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2008 OECD Economic Surveys: Indonesia 2008

Economic Assessment

image of OECD Economic Surveys: Indonesia 2008

OECD's first (2008) survey of Indonesia's economy reviews growth performance and key policy challenges including improving the business and investment climate and improving labour market outcomes. This publication includes StatLinks, URLs linking tables and graphs to Excel ® spreadsheets containing the underlying data.

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Improving labour market outcomes

Since the financial crisis of 1997-98 job creation has slowed, unemployment has been high, particularly among youths, and informality remains widespread. Important contributory factors are a tightening of employment protection legislation (EPL), especially with the enactment of the Manpower Law of 2003, and sharp increases in the real value of the minimum wage. Strict EPL is nevertheless failing to provide effective social protection for the needy, because it is not binding in the informal sector. It is also affecting Indonesia’s trade competitiveness, because the country has a comparative advantage in labour-intensive manufacturing, whose former dynamism has waned. This chapter argues that options for reform could focus on making labour legislation more flexible, particularly for regular contracts, while enhancing formal safety nets, especially through well targeted, conditional income-transfer programmes.

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