Indonesia's labor market today is remarkably different than it was 63 years ago when it gained independence. The most noticeable difference perhaps is that whereas the predominant majority of Indonesians were then engaged in agriculture, today, employment in services at 40 percent of the employed is virtually on par with the share of employment in agriculture. For Indonesian women, services today provide the largest share of employment.
This structural shift in employment, away from agriculture to higher value-added industry and services, has been a key driver in increasing labor productivity, rising living standards and lifting millions of poor from poverty. Today, Indonesian's labor productivity is growing at a healthy pace, at an annual average rate of 4.3 percent between 2000 and 2007, driven largely by within-sector productivity growth, that is, the modernization of existing sectors and firms, rather than structural shifts.
Further accelerating productivity growth and balancing that with employment growth will be essential for Indonesia's competitiveness, job creation and poverty reduction. Despite robust economic growth, averaging 5 percent between 2000 and 2007, Indonesia's labor market outcomes have not shown substantial improvements. Headline statistics provided by Statistics Indonesia indicate that unemployment in 2007 fell to 9.1 percent from a high of 11.2 percent in 2005.
Nonetheless, the drop in the unemployment rate has been offset in the rise of those who are involuntarily underemployed, that is, those who are working involuntarily less than 35 hours a week while they are willing and available to work more.
As a consequence, the share of those "fully employed" (total employment less underemployed) in 2007 is actually below the level seen even in 2002. In developing countries with large informal economies, such as Indonesia, unemployment is a useful but inadequate measure of labor market performance.
Boosting productivity growth will be critical also in lifting the 52 million Indonesian working poor above the US$2 per day poverty line. The working poor do not suffer from a lack of economic activity but rather the unproductive nature of that activity. With the majority of Indonesia's poor depending on the land for their livelihoods, increasing agricultural productivity is central to pro-poor growth.
The current rise in food prices underscores the need for increased investment in this sector. In recognition that productive and decent work is a key sustainable route of poverty, full and productive employment and decent work for all has been introduced as a new target under the Millennium Development Goal (MDG) 1 of eradicating extreme poverty by 2015.
Labor productivity, along with the employment-to-population ratio, vulnerable employment, and the share of the working poor in employment are the indicators used to measure progress for this new target.
Investments in education, training, and lifelong learning are well-known policy measures to increase productivity. While educational attainment levels (quantity of education) in Indonesia have improved substantially, there is evidence to suggest that there is much scope in improving the quality of education.
Surveys of student performance across OECD and other developing countries suggest that substantial numbers of Indonesian students may not be acquiring the competencies needed for effective and productive participation in society and the labor market. Workplaces, through on-the-job training, provide a critical platform to improve those competencies.
As Indonesia celebrates 63 years of independence, a time during which Indonesian workers have faced both incredible opportunities and challenges, a renewed focus on employment and labor productivity growth, and ensuring that the gains from productivity growth accrue to firms for both added investment and innovation, but also to workers in the form of higher real wages, improved working conditions and continuous on-the-job learning, provide a sustainable pathway to a job-rich development.
