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SOME REFLECTIONS ON HISTORICAL AND INTERNATIONAL DIMENSIONS OF LABOUR MARKET AND INEQUALITY IN INDONESIA

Chris Manning Adjunct Assoc. Professor Indonesia Project, ANU

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INTRODUCTION

The increase in income inequality is

special to the democratic era

 It is also experienced among wage employees

in Indonesia

 It is recognized as part of an international

trend (Picketty)

What are the historical and international

precedents and possible policy directions to redress this situation

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SHARE OF TOTAL WAGE

7.7 5.4 16.2 12.9 25.04 31.87 10 20 30 40

2004 2012

Per cent Share of total wage by the highest decile Share of total wage by the second 20% Share of total wage by the lowest 20%

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OUTLINE

1.

A framework for thinking about labour transitions and inequality

2.

Historical episodes that favoured more equitable labour outcomes in Indonesia

3.

Learning from international experience: the East Asian Tigers and China

4.

Factors contributing to worsening wage inequality

5.

Rethinking labour policies to lower inequality in Indonesia

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• 1. A FRAMEWORK

Moving people out of low productivity

agriculture is probably Indonesia’s most importand development challenge

 a common development challenge in many

countries

 output per worker is less than half in other

sectors

 the poverty incidence is three times or more

that in other sectors

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5 10 15 20 25 30 35 40

Output per Full Time Equivalent Worker in Indonesia 2011 (Rp. Million)

• Rp. Million

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Important to keep this perspective in

mind when thinking about policies towards industrial workers

 a key mechanism for raising agricultural

productivity is creating jobs outside agriculture

 even low wages in manufacturing or services

can mean better living standards for agric. workers

 pushing wage costs too fast limits the number

• f jobs offered outside agriculture

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Dualism in general has historically been a

challenge in Indonesian labour markets

 substantial wage gaps between larger, foreign

and state owned establishments and smaller firms

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• 2. LEARNING FROM THE PAST:

Factors contributing to a more equitable

society under Soeharto – see Figure 3

 the wise allocation of windfall oil-boom taxes

to rural public works in the 1970s

 investment in agriculture with a focus on

international competitiveness and stable but cheap food prices

 the promotion of export oriented

manufacturing production in labour-intensive jobs

drew a substantial number of poor people out of

agriculture in the 1980s and 1990s.

see Figure and Table

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The table shows the substantial number

• f new jobs that had been created in

export oriented industries in the 1980s and 1990s.

 Most of these jobs were created prior to the

AFC in 1997-98l.

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Industry Total no. of jobs % of all jobs in % of all new jobs (million) export industries created by exports 1985 2005 1985 2005 1985- 95 1995- 2005 Primary 37.7 43.6 5.0 9.5 9.6 110.5* Food Processing 1.5 1.8 2.5 16.8 8.8 ** Light Industries 2.7 6.4 33.6 54.9 73.0 65.6 H & C Industries 1.3 3.0 13.8 28.1 28.7 61.2 Services 23.3 40.7 7.5 17.4 27.3 36.0 ALL INDUSTRIES 66.5 95.5 7.1 16.6 26.7 67.4

Share of All Employment Contributed by Export Activities by Major Industry, Indonesia Pre- and Post Crisis, 1985- 2005

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• 3. INTERNATIONAL EXPERIENCE

North East Asian countries provided a

model for developing countries like Indonesia were the

In 30 years (1965-1995) in both Korea and

Taiwan registered an improvement in the gini ratio, at a time when

 Agricultural employment shrank from around

50-60% to around 10%, and productivity more than increased several times

 Manufacturing employment rose from 10-15%

to 25-30%, reaching a peak around 1985

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By comparison, in Indonesia

 The agricultural employment share fell

from 55-45% from 1986-1996 but then remained steady for the next 10 years.

It began to fall under 40% only from 2012 The absolute size has remained stable at

around 40 million for 25 years.

Increases have mainly been from wage

employment outside Java (palm oil)

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10 20 30 40 50 1987 1990 1993 1996 1999 2002 2005 2008 2011

Millions

Agricultural Employment in Indonesia (1986-2014, 3year moving averages)

Self employed Employee Family Worker TOTAL 16

10 12 14 16 18 20 22 24 1991 1995 1999 2003 2007 2011

Millions

Agricultural Employment Java and Outer Islands, 1990-2014 (3 year moving averages)

Java Outer Islands

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 The manufacturing employment share

rose from 8-13% in 1986-1996 when exports of labour intensive products rose rapidly.

It has remained around 12-13% of total

employment ever since.

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China shows a similar but slower transfer

• f labour into manufacturing as Taiwan

and Korea but with some important differences

 Because many of the new jobs were held by

low wage migrant workers, inequality increased

However like Korea and Taiwan, wages

increased rapidly in the 2000s even among migrant workers.

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Manufacturingk, Construction and Migrant Worker Wages in China (from Cai Fang, 2014)

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Summing up the international comparisons:

 Korea, Taiwan and later China transferred

sufficient workers out of agriculture on a sustained basis to contribute to significant rises in wages and productivity

 In China this process was accompanied by a

worsening of income distribution

 The same process began but was halted in

Indonesia in 1997-98 and after the crisis

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IV WHY INCREASING WAGE

INEQUALITY

The resources boom Rising skill premiums An agressive minimum wage campaign

2011-2014 increases the wage gap between protected and non-protected workerrs

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0.00 0.50 1.00 1.50 2.00 2.50 2004 2006 2008 2010 2012 2014 R u p i a h M i l l Jakarta Kota Tangerang Kota Bogor Kota Bandung Kota Semarang Kota Surabaya

Real Minimum Wages in Selected Urban Locations in Java (2014 prices

Sharply rising minimum wages at the end of SBYs second term rejection of low wage policy

• V. RETHINKING LABOUR

POLICIES FOR GREATER EQUITY

Solving the agricultural employment and

productivity problem and increasing incomes of the bottom 40% will require moving labour out of agriculture

 at least halving the agricultural work force by

some 20 million over the next 10 years.

Revitalizing exports in labour-intensive

exports is suggested as the main strategy to achieve this goal

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See Papanek (2014) for recommendations

• n what might be achieved

 If Indonesia takes 10% of China’s market in

labour intensive exports it can absorb 20-25 million workers mostly from poor farms on Java

 The opportunity arises because of steeply

rising (market-led) wage costs in China (wages now close to $300 a month or more in the main industrial regions)

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Improved infrastructure especially in

regions where labour-intensive manufacturing is/can be located (Central Java, East Java)

 See also Papanek

Establishing special FTZs in these regions  Buildng on existing government plans in this

area

 Extending pensions and other labour

insurance benefits in th zones under the BPJS

 Provide new arrangement for severance

payments in these zones once pension benefits are put in place

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 Wage increases tied to inflation with

productivity-based increases negotiated at the firm level

 Special support from international bodies

(ILO) and national bodies for collective bargaining

 Develop vocation training facilities to

support the new industries

This should not in any way be considered a race

to the bottom – it is adapting to international demand and taking an increasing share of the higher value-added market in these products

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CONCLUSION

Greater integration of rural and urban

labour markets is important for reducing inequality

 Reducing the concentration of low

productivity workers in agriculture is the highest priority

Greater inequality in wage incomes in the

past decade seem to relate to both:

 structural factors  domestic industrial and labour policy

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The launching of BPJS in 2014-15 offers

an opportunity

 to expand the number of labour-intensive

industrial jobs and reduce inequality

 raise wages at the bottom of the wage scale

and reduce inequality

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EXTRA TABLES

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TABLE 5: GROWTH IN MANUFACTURING EMPLOYMENT, TIGERS AND CUBS, 20 YEARS FROM TAKEOFF (% CHANGE)

Subregion Country 1--10 Yrs 11--20 Yrs Avg Tigers 66.0 25.3 45.6 Korea 62.8 31.9 47.3 Singapore 89.3 15.8 52.6 Taiwan 45.9 28.3 37.1 Cubs 37.0 37.3 37.2 Indonesia 22.5 38.9 30.7 Malaysia 22.5 45.8 34.1 Thailand 43.8 27.4 35.6

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Sub region Country 1 1--5 6--10 11--15 16--20 Avg Tigers 32 31.2 28.9 25.2 22.1 26.9 Korea 42.2 33 30.6 29.5 28.4 30.4 Singapore 27.6 26.8 16.2 11.4 8.9 15.8 Taiwan 26.2 33.9 39.9 34.7 29.1 34.4 Cubs 15.3 16 13.6 16.4 20.3 16.6 Indonesia 7 8.4 9 14.2 26.4 14.5 Malaysia 12 11.5 8 8.1 9.6 9.3 Thailand 26.9 28.2 23.7 26.9 25 26

Table 7: Growth in Labour-Intensive Manufacturing Exports, in the Tigers and Cubs After Takeoff

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TABLE 9: PERCENTAGE OF THE POPULATION THAT GRADUATED FROM SECONDARY SCHOOLING

Subregion Country YR1 YR5 YR10 YR15 YR20 Tigers 9.3 11.7 15.8 23.7 27.1 Korea 7.8 10.1 14.2 18.7 25.6 Singapore 31.3 33.2 Taiwan 10.8 13.3 17.4 21 22.4 Cubs 3.5 5.7 6.6 8.7 12.5 Indonesia 2.8 4.9 5.6 8.8 10.1 Malaysia 6 9.8 11.1 13.9 23.5 Thailand 1.8 2.3 3.1 3.5 3.9

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TABLE 10: SKILLED AND UNSKILLED WAGE GROWTH, TIGERS AND CUBS, 20 YEARS FROM TAKE-OFF

1--5 6--10 11--15 16--20 Avg Growth in Skilled Wages (%) Tigers 195.6 137.8 163.6 46.3 122.4 Cubs 64.2 63.9 39.5 60.4 57 Growth in Unskilled Wages (%) Tigers 212.3 92.3 136.4 40.3 108.7 Cubs 47.1 51.8 52 75.9 56.7 Skill Premium Tigers 1.4 1.4 1.6 1.8 1.5 Cubs 1.1 1.2 1.2 1.1 1.1 34

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