Unemployment in Indonesia and the Philippines Essay

Overall, Southeast Asia (SEA) has experienced favorable economic growth for the past few decades, largely attributable to factor accumulation that enabled significant investments, including in human capital development. Rapid economic growth led to enormous strides in development and poverty alleviation. However, the ensuing aftermath following the East Asian Crisis and the Global Financial Crisis (GFC) in 2008 has resulted in a marked decline in economic growth rates. Poverty is still a widespread phenomenon throughout SEA, with many inhabitants still living under the poverty line. Furthermore, many SEA countries face issues arising from rapid population growth, including increasing concerns regarding the capacity of these countries to absorb a rapidly growing labor force. Unemployment, which may broadly refer to the category of people in the labor force who are (a) without work; (b) currently available for work; and (c) actively seeking work, is among the top concerns for policy makers in SEA as it exacerbates poverty, undermines stable development and is a source of social unrest (Hussmans, 2007; ILO, 2013). Within the following, I will examine trends and determinants of unemployment in the Philippines and Indonesia, with unemployment rates at 6.4% and 6.6% in 2011 respectively – the highest in the SEA community (ILO, 2013). Moreover, these labor markets also face severe underemployment, which refers to ‘an underutilization of labor in addition to that resulting from unemployment’ (Felipe & Hasan, 2006).

Evaluation of the labor markets in the Philippines and Indonesia will focus on the magnitude and ramifications of these two factors. Concluding remarks will emphasize discussion on labor market policy (LMP) implications and possible policy prescriptions that governments may undertake in order to address problems vis-à-vis labor markets and unemployment. Economic Trends and Developments in Indonesia

Up until the East Asian Crisis, Indonesia’s GDP growth rate, which averaged about 5% over the past 25 years, was among the highest in Asia and developing countries (Sugiyarto et al., 2006). As Indonesia’s economy grew, absolute poverty declined from approximately 40% to 11.34% between 1976 and 1996 and was coupled with a rise in income, employment levels and consumption (Islam et al., 2001). Rising consumption was also correlated with a more diversified economy that contributed to a structural transformation that marked a shift of labor from the agricultural sector into the industrial sector. In 1971, the agricultural sector’s employment share of the labor force was 67% but declined to 41% in 1997 (Sugiyarto et al., 2006). This sectoral change led to increases in productivity, and industries such as manufacturing and textiles grew rapidly. Under the Suharto administration and following the oil crisis years, Indonesia reinitiated the implementation of more liberalized trade and investment policies (Wei, 2006).

Similar to other East Asian countries, Indonesia experienced a boom in exports, which allowed for capital accumulation to finance investment, which (as a ratio to GDP) amounted to approximately 30% at the culmination of the Suharto era (ibid). However, during this period, labor markets were repressed under the military dictatorship with poor access to labor unions and a lack of a welfare net and social security system (Johnson, 2011). Population growth rates outstripped job creation, although open unemployment was around 3% during the early 1990s (Sugiyarto et al., 2006). Quality of investment declined and became increasingly funneled into physical infrastructure and real estate. With a high incidence of corruption, prevalence of crony capitalism and a weak financial institutional framework, Indonesia suffered severe consequences when the East Asian crisis hit. Devaluation of the rupiah decreased competitiveness of industry, especially in the manufacturing sector, which relied on imports, resulting in increases in unemployment, underemployment and increased informalization of employment. Labor Market Outcomes in Indonesia

Since the crisis in 1997, unemployment rates have been steadily increasing from 6% in 2000 to 9.5% in 2003 (ibid). In 2001, the BPS amended its definition of unemployment to include discouraged workers, which refers to those who have ceased to seek employment (ibid). However, unlike the ILO, the BPS failed to differentiate between those who are willing and unwilling to work (Suryadarma et al., 2005). As a result, some have argued that the unemployment figures derived from the BPS are artificially high (ibid). Nonetheless, in 2011 the number of unemployed people rose from 29.64 million to 34.32 million, indicating the prominence of unemployment in the Indonesian labor market (Adhinegara, 2012). Underemployment, which may manifest itself in terms of involuntarily working less than full time (i.e. 35 hours) and low productivity and wages, is also becoming an increasing concern. In 2003, approximately 34% of the labor force worked less than 35 hours per week, while 35-50% earn wages that marginally surpass the poverty line (defined as $2 per day) (Sugiyarto et al., 2006).

Some of this may be explained by the reversal in sectoral employment shares that occurred in the aftermath of the East Asian crisis, with agricultural employment rising once again, acting as a ‘safety net’. Agricultural output represents relatively low value-added and is characterized by a large informal base. Surplus labor and lack of enforcement of minimum wage regulations place a downward pressure on real wages, illustrating a lack of decent work opportunities and increase underemployment. Agricultural laborers remain densely concentrated within rural areas, with only 12% of the agricultural sector living in urban areas. This suggests that rural areas lack the infrastructure and facilities necessary to foster human capital development marginalizing the prospects and opportunities for nonfarm jobs. The severe degree of underemployment, which is more prevalent among females, rural and informal sector laborers, and a large proportion of youths also supports evidence of a mismatch. Paradoxically, Sarkernas surveys have also illustrated a highly imbalanced distribution of working hours, with 40% of laborers overemployed (working 41-59 hours a week) and 9% excessively overemployed (60+ hours a week). These results suggest that there is a lack of full-time employment opportunities with sufficient remuneration. Those overemployed are most likely compelled to undertake an excessive number of hours to supplement a diminutive hourly wage. Certain demographics have been more severely affected than others. Women contribute to a larger share of unemployment and underemployment, with many of them employed in housekeeping or family households.

Unemployment has also risen in urban areas, indicating a decline in job creation within the secondary and tertiary sectors and a greater ability of rural areas to absorb labor corresponding with a surge in the agricultural and informal sectors. As Indonesia is characterized by a young demographic profile- with 60% of the population below the age of 30, youth unemployment (between 15-29 years old) has been increasing significantly (Oberman et al., 2012). Youths are 4.6 times more likely to be unemployed in comparison to adult workers, due to limited education attainment and access to training, despite education reforms that occurred during the 1970s (ILO, 2012; Sugiyarto et al., 2006). Increased government education expenditure increases were provisioned by oil windfalls and increased the availability of education through the abolishment of primary school fees. Demand for secondary and tertiary education increased. By the 1990s, primary school enrollment rates were above 90% and government mandated schooling was extended. However, access to secondary and senior schooling is far less equitable, due to the diminished presence of the public sector in these categories of schools and the inability of poorer households to afford private fees. Only 4% of workers have received tertiary education. Nonetheless, by 2003 about 39% of the labor force had attained some secondary education. The increases in education attainment also resulted in a rise in employment expectations, in terms of the quality of work and remuneration. However, most new entrants into the labor force facing unemployment are secondary school graduates, emphasizing a mismatch between labor market demands and education levels. Labor Market Policies

The end of the Suharto era and the crisis marked significant changes to LMP. Democratization and ratification of ILO conventions gave way to the Trade Union Act of 2000 and the Manpower Protection Act of 2003 (Manning, 2004). The Trade Union Act ensured the right to unionized labor, allowing for increased collective bargaining. Despite the surge in unions, industrial relations between laborers and employers were not negatively impacted (ibid). The Manpower Protection Act consisted of policies instituting survival and security rights, such as severance pay, grounds for dismissal
and minimum wages. Decentralization gave rise to increased authority of local governments that were responsible for these policy issues and contributed to uncertainty in regional policies (ibid). These policies led to a significant rise in wages and severance pay. Surveys of manufacturing firms indicated that rising labor costs were considered as constraints on business. Due to increasing competitive pressures and availability of cheap labor in neighboring countries, such as China, labor demand decreased, indicating that new LMP contributed to labor market inflexibility and declining employment growth in modern sectors (Sugiyarto et al., 2006). Moreover, these policies were positively correlated with a rise in the informal sector, exacerbating income inequalities and poverty among informal workers (ibid). However, some have argued that despite the consequential labor costs, other factors such as tax rates and limited access to cost-effective financing are considered to be greater constraints on business activity (ibid). Decentralization also contributed to widespread corruption, significantly hampering investment. Challenges and Policy Implications for Indonesia

In response to the crisis, job creation has remained one of the top priorities of the government. Direct job creation programs, Padat Karya, were implemented in 1998 and provided support, including measures such as the provision of emergency income and employment information (Islam et al, 2001). However, the programs were executed by several government agencies and lacked a consistent policy framework, reducing effectiveness (ibid). The program was unsuccessful as projects were designed poorly and lacked community involvement. Targeting the most impoverished and newly unemployed proved difficult due to poor management, resulting in leakages and inefficiency (ibid). In order to meet these challenges, the government should implement a stronger, more centralized institutional framework that allows for greater coordination and management in direct job creation. Policy objectives also need to remain consistent and be supported by government expenditure in order to ensure sustainability. However, the constraints on government expenditure emphasize the fundamental need to stimulate investment, a key driver of employment opportunities, through a number of policy changes to improve the investment climate. Currently,
Indonesia’s business regulations regarding licensing, taxes and entry are not conducive to business activity (Oberman et al., 2012). Businesses also lack access to working capital and credit due to a weak banking system. Poor access to credit stifles entrepreneurship and exacerbates intra-local inequality. Thus, alternative approaches that are more successful in targeting rural areas and poorer groups, such as micro financing should be considered. Moreover, investment is essential in order to increase total factor productivity (TFP), which is lower in Indonesia in comparison to other Asian countries. Policies, including the protection of property rights and market-based solutions, should facilitate technology transfer, competition, and research and development to increase innovation and efficiency. Although capital investment was successful previously, sustainable economic growth can only be achieved through TFP. Furthermore, the East Asian crisis highlighted the limitations of financial institutions and macroeconomic instability, although Indonesia has significantly improved its ranking in the World Economic Forum competitiveness report between 2011 and 2012 (ibid). Indonesia has battled with high inflationary pressures, despite a dramatic reduction from 20% in 2000 to about 8% today (ibid). However, the Phillips curve dictates a tradeoff between inflation and unemployment, holding negative implications for the use of monetary policy, although various empirical studies have failed to provide robust results indicating the existence of the Phillips curve in Indonesia. Perceptions of corruption are also of significant detriment to investment climate, increasing uncertainty and inefficiency, effectively acting as a tax. Empirical studies have also indicated a positive correlation between corruption and a lack of good governance and political legitimacy, which may aggravate social unrest and instability. The magnitude of unemployment and underemployment signifies a severe mismatch between education and labor market demand. Although primary and secondary school enrolment rates have significantly increased, access to education still remains inequitable, with many females and rural areas neglected. Rural areas often have an undersupply of teachers, and in recent years Indonesia’s education expenditure represents a much smaller proportion of its GDP in relation to other ASEAN countries, such as Malaysia. Investments in infrastructure and transportation will facilitate the provision of schools in rural areas,
although improvements in teaching quality must also be addressed in more innovative ways. In 2004, government reforms increased base salaries of certified teachers, although other measures that promote professional development should be taken into account. Investments in senior secondary and tertiary education should be prioritized, which would help meet the most severe projected skill shortages and address gender disparities, which are the most pronounced at the professional level. Outreach programs that encourage women in their academic pursuits would address inequality and may foster economic growth. Studies have provided support to claims that firms with women in top management positions and with greater gender diversity often benefit from superior business performance. Coordination with the private sector would be the most feasible in accomplishing this. Indonesian tertiary schools lag far behind institutions in other SEA countries. Based on the World Bank’s skills report, 30% of employers cited low quality of local training as the central factor in the perceived skills shortage. Employers stated that significant investments had to be made to provide months of on-the-job training to new graduate employees before seeing substantial contributions to output levels. Economic Trends and Development in the Philippines

Despite its favorable position following WWII with high per capita income, base of well-developed human capital and strong manufacturing sector, the Philippines’ growth experience has been disappointing in comparison to its SEA counterparts, especially after the debt crisis in 1983 (Usui, 2012). Although the Philippine economy shows signs of resurgence with modest growth rate increases in the past few years, growth has not translated into commensurate employment growth and poverty reduction. Exacerbated by an average population growth rate of 2.5% since the 1960s, unemployment has significantly risen from 4.9% to 7.3% from 1980 to 2010, translating into a meager 1.5% in GDP per capita (Usui, 2012; Ofreneo, 2013). Similar to Indonesia, a greater proportion of people are characterized by underemployment, which affected 18.8 of the labor force in 2010. These factors have also stymied poverty alleviation measures, with an increase in poverty figures from 20% in 2003 to 20.9% in 2009 (Ofreneo, 2013).

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