Ongoing efforts to build up infrastructure should improve employment growth in Indonesia

As Indonesia grapples with an economic slowdown, decreased export revenues and subdued GDP growth, the creation of new jobs – particularly permanent, full-time positions – is not expected to keep pace with the over 2m Indonesians who enter the labour force each year. The country’s greatest potential economic strength, its powerful domestic consumer base, could also prove to become a significant challenge, particularly since roughly half the total population is under 30 years old.

In light of these challenges, the National Development Planning Agency (BAPPENAS) has recently introduced a series of initiatives aimed at curbing unemployment and poverty rates, focusing on infrastructure development to spur job creation. These new measures will also support ongoing decentralisation efforts, bolstering the coffers of local and regional governments, in a move which is expected to improve progress at a host of planned and ongoing infrastructure projects.

Although the nation will likely continue to struggle to meet the needs of a fast-growing workforce, infrastructure development programmes offer a viable solution for near-term employment challenges and should help to keep unemployment in check through to the end of 2016.

Rising Workforce 

A strong track record of economic growth has enabled Indonesia to expand its workforce and reduce unemployment considerably over the previous decade, with unemployment dropping from a high of 10.3% in 2006 to 9.1% in 2007, 8.4% in 2008 and 7.9% in 2009 – an impressive feat given global conditions at the time. The country’s labour force has simultaneously recorded steady expansion, rising from 116.5m in 2010 to 119.4m in 2011, 121.9m in 2014 and 127.8m in the first quarter of 2016, according to Statistics Indonesia (BPS). Some of this can be explained by the rising number of female workers, with BPS data showing that the unemployment rate for women fell from 13.4% in 2006 to 8.7% in 2010, the last year for which statistics are available. Youth unemployment, although it has also fallen over the years, from a peak of 27.7% for males and 34.3% for females, has been stubbornly high, with the World Bank reporting that it stood at 19.3% and 21% for males and females between 15 and 24 years old, respectively, in 2011.

Unemployment as a percentage of the total labour force continued to decline until 2013, falling to a 10-year low of 5.9% in 2014, but rising again slightly to 6.2% in 2015 as a result of lagging economic growth, global volatility and falling commodities prices, all of which have resulted in job losses.

Slowdown 

BPS reported that 7.6m, or 6.2% of the workforce, was unemployed in August 2015, compared to 7.24m, or 5.9% unemployment, in August 2014. BPS data shows that unemployment rose by 320,000 people during the first half of 2015, and blue collar job losses were recorded against a backdrop of lay offs from businesses hit by the country’s slowdown, which saw GDP growth fall to a six-year low of 4.67% during the second quarter of 2015 before accelerating during the second half of the year to finish at 4.79% growth.

Export revenues fell also fell in 2015 for the fourth consecutive year, dropping by 14.4% yearon-year, according to the World Bank. Growth in domestic consumption, which accounts for 57% of GDP, fell to 4.94% in the first quarter of 2016, compared to 5.01% in the first quarter of 2015.

As a result, Nikkei Markit reported that manufacturers cut payroll numbers at their second-fastest pace in at least four years in September 2015, with industrial activity contracting for the 12th straight month. Unemployment also rose as a result of poor weather conditions, which resulted in a significant loss of employment for the agricultural sector. At this time, BPS reported that the total number of Indonesians working in agriculture fell from 40.12m in February 2015 to 37.75m in August 2015.

BAPPENAS, which is responsible for national planning and budgeting, in addition to coordinating international development in Indonesia, has targeted a reduction in Indonesia’s unemployment rate to between 5.2% and 5.5% in 2016. This will prove challenging as Indonesia’s population is a young one, with roughly half of citizens under the age of 30, exacerbating existing employment challenges.“The sense we have is that the economy only generated up to 200,000 jobs between August 2014 and August 2015, while the working-age population increased by 3.1m in the same period,” Hans Beck, senior economist at the World Bank, told OBG. Workers are also concerned by ongoing integration of the ASEAN Economic Community, which is in the process of creating a single market for goods, services and skilled labour. With productivity levels relatively low among Indonesian workers, and the country consisting of ASEAN’s largest domestic consumer base, many businesses are concerned about the impact that rising labour competition will have on profits and growth.

Wage Regulation 

The administration of President Joko Widodo has responded to rising levels of unemployment and lagging GDP growth through a series of policy reforms and stimulus packages intended to boost growth. First launched in September 2015, 12 new packages have been announced so far, a number of which specifically emphasise increased foreign investment and job creation (see analysis), painting a significantly brighter outlook for medium-term employment growth.

The government’s fourth stimulus package, for example, includes a new fixed formula to determine wage increases across Indonesia’s 34 provinces, allowing for an increase every year based on the provincial inflation rate and economic growth pace. This formula is expected to offer more certainty to business owners in regards to wage growth, with the previous system dependent on often-turbulent negotiations between local governments and labour unions, and based on a cost-of-living index which is highly subjective. Authorities reported that the index systematically misrepresents the cost of living for low-paid workers, resulting in sudden, abrupt annual wage increases – the minimum wage in Jakarta, for example, rose by 40% in 2013.

The wage reforms were announced in October 2015, with the authorities telling media that when local inflation and economic growth are both at 5%, the provincial minimum wage will increase by 10%. Although this will improve business certainty, some stakeholders have criticised the move, saying businesses will be unable to handle rising costs, particularly as productivity has lagged despite sometimes dramatic growth in labour costs.

“Wages keep going up, but there is no corresponding increase in productivity. If the government mandates rising wages, they should also require worker certification to ensure the quality of labour keeps pace with salary growth,” Yesaya Rudy Budiman, managing director at property developer Springhill Group, told OBG.

BAPPENAS Response 

Ongoing efforts to build up infrastructure should also improve both nearand long-term employment growth, in addition to supporting the government’s wider decentralisation agenda. In November 2015 BAPPENAS announced that the government will implement a strategy aimed at both reducing poverty and boosting job creation. Bambang Prijambodo, an official at BAPPENAS, told online trade and investment news outlet Indonesia Investments that infrastructure development during the latter half of 2015 and early 2016 offered the best opportunity to create new jobs. Prijambodo said the government will be able to achieve delivery of new infrastructure through a planned increase to the “village fund” budget and “special allocation fund” in the 2016 budget, which will bolster ongoing decentralisation efforts and give local and regional governments more control over infrastructure planning and delivery. Government spending on the village fund, which focuses on infrastructure development in rural areas to enhance connectivity and reduce transport costs, is budgeted to increase from Rp20.8trn ($1.5bn) in 2015 to Rp46trn ($3.4bn) in 2016.

Projections 

These efforts are expected to offset some of the losses recorded in the agricultural sector, in addition to reducing transport costs that have long hampered economic growth, as evidenced by moderately higher growth projections for 2016. The IMF has projected 4.9% real GDP growth in 2016, while BPS reported GDP growth reached 4.92% in the first quarter of 2016. Employment has also shown a slight improvement; the country’s unemployment rate fell to 5.5% in February 2016, according to BPS reports. This meant 7.02m people in absolute terms, compared to 5.81% a year earlier. However, the total workforce also shrank, from 128.3m in February 2015 to 127.8m people in February 2016, which BPS attributed to a decline in agricultural workers.

This data could be potentially misleading, however, as BPS considers any person over 15 years of age who works for at least one hour per week as an employed person, making the country’s unemployment rate appear somewhat lower than it actually is. Indeed, BPS data showed that the number of people working less than 35 hours per week actually rose from 35.7m in February 2015 to 36.3m in February 2016, indicating that permanent employment is in decline, and keeping in line with the country’s broader growth trend. In October 2015 the Institute for Development of Economics and Finance projected that unemployment in Indonesia will reach 7.5% in 2016, making the timely delivery of new labour-intensive infrastructure projects a critical priority for the Widodo administration.

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The Report: Indonesia 2017

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