ADB - Study on Indonesian labor market and growth perspectives

Indonesia - Photo credit: Mr.TinDC on / CC BY-NDAsian Development Bank’s study "Indonesia: Enhancing Productivity through Quality Jobs" focuses on the Southeast Asian Country’s most pressing labor market challenges and policy options to achieve higher and more inclusive economic growth.

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Context: Indonesia today

Today, Indonesia faces the coexistence of old and new development challenges. While efforts to sustain high economic growth remain, with rising income inequality during the commodity boom period, the government has put increased focus on making growth more inclusive. 

There is a growing consensus among policy makers that better jobs and greater productivity are the fundamental factors needed for sustaining rapid and more inclusive growth. It is widely recognized that improved productivity is essential to maintaining Indonesia’s competitiveness.

Meanwhile, better jobs are critical for improving living standards and reducing poverty. A clear understanding of the labor market, demographic and labor force transitions, and investment in education and skills development should help create a basis for sustainable growth for the next generation. 

ADB study: enhancing productivity through quality jobs

In this context, the study "Indonesia: Enhancing Productivity through Quality Jobs", prepared by a team from the Asian Development Bank (ADB) Economic Research and Regional Cooperation Department (ERCD) under the supervision of Edimon Ginting, Director of the Economic Analysis and Operational Support Division (ERCD), presents findings of thematic analyses of the current development challenges related to employment outcomes and job creation in Indonesia

The study is divided into 7 Chapters:

  1. Improving Employment Outcomes and Productivity in Indonesia,
  2. Labor Supply and Attachment to the Workforce,
  3. Jobs, Wages, and Labor Market Segmentation,
  4. Structural Transformation and the Release of Labor from Agriculture,
  5. Urbanization and Labor Productivity in Indonesia,
  6. Education, Skills, and Labor Productivity,
  7. Labor Market Policies and Institutions in Indonesia.

The study highlights opportunities created by the demographic dividend and some positive signs of female engagement in the workforce. However, the challenge of the labor market is a large backlog of lower productivity labor in agriculture and in the informal sector, which is a drag on improvements in wages and productivity.

Furthermore, the document shows that in recent years a more rapid trend of labor migration out from low productivity agriculture to the services sector has been observed. Given the labor saving effects of modern technology, the economy needs to create a more diversified services sector to absorb the labor surplus.

Then the study analyses the urbanization process. In tandem with the labor migration out from agriculture, Indonesia has urbanized rapidly. While the agglomeration externalities accelerate average productivity growth, urban districts also tend to attract a high share of low-productivity services. Education and training for skills in demand are key for sustaining productivity growth. In this context, the imbalance between the demand and supply of human capital is a major challenge.

The quality of education and relevance of skills training is critically important. The study maintains that moving forward on selected labor market policies and issues, including minimum wages and collective bargaining, compliance with labor regulations, employment protection legislation (including severance payments), and the expansion of nonstandard forms of work, requires a high degree of commitment among stakeholders to implement the reforms in good faith.

> Click here to read the study

Photo credit: Mr.TinDC on / CC BY-ND