricultural producers in the export-oriented cash crop sector. However, producers, especially those heavily dependent on imported inputs and credit arrangements, were badly hit by the financial crisis, lack of international confidence in the rupiah, and the political turmoil.

D. Recent Labor Market Trends

17. Despite the recovery in economic activity in 1999-2000, employment generation has been relatively weak in the aftermath of the crisis, particularly in the formal sector. The absence of a sustained recovery in formal sector employment has put upward pressure on open unemployment and prevented a recovery in real wages in the agriculture and urban informal sectors, which account for approximately 70 percent of total employment. Real wages in the manufacturing sector have shown a sustained recovery. While some recovery from the depressed levels following the crisis is justified, the more recent upward trend appears to derive mainly from the impact of labor market regulation (see below), and seems unsustainable. 11 Although relatively limited labor data are available for 2001, the continued stagnation of nonformal real wages suggests that there has not been a marked improvement in employment generation.

18. Non-agricultural employment initially rebounded after the crisis, but has slowed in recent years (Table 7). Employment increased by just under 5 percent in 1999, led by a sharp recovery in manufacturing employment, which rose by 16 percent. Wage employment, the proxy used for formal sector employment, also rebounded, but more weakly, rising by 2 percent. The recovery in nonagricultural employment faded significantly in 2000, with employment declining by around 1½ percent. Employment growth in the industrial sectors fell sharply, prompted by a decline in the growth of manufacturing employment to just under 2 percent. Service sector employment also declined. 12 Growth in formal sector employment fell to close to zero.13

Table 7.

Employment Trends, 1997-2000

(In percent change)

article image
Source: Central Bureau of Statistics (BPS, Sakernas Survey, 1997-2000).

19. Agricultural employment initially declined, falling by 2 percent in 1999, but later picked up as formal sector employment slowed. The initial decline reflected in part a shift back into manufacturing and urban informal sector employment, in response to the increased employment opportunities in these sectors. This trend was reversed in 2000, as growth in non-agricultural employment slowed. Agricultural employment increased by 7 percent and as during the crisis, the bulk of the new employment consisted of shared work on family-owned farms.

20. Participation rates have continued to rise since the crisis, while underemployment has fallen (Table 8). Both are likely to reflect the necessity to supplement family incomes in the face of the weak recovery in real wages in the urban and rural informal sector. The decline in underemployment was strongest in the rural areas as family farms made adjustments to better utilize labor crowded in during the crisis, either by using existing land more intensively (e.g., by adding an additional nonrice crop in the dry season) or opening up new farm land (e.g., in the upland forests).14

Table 8.

Participation and Under-employment, 1998-2000

(In percent of labor force)

article image
Sources: Central Bureau of Statistics (BPS, Sakernas Survey, 1997-2000)

21. Real wages have shown sharply divergent trends across sectors. In the immediate postcrisis period in 1999 there was a broad recovery in real wages across all sectors. In 1999, real wages in the manufacturing sector rose by around 11 percent, and there were also substantial increases in real wages in the agriculture and urban informal sector. However, while real wages in the informal sector have remained relatively stagnant since 1999, around 20-30 percent below their precrisis levels, real wages in the manufacturing sector have continued to increase, rising to over 10 percent above their precrisis levels in 2001. The latter has been driven largely by substantial increases in minimum wages. Manufacturing real wages have also risen sharply in foreign currency terms (Figure 2). Between 1998 and 2001, wages in the manufacturing sector deflated by the nominal effective exchange rate rose by 80 percent, although they remain around 15 percent below their precrisis levels. However, this gap will close significantly if the minimum wage increases awarded in 2002 take full effect.

Figure 2.
Figure 2.

Manufacturing Wages in Foreign Currency Terms1/

Citation: IMF Staff Country Reports 2002, 154; 10.5089/9781451818239.002.A006

Sources: Central Bureau of Statistics (BPS) Indonesia.1/ Manufacturing wages detailed by NEER.

22. There were also marked regional variations in real wage trends, particularly in the agricultural sector. In densely populated Java, which accounts for about half of agricultural employment, real wages have stagnated at about 25 percent below their peak before the crisis. Real wages in agriculture have, however, recovered much faster in the less densely populated outer islands, particularly in areas where export-oriented cash crops predominate, and in Bali, where the tourism industry continues to absorb large numbers of workers from the countryside (Figure 3). As a result, average real wage levels in agriculture were only about 10 percent or less below their precrisis levels outside Java in late 2001.

Figure 3.
Figure 3.

Agricultural Real Wages by Region1/

1996 = 100

Citation: IMF Staff Country Reports 2002, 154; 10.5089/9781451818239.002.A006

1/ Wages for being and weeding rice padiSource: BPS Monthly Agricultural Wage Survey.

23. The progress made in restoring macroeconomic stability and resuming growth also helped to reduce poverty substantially in the course of 1999/2000. The national headcount poverty index fell from its crisis peak of 27 percent to 15 percent in early 2000, a level comparable to that of 1996. Nevertheless, large numbers of Indonesians remained “near poor” and continued to be affected by various dimensions of poverty: 58 percent of the population still fell below the $2 a day poverty line and the World Bank estimates that a similarly large proportion of the population continued to experience inadequate access to basic social services and proper nutrition. In addition, the subsequent stagnation of real wage levels in agriculture and the urban informal sector and sharp rise in the price of rice in 2001, the main dietary staple of low-income households in Indonesia, suggest that some of these gains in poverty reduction maybe eroding.15

E. A New Approach to Labor Market Policy

24. The flexibility of Indonesia’s labor markets derived in part from the tight controls exerted over organized labor during the Suharto regime. While collective bargaining was formally supported as a means of setting labor standards and resolving disputes, the New Order government’s main labor policy objective was to minimize worker unrest in order to facilitate modern sector job creation and rapid economic growth. To this end, only one government-controlled labor union—the All Indonesia Labor Federation (AILF)—was formally recognized and, although strikes were not rare during this period, they were seldom initiated or backed by the AILF and the military frequently intervened on behalf of employers to settle labor disputes. Employers were therefore relatively free to adjust wages and employment levels in response to fluctuations in economic conditions.

25. Labor regulation began to spread in the modern sector in the early 1990s, but was not allowed to become a significant source of rigidity. The emergence of new export-oriented industries in the late 1980s resulted in considerable labor unrest and strong international criticism of labor standards in Indonesia.16 Rather than relax controls over labor, the New Order government instead offered modem sector workers higher minimum wages and social security benefits. Real minimum wages were more than doubled nationally from 1991 to the eve of the Asian crisis in 199717 while participation in the national social security program was made compulsory. However, these policies were weakly enforced and coverage was largely restricted to the modern sector; workers in informal sector occupations and agriculture, as well as most employees of small and medium-sized enterprises, remained uncovered.

26. The political context of labor policy changed dramatically following the downfall of the Suharto government, resulting in a marked reorientation in favor of organized labor. Basic labor freedoms and worker protections were quickly reaffirmed through formal ratification of a range of ILO conventions, including the convention on freedom of association, and passage of a new trade union law (Law 21) guaranteeing workers the right of assembly. More than 60 trade union bodies have now been established, and union membership is estimated to have more than doubled since the mid-1990s.18 Industrial disputes have also increased and there is a strong sense among union membership, with considerable political support, that justice in the wake of the repressive policies imposed on organized labor during the New Order regime demands greater concessions to workers.

27. The emergence of a more active and organized trade union movement has resulted in more concessions to workers in recent years. Unions have demanded and received greater labor protections, including reinstatement of severance pay (Minister of Manpower Decree 150), restrictions on dismissals, and other changes to labor legislation. The recent gains in union freedoms and labor protection standards have been codified in a new labor protection law that is pending before Parliament. A new industrial relations law, which seeks to overhaul the collective bargaining and dispute resolution process, has also been submitted for parliamentary review and approval.

28. With the collapse of real wages in the wake of the crisis, minimum wage policy has again become a key plank of labor policy. In response to intensified demands for higher wages, real minimum wages (national average) were increased by nearly 20 percent per annum in 2000 and 2001 (Table 9). Enforcement of minimum wage laws has also been stepped up.19 The new minimum wages that took effect on January 1 imply a further substantial increase in real minimum wages, pushing them well above precrisis levels in most provinces. This more vigorous use of minimum wage policy signals the return of a mechanism developed during the Suharto era to compensate workers for a lack of freedoms at a time when the strict controls over unions have been lifted.

Table 9.

Indonesia: Minimum Wage, 1996-2002

article image
Source: “Minimum Wages: A Key Policy Issue for 2002” Chris Manning (unpublished) and staff estimates.

Deflated by CPI.

Deflated by NEER.

Period average.

For 2002, assumes inflation of 9-10 percent and average exchange rate of Rp 9,000 per dollar.

29. As was the case in other aspects of public policy, the authority to set minimum wages devolved to the regions following decentralization in 2001. Decentralization has made the wage setting process far less coordinated from a national perspective.20 In particular, there has been large variability in minimum wage increases in the two years since decentralized wage setting has been in effect. Decentralization so far seems to have resulted in higher wage increases in the more industrialized regions, due in part to the more active trade union movement, and local governments have followed a variety of strategies in setting minimum wages.

30. A recent study by the SMERU Research Institute (2001b) provides empirical evidence that the sharp rise in minimum wages is having an adverse impact on employment generation in the economy. The study comprised a statistical analysis of national labor force data, as well as a qualitative survey, of the impact of minimum wages on market wages and employment in the urban formal sector in a number of provinces. The main findings are as follows:

  • Compliance with the minimum wage has increased steadily over time. By 1999, average formal sector wages were clustered around the minimum rate, suggesting that the minimum wage is now binding for most workers in the urban formal sector.

  • The employment effects of minimum wage increases are significant. The study indicates that a 30 percent real increase in minimum wages will reduce employment in the urban formal sector by some 3 percent (approximately half a million jobs) below the level that would have resulted without any minimum wage increase. The impact is greatest on the most vulnerable groups—employment losses for women, youth, and less educated workers range from 6-9 percent.

  • Higher minimum wages also depress wages in the informal sector. Job losses in the formal sector forces some workers to seek employment in the urban informal and agricultural sectors, thereby depressing real earnings and hence income levels in these sectors by 1-4 percent for every 10 percent increase in the real minimum wage.

31. These empirical results in turn suggest that the use of minimum wage policy to push up earnings in the formal sector may be eroding the achievements that have been made in poverty reduction. A vigorously implemented minimum wage policy will boost the incomes of those workers who are able to retain their jobs in the modern sector, but such workers are unlikely to be living below the poverty line. Indeed, there is a large body of research that shows that the poor work mostly in the urban informal sector and in agriculture. If minimum wage policy has contributed to the reduction of formal sector employment growth below that of the working age population—and available evidence suggests it has in recent years—more workers will remain in inferior jobs in the informal sector, thereby losing an opportunity to lift themselves out of poverty. Furthermore, to the extent that informal sector wage levels are also depressed, many workers in these occupations are at risk of falling back into poverty.

F. Conclusions

32. The adaptability of the labor market in the face of the sharp contraction in output during the crisis in 1998 was remarkable. Unemployment rose only modestly and the economy was able to absorb substantial numbers of displaced workers in the agriculture and urban informal sectors. Although the incidence of poverty rose sharply during the crisis, as real wages and labor incomes declined, the increase was more modest than had been predicted at the height of the crisis. The flexibility of the labor market stemmed largely from the fact that, despite the rapid development of the economy in the precrisis era, the labor-market had retained many of the features of a classic labor surplus economy. The agricultural and urban informal sectors remained large and flexible real wages facilitated adjustments to large shocks to labor demand.

33. However, growth in formal sector employment has failed to regain the momentum it generated in the precrisis period. These trends are particularly worrying, given that formal sector employment generation is critical for a broad- based improvement in living standards. After a brief recovery in 1999, formal sector employment stagnated in 2000 and the preliminary indications are that this trend continued in 2001. The absence of buoyant employment growth in the formal sector has prevented the economy from effectively disposing of the large labor surplus generated by the crisis, with the result that the initial recovery in labor incomes has not been sustained, giving rise to fears that the early postcrisis reductions in poverty levels have begun to erode.

34. There are also concerns that labor market policy is beginning to erode Indonesia’s competitiveness and capacity to generate remunerative employment. While the lack of buoyancy in formal sector employment reflects in part the broader fragility of Indonesia’s recovery, this loss of competitiveness comes at a difficult time for the economy. A reorientation of labor policy was clearly overdue given the repressive policies of the past and the ratification of the HO conventions are particularly welcome in this regard. However, care needs to be taken to ensure that the reform of labor policy is carried out in a manner that is consistent with preserving Indonesia’s capacity to attract investment into labor absorbing industries. Two aspects of recent developments in labor policy merit particular attention in this regard:

  • Minimum wage policy. Aggressive use of minimum wage policy not only risks undermining much needed employment generation in the formal sector, but also risks undermining the government’s poverty reduction efforts more directly. As argued above, although higher minimum wages will boost incomes for those able to retain their jobs in die formal sector, they are likely to depress labor incomes in the urban informal and agricultural sectors, which employ the bulk of the poor. In this context, the large increases in minimum wages that took effect in January 2002 are of particular concern as they are likely to hit labor-intensive industries in export-oriented sectors especially hard. In the absence of sustained formal sector employment growth, poverty is not likely to be reduced quickly.

  • Industrial relations. The authorities also need to move quickly to put in place an orderly framework of collective bargaining to ensure that the long overdue freedoms recently granted to Indonesia’s labor unions can be deployed equitably and effectively with the minimum disruption to industrial relations. While the strict controls on organized labor under the Suharto regime have been removed, clear and effective ground rules for employer-employee relations in this more liberalized environment have not yet been established. Prompt passage of a sound industrial relations law would seem to be an essential first step in this regard.

References

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1

This chapter was prepared by Ben Bingham, Paul Heytens, and Jung Yeon Kim, in collaboration with World Bank staff.

2

In this paper wage/nonwage employment is used as a proxy for formal/informal employment respectively.

3

The discussion in the subsequent two sections draws on the analysis in Manning (2000).

4

Most significantly, there continued to be an elastic supply of unskilled labor to support labor-intensive, export-led economic growth.

5

Care needs to be taken with the historical data on unemployment as the unemployment rates prior to 1994 are not strictly comparable with more recent data.

6

Estimates of the impact of the crisis, prepared in 1998, had predicted that open unemployment could rise to around 10-15 percent of the labor force and that almost half the population were expected to fall below the poverty line (ILO, 1998).

7

The increase in labor force participation rates also does not appear to have resulted from migrant workers returning from overseas. In particular, migrant workers did not return from Malaysia in large numbers as many had feared as Malaysia weathered the crisis reasonably well, and redundant construction workers were readily absorbed into plantations and service sector employment in that country (World Bank 2000).

8

The data understate gross displacement of workers as they refer to the change in employment between two points of time. The 1998 Sakernas Survey estimated that the gross displacement of workers, i.e., workers who left their jobs in 1998, was around 4.3 million.

9

Output per worker is estimated to have declined by around 12 percent.

10

Agriculture, manufacturing, and mining.

11

Effective wage increases may not have been as large as they appear as many firms dismissed their lowest paid workers and casual/contractual laborers while retaining their better-paid skilled employees. This practice would have had the effect of raising the average wage reported in the labor force surveys even in the absence of a pay rise.

12

Changes in the disaggregation of the employment make it difficult to identify the sources of this decline.

13

Employment data for 2001 is not yet available.

14

More favorable weather conditions may also have facilitated the increased labor intensity in agriculture. During the crisis the agriculture sector was hit hard by a severe drought as a result of El-Nino weather patterns and the worst forest fires in more than a decade.

15

Poverty estimates in Indonesia are only available with a long time lag. Most such estimates come from large household surveys which, because of their size, generally take more than a year to process.

16

In an effort to enter new markets and retain market share, export-oriented firms in garments, footwear, and other labor-intensive industries regularly ignored the law on minimum wages, overtime, and the maximum permitted work week, eventually prompting widespread strike activity. The fact that many of these firms were owned by foreign investors (primarily from Korea, Taiwan Province of China, Singapore, and Hong Kong SAR) also evoked nationalist reactions among workers and added to the intensity of their protests. The increased labor unrest, in turn, prompted greater international scrutiny of Indonesia’s labor record.

17

Minimum wages had been an element of government wage policy since the early 1970s, but had not played much of a role in the wage formation process prior to this period.

18

These estimates are subject to uncertainty as unions are no longer required to report data on membership.

19

Increased trade union assertiveness has acted as an additional enforcement mechanism.

20

Prior to regional autonomy, minimum wage proposals were submitted by provincial governors to the Minister of Manpower for approval, which was generally granted without revision.

Same Series

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Cover IMF Staff Country Reports
Indonesia: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2002: Issue 154
Publisher:
International Monetary Fund
ISBN:
9781451818239
ISSN:
1934-7685
Pages:
96
DOI:
https://doi.org/10.5089/9781451818239.002

Real Wage Developments

(1997-100)

Manufacturing Wages in Foreign Currency Terms1/

Agricultural Real Wages by Region1/

1996 = 100