Creating Better and More Jobs in Indonesia: A Blueprint for Policy Action

Abstract

There has been a dramatic deterioration in the Indonesian labor market performance since the Asian financial crisis mainly due to the decline in investment and a much more regulated labor market. This has resulted in real wages outstripping productivity growth, increasing 'informalization', increasing wage inequality, and disappointing export performance for labor-intensive manufactures. In this context, the Government of Indonesia has been under pressure to reduce open unemployment from 10 to 5% over 2004-2009.

In a country of more than 220 million people, the high and increasing unemployment is aggravated by widespread underemployment accounting for more than 35% of the total labor force or 35 million workers. Currently, about 37 million Indonesians live in poverty, which is likely to increase as more workers are laid off due to business closures. This problem is a reflection of underdevelopment and policy decisions taken in recent years. Taking into account new entrants, unemployed, and underemployed, the main challenge is to create 50 million productive and decent jobs in the next 5 years, 15 million of which will be for new entrants alone; or 10 million good jobs per year, one third of which is for new entrants.