4. Promoting stronger local employment outcomes in Indonesia

As the Indonesian economy continues its path of structural transformation, presenting new employment opportunities, labour market services can be an effective tool to connect people to good jobs and foster inclusive growth at the local level. Structural transformation has led to notable changes in employment patterns in Indonesia, with increases in services employment, regular wage jobs and decreasing informality. However, disparities in employment outcomes persist across segments of the population and provinces, and informality remains high. The ongoing COVID-19 pandemic crisis represents a major challenge for local labour markets in Indonesia, with vulnerable workers, such as youth and informal workers, as well as workers in some sectors, such as tourism and industry, who risk being particularly affected.

Section 4.1 of this chapter outlines employment trends in Indonesia and section 4.2 delves into the variations in employment performance across provinces. Section 4.3 presents the scope and functioning of labour market services at the local level in Indonesia. Section 4.4 outlines main challenges in the provision of labour market services, and section 4.5 presents international good practice examples that could guide the reform of labour market services in Indonesia.

Despite employment growth driven by services, employment outcomes are uneven across provinces in Indonesia. Young people face a challenging labour market context in Indonesia. Agriculture remains a critical source of employment, and informality continues to have an impact on local economic and employment opportunities, especially in rural provinces. At the same time, technological developments represent an opportunity to boost productivity at the local level, but they also present challenges of potential job disruption.

The different labour market outcomes at the local level across Indonesia require local strategies to boost quality jobs. Policies enhancing local flexibility need to be complemented by measures to protect workers, foster inclusiveness and allow workers and firms to make the most of ongoing changes, in order to promote good and sustainable outcomes (OECD, 2018[1]). Effective local labour market services can be critical to match people to jobs and reduce disparities across provinces and segments of the population.

The recent COVID-19 pandemic crisis outbreak poses new and unexpected labour market challenges to workers and jobseekers across Indonesia, which will require both national and local policy action. The COVID-19 pandemic risks hitting particularly hard young people and women, who have poorer quality jobs, as well as informal workers, who do not have access to social safety nets. Some local economies face more challenges than others, as they rely heavily on sectors that are witnessing a halt due to the virus outbreak, such as tourism and industry. Estimates from the Asian Development Bank (ADB) show that Banten, Bali and Jakarta are the provinces most heavily affected by COVID-19.

Services have become a central source of employment in Indonesia, creating 14.2 million jobs over the last decade, while industry growth has also gained momentum (Allen, 2016[2]). Services employ almost half of the Indonesian workforce in 2019. Industry, including mining and quarrying, manufacturing, construction and public utilities (electricity, gas and water) employed 23.5% of the labour force in 2019, or 29.7 million jobs. Manufacturing is traditionally considered as a catalyst of growth for developing countries, driving industrialisation and generating productive jobs. Since the late 1960s, structural transformation has led to shifts in production and employment patterns in Indonesia, contributing to a dramatic increase in economic activity, temporarily slowed down by the 1997 Asian stock market crash (see Box 4.1). Although in absolute terms more people are employed in industry as a whole, growth in this sector, has slowed down in Indonesia over the last decades. Before 1997, manufacturing played a dominant role in the Indonesian economy, with growth in manufacturing value added averaging around 10% annually and contributing to strong economic growth. On the other hand, between 2011-19 manufacturing growth has averaged 4.6%, and GDP growth slowed to 3.8% in 2019 (Asian Development Bank, 2020[3]).

Although declining, agriculture still represents the largest employer in the country. Agricultural employment has fallen in the past decades, amounting to 27.3% in 2019. The agricultural sector has declined from 39.1 million jobs in 2011 to 38.1 million jobs in 2019 (Statistics Indonesia, 2020[4]). However, the National Labour Force Survey conducted in August 2019 shows that agriculture, plantation, forestry, hunting and fisheries remains the single sector employing the largest share of workers (27.3%), followed by trade, manufacturing and construction (see Figure 4.2). Moving from agriculture to industry and services has gone hand in hand with a shift of the population from rural to urban areas, as well as informal-formal labour migration. The large share of the population has left informal employment in rural areas to enter formal jobs in industry and services (Dartanto et al., 2017[5]).

After peaking at about 8% in 2008, unemployment has decreased in Indonesia, amounting to 5.3% in 2019, and it has fluctuated above 5% over recent years (see Figure 4.3). Unemployment is higher in Indonesia than all other ASEAN countries except for Brunei Darussalam. However, unemployment figures should be treated with caution, given that the majority of jobs being created either entail short-term contracting or are in the informal economy. The informal sector in Indonesia still employs more than 50% of workers, and it is likely that a high level of informality will persist given the trend of growth of the gig economy and e-commerce in the country (World Bank, 2019[9]). Furthermore, Indonesia does not provide unemployment benefits for the working age population. As such, many workers tend to shift between short-term work opportunities and then exit the labour force (Allen, 2016[2]).

The ongoing COVID-19 pandemic will however lead to a worsening of labour market conditions in Indonesia, likely generating a significant spike in unemployment. Data released by the Ministry of Manpower in mid-April 2020 shows that as many as 2.8 million people lost their jobs. More than half were furloughed and placed on paid or unpaid leave (The Jakarta Post, 2020[10]). The number of laid-off workers has amounted to more than 150 000 in the city of Jakarta until the beginning of April 2020 (The Jakarta Post, 2020[11]). As of mid-June 2020, the Indonesian Chamber of Commerce (Kadin) stated that around 6.4 million Indonesians had lost their jobs due to the impact of the coronavirus pandemic and new rounds of layoffs were likely to hit by August (Reuters, 2020[12]).

The shift from agriculture to industry and services has ushered productivity gains across and within sectors in Indonesia. It has led to job creation in non-farm sectors, therefore reducing agriculture-dependency, and providing opportunities for new labour entrants (International Labour Organization, 2017[13]). Productivity is widely acknowledged as the main driver for economies to move to higher income levels and lift living standards.

Labour productivity, defined as GDP per worker at constant prices and in Purchasing Power Parity (PPP), amounted to USD 24 300 in Indonesia in 2015, and it had been increasing over the previous decades (see Figure 4.4). Productivity in Indonesia is higher than the ASEAN average, but it remains lower than in Singapore (USD 127 800), Malaysia (USD 55 700) and Thailand (USD 26 500) (Asian Productivity Organization (APO), 2017[14]). Productivity growth has fluctuated over the past two decades and has been lower than for some ASEAN countries (see Figure 4.5). Productivity growth in Indonesia averaged 3.7% between 2000-05, 2.8% between 2005-10 and 4.2% between 2010-15, compared to 3.4%, 2.9% and 3.5% on average across ASEAN over the same periods. Productivity in Indonesia lags behind OECD and G20 emerging economies averages. Labour productivity growth has been faster in Indonesia than on average in the OECD, which is to be expected in an emerging market economy. The lower labour productivity level in Indonesia explains almost all of the gap in GDP per capita compared to OECD countries, highlighting the importance of reforms to encourage investment and raise total factor productivity (OECD, 2018[15]).

Previous OECD work based on data from the Ministry of Co-operatives and SMEs showed that over the 2006-2013 period, productivity growth, measured as annual growth in GDP per worker at constant prices, was modest across all business sizes. Average annual growth rates amounted to 1.1% for micro-enterprises, 0.3% for small enterprises, 0.6% for medium enterprises and 1.0% for large enterprises. As annual GDP growth averaged between 4.5% and 6.3% over the same period, that trend suggests that growth was mainly driven by factors other than gains in firm-level productivity, such as consumption, government spending and increased labour force utilisation (OECD, 2018[16]). The government of Indonesia has developed plans to boost productivity in the country, acknowledging its role as an engine of inclusive growth (Box 4.2).

The world of work is changing as technology continues to pervade many workplaces. Across the OECD, it has been estimated that 14% of jobs will be vulnerable to job destruction, while 32% will see significant change in their overall task composition (OECD, 2019[19]). Digitalisation, automation and technological progress are fundamentally altering the way people live and work. While technological upgrading has historically been a driver of growth and economic development, in the current wave new technological developments are taking place at a much faster pace.

As tepid productivity growth and slowing expansion in the labour force and manufacturing industries are identified as key constraints to Indonesia’s growth potential, technology has a role to play in boosting future growth. Both advanced and developing economies are embracing emerging technologies to promote sustainable growth. Adopting new technologies can allow industry to become more productive by enabling more efficient resource use, new product development, and entry into new markets. Indonesia is no exception in this regard, and the Government of Indonesia recognises the role of technology and innovation in achieving economic growth targets and higher incomes (Asian Development Bank, 2020[20]).

While the future of work creates opportunities for Indonesia to boost productivity and job quality, the high concentration of jobs in labour intensive manufacturing and services could put Indonesian workers at risk of technological disruption in the future (see Box 4.3). However, it should also be stressed that several barriers could limit technology adoption. This is the case for example of the high cost of technology relative to labour, which is often larger in emerging economies than in OECD countries.

In recent years, regular wage employment has expanded in Indonesia. While there were 26.8 million workers employed as regular employees in 2006, this had almost doubled to 51.7 million by 2019. As a result, the share of regular employees in total employment rose to 40.8% in 2019. Structural transformation has been one of the factors driving the increase in regular wage employment, as wage employment expands as manufacturing and services grow and agriculture employment declines. Of the 24.9 million new regular wage jobs created between 2006 and 2019, most were in the industrial and services sectors. However, the majority of workers are employed on short-term contracts and/or earning an income that is below the minimum wage (Allen, 2016[2]).

While formal employment has substantially increased, informality represents a persistent phenomenon in Indonesia. Labour Force Survey data show that the majority of employees in Indonesia are own account workers (20%) and employers assisted by temporary/unpaid workers (17%) (see Figure 4.6). Informal employment accounted for 43.8% of non-agriculture employment and 87.5% of agriculture employment in 2019. Research shows that informal firms in Indonesia tend to pay lower wages and have low productivity (Rothenberg et al., 2016[24]). Informality is an issue especially in rural areas, where agriculture is the main source of employment. About 70% of the workforce in rural areas works informally, compared to 45% in urban areas. Data also shows that the rural employed population works substantially less than normal working hours, as compared to the urban population. The combined trends of high youth unemployment, low female labour force participation and high rates of people working less than normal working hours suggest that labour underutilisation represents a significant challenge for Indonesia (Allen, 2016[2]).

Throughout Indonesia there were 26.7 million enterprises, of which 12.6 million enterprises were in retail trade, followed by 4.4 million in manufacturing and 4.5 million in accommodation and food services. Micro and small enterprises (MSMEs) dominate the number of establishments, accounting for 98.3% of all establishments and providing employment to 53.6 million non-agricultural workers (76.3%). Meanwhile, medium and large firms accounted for 447 400 enterprises, and employed 23.7% of non-agricultural workers. Most establishments (92.1%) employed only less than five workers, while firms with a hundred or more workers accounted for only 0.2% of enterprises. Moreover, many enterprises have low earnings, with 90% of establishments reporting annual revenue of IDR 300 million (USD 20 000) or less. The majority of enterprises in Indonesia are not legal entities, with 93.2% of firms reporting to be informal or unincorporated. Establishment with legal entity in form of public or limited incorporated, CV, firm, pension fund, foundation, or foreign representative accounted only for less than 3% of firms. Micro, small, and medium sized firms account for approximately 60% of GDP.

Although regular wage employment has overall increased and informal employment decreased, job quality, as measured for example by job pay and contract length, could improve in Indonesia. Research shows that over time the share of regular employees receiving wages that pay the minimum wage or higher has remained constant, while the share of workers earning less than the minimum wage has increased. This trend suggests that increases in the minimum wage have outstripped productivity growth and that the growth in job quality has been limited. In addition, a large share of workers in Indonesia are employed with short-term contracts. Such contracts constitute a disincentive for employers to invest in workforce skills development, resulting in lower quality jobs for workers (Allen, 2016[2]). Despite having decreased over the last decade, vulnerable employment, including own workers and unpaid family workers, still accounts for almost half of total employment. Furthermore, while vulnerable employment in Indonesia compares favourably to some ASEAN countries, such as Viet Nam, Lao PDR, and Cambodia, Indonesia still lags behind the Philippines, Malaysia, Singapore and Brunei Darussalam (see Figure 4.8).

Labour market rigidities have hampered the development of the formal sector in Indonesia. The level of the minimum wage appears relatively high by international standards, and severance payments are among the highest in the world, but failing to protect workers as compliance is below 10%. Generous severance conditions are among the main reasons why firms tend to employ workers on a temporary basis. Under the Indonesian Labour Law 13 of 2003, which regulates termination conditions for employees, employers are restricted from discharging employees without case, and must provide discharged workers with a combination of severance pay, long service pay, compensation rights pay and separation pay. Many firms choose to hire employees on short-term contracts to avoid provisions on severance pay, which are high in comparison to other countries in ASEAN. The current government plans to pass a comprehensive reform in Indonesia (so called Omnibus Law), which will also touch upon labour market regulation (see Box 4.4).

Informal and vulnerable workers risk being hit harder than others by the COVID-19 crisis. The impact on income-generating activities can be especially harsh for unprotected workers and the most vulnerable groups in the informal economy. Informal workers lack the basic protection that formal jobs can provide. They are also disadvantaged in access to health-care services as many do not qualify for government support because they are not registered as residents in the districts where they reside. They also have no income replacement if they stop working in case of sickness. Informal workers in urban areas also tend to work in sectors carrying a high risk of virus infection and directly impacted by lockdown measures, such as street vendors, food servers and construction workers among others (International Labour Organization, 2020[25]).

Looking at labour force participation rates can provide a broader picture of the Indonesian labour market by factoring in the proportion of the working-age population that is employed or actively looking for work. The overall labour force participation in Indonesia has fluctuated over the last decade, and sits today at 67.5%, slightly higher than ten years ago (66.5% in 2008), but below the average across ASEAN countries of 69.1%. In addition, only one in two working-age women participated in the labour force in 2019, which is substantially lower than many other ASEAN country. While male labour force participation is among the highest across ASEAN, women labour force participation is among the lowest in the region (see Figure 4.9). Taking care of the household emerges as the main reason for working-age women being unemployed and not looking for a job in Indonesia. On the other hand, the majority of working-age men not working are unemployed because they are going to school (see Figure 4.10).

The participation of women in the labour force has not increased over the last 20 years. For instance, it also stood at 50% in 1998. Marriage, childcare responsibilities, and low educational attainment are frequently pointed out as factors contributing to lower female labour force participation (Australia Indonesia Partnership for Economic Governance, 2017[28]). Indonesia’s flat overall female labour force participation rate over the last two decades might also reflect two opposing forces: growth in participation at the top of the education/income distribution, where women access more lucrative jobs, offset by reductions in participation at the bottom of the income distribution, where women who previously had to work in unappealing jobs pulled out of the labour market as their households became more affluent (Schaner and Das, 2016[29]). Both patterns can partly reflect welfare gains, as highly educated women access higher-paid jobs, while women in poorer households become less likely to rely on informal and low paid jobs. However, projections show that Indonesia is unlikely to reach its Group of Twenty (G20) target of decreasing the gender gap in participation by 25% between 2014 and 2025.

Women also tend to earn substantially less than men, with this gender pay gap more pronounced in urban than rural areas. By some estimates, the gender pay gap amounts to around 20% in Indonesia, compared to less than 15% in the OECD (OECD, 2016[30]). The pay gap is often dependent on age, hours worked, educational attainment, work and industry type as well as geographical location. Research shows that the gender wage gap is widest in finance and real estate, followed by public administration, with public sectors such as public administration, education and health and public services characterised by wider gaps than other sectors (Taniguchi and Tuwo, 2014[31]). Gender pay gaps persist across different education levels in Indonesia, but they are smallest among the better educated. Data shows that women without education earn half as compared to men, while women who graduated from senior secondary education earn on average 79%. Women working in the informal sector are found to have even higher wage gaps (Australia Indonesia Partnership for Economic Governance, 2017[28]).

The outbreak of the COVID-19 pandemic risks exacerbating women’s position in the labour market. Women in Indonesia are more likely to be in low-paid jobs when in full-time contracts, and they are less likely to be employed in managerial positions. There are also more women working part-time and being self-employed than men in Indonesia (OECD/ILO, 2019[32]). In addition, children out of school, intensified care needs of older persons and ill family members, and overwhelmed health services, will pose further labour market challenges for women, as the United Nations (UN) estimates that, before the pandemic, women were doing three times as much unpaid care and domestic work as men (United Nations, 2020[33]). The combined effect of less stable jobs and increasing care responsibilities risk substantially worsening women’s employment outcomes in Indonesia. Selected economic sectors, such as hotels, restaurants, and manufacturing, are expected to experience severe downturns as the impacts of COVID-19 take hold. As demand contracts and businesses see a sudden downturn in earnings, it is expected that employment losses will be more concentrated in industry and services. The share of women workers in sectors that are expected to be hardest hit is high. To illustrate, one in three women, compared with one in five men, work in the wholesale or retail trade and in accommodation and food services. Many of the jobs in these sectors also are informal, entailing little protection for workers and lack of provision of paid leave. In addition, occupations in these sectors, as well as manufacturing, are less amenable to work-from-home arrangements and exposed to downturns in business volumes. In absence of paid leave or unemployment benefits, household income and consumption power is likely to fall and result in many near poor and vulnerability households facing a heightened risk of falling into poverty. Female-headed households are of particular concern.

The demographic dividend, defined as the accelerated economic growth that may result from a decline in a country's mortality and fertility and the subsequent change in the age structure of the population, opens up large opportunities for Indonesia to maximise productivity by effectively using its working age population. However, to reap the full benefits of the dividend, appropriate policies should be put in place to improve labour market outcomes of young people (Kring and Breglia, 2015[34]). Indeed, around 40% of the Indonesian population was under age 24 in 2018. Youth unemployment is a common challenge in Southeast Asia, where youth are five times more likely to be unemployed than the rest of the population, suffering from poor quality jobs as well as informal and vulnerable employment (International Labour Organization, 2016[35]).

While male and female unemployment have experienced similar trends over the last decade, youth unemployment continues to be substantially higher, totalling 15.8% in 2018 (see Figure 4.11). The large majority of employed youth are within the trade, agriculture, manufacturing and public services sectors. High levels of youth unemployment suggest that the school to work transition is not always smooth, as few school leavers are employed before leaving school, and one in three unemployed youth aged 15-24 are still unemployed after 12 months (Allen, 2016[2]).

Taken as a whole, the employment prospects of young Indonesians have worsened over recent years. Few young people aged 15-19 participate in the labour force, as most are still in education. However, national statistics show that for 15-19 year-olds who participate in the labour force, the unemployment rate is particularly high and has worsened over the last years. In 2018, the unemployment rate for youth aged 15-19 amounted to 26.7%, up from 17.7% in 2015. Over the same period, the unemployment rate of 20-24 year-olds increased more moderately, from 12.9% to 16.7% (see Figure 4.12). This suggests that young people, especially those who just finished junior or senior secondary school, face substantial challenges in entering the labour market. In addition, a large share of young people are employed in informal jobs, pointing to youth facing high risks of vulnerable employment.

Finally, a substantial share of young people are neither in employment nor in education or training (NEET) in Indonesia. Indeed, 22.6% of youth aged 15-24 were NEET in Indonesia in 2019, and the proportion is higher among young women (28.7%). Those categorised as NEET tend to come from low-income families and face job entry barriers, perpetuating cycles of poverty and inequality. The share of NEET in Indonesia also compares negatively to most other ASEAN countries. For example, the share of youth NEET in 2019 amounted to 20.1% in Brunei Darussalam, 18.8% in the Philippines, 14.9% in Thailand, 14.6% in Viet Nam, and 4.3% in Singapore. On the other hand, the share of youth NEET was 42.1% in Lao PDR in 2017. The conditions of young people also tend to vary based on their gender, residence and location. Gender differences among young people are persistent. Women are less likely to participate in the labour force, partly due to family responsibilities, and suffer an ongoing wage gap, especially noted among low educated women (UNFPA, 2014[36]). Young men are more likely to be economically active than women, and labour market participation is lower in urban than rural areas, with active urban youth being at greater risk of unemployment (Kring and Breglia, 2015[34]). The share of youth not in employment, education or training is also relatively high in richer provinces such as East Kalimantan and Riau. The share of NEET seems to be lower than the Indonesian average in provinces that create most jobs in the country, such as the Special Capital Region of Jakarta and the Special Region of Yogyakarta, as well as in some rather rural and remote regions such as Papua and East Nusa Tenggara, where informality is high. The Indonesian cities of Makassar and Surabaya provide examples of strategies local governments are putting in place to tackle this pervasive issue (see Box 4.5).

The ongoing COVID-19 pandemic crisis risks exacerbating employment outcomes of young people in Indonesia. Young people, already facing higher unemployment rates are more vulnerable to falling labour demand, as witnessed during the global financial crisis. The high share of NEET also suggests that youth might face even more challenging conditions as a consequence of the ongoing pandemic crisis, as opportunities for employment, both formally and informally, are likely to shrink across Indonesia.

Unemployment rates vary by 7 percentage points across Indonesian provinces (see Figure 4.13). Banten and West Java are the provinces with the highest unemployment rates, averaging above 8% over 2015-2019. Aceh and East Kalimantan also have higher unemployment rates than the Indonesian average. It is suggested that high unemployment rates in these provinces may be linked to the drop in commodity exports, while West Java and Banten are manufacturing hubs and therefore attract jobseekers from other provinces (International Labour Organization, 2016[37]). On the other hand, Bali has by far the lowest unemployment rate, amounting to 1.5% in August 2019. Employment in Bali is highly dependent on tourism, but it does not seem to suffer from seasonality. Tourism has been placed at the top of the Indonesian government’s agenda, seen as a tool to foster growth not only in provinces already attracting international travellers but also in more rural and remote areas (see Chapter 2). Unemployment rates lower than the national average in Central Sulawesi, North Maluku and East Nusa Tenggara may reflect higher incidence of working poverty and informal employment (International Labour Organization, 2016[37]).

In most provinces in the east of the country, such as Papua and East Nusa Tenggara, the large majority of workers are employed in agriculture (see Figure 4.14). In Papua, the agricultural sector employed 1.2 million people in 2019, representing almost 70% of workers. About half of the working population is also employed in agriculture in West Kalimantan and East Nusa Tenggara (48.8% and 48.4%). Meanwhile, manufacturing, as well as services, prevail in western provinces. Manufacturing employs 24.1% of workers in Banten and 23.8% in Riau Islands. In Central Java and West Java, about 22.3% and 21.1% of workers are employed in manufacturing. Services employ about 80% of workers in the Special Capital Region of Jakarta. More than 50% of workers are employed in services in Banten, West Java, Bali, the Special Region of Yogyakarta, Riau Islands and East Kalimantan. On the other hand, services employment is lowest in Papua and East Nusa Tenggara. Workers in agriculture are traditionally less qualified than workers in industry and services. The large majority of agricultural workers attain below junior high school levels, while in trade, restaurants and accommodation services, most workers attain senior secondary school levels, including both vocational and general high school. In community and social services, the majority attain university education (see Figure 4.15).

In addition, working conditions in the agricultural sector tend to be worse than in other sectors. The net wage in agriculture, plantation, forestry, hunting and fisheries is the lowest across sectors in Indonesia, amounting to IDR 1.5 million (around USD 100) (see Figure 4.16). The spread of agricultural jobs across rural and remote provinces, especially in the east of the country, suggests that living conditions are critically more challenging in these provinces than the rest of the country. Data from the National Labour Force Survey also suggests that workers in rural and remote provinces would be willing to accept a job if they received an offer (Figure 4.17). This points to the lack of employment opportunities in these provinces and the willingness of the local workforce to improve their conditions. In West Papua and East Nusa Tenggara almost 35% of people would be willing to take on a job if they were offered one.

In Indonesia, the informal economy constitutes a substantial part of the labour force. The “informal economy” includes all economic activities by workers that are not covered, or insufficiently covered, by formal employment arrangements, in law or in practice. The characteristics of informal employment typically include a lack of protection for non-payment of wages, retrenchment without notice or compensation, unsatisfactory occupational health and safety conditions and a lack of social benefits such as pensions, sick pay and health insurance (International Labour Organization, 2020[39]). Regular wage employment has expanded in Indonesia over recent years, while the reliance on workers typically associated with the informal economy, such as own account workers and unpaid workers, has declined (Allen, 2016[2]).

The share of workforce in regular wage employment varies across provinces and tends to be traditionally concentrated in industrial and urban areas on Java and special economic zones in Sumatra and Kalimantan (Allen, 2016[2]). In 2015, East Nusa Tenggara and West Nusa Tenggara were the provinces with the lowest share of regular wages employment. These provinces are instead characterised by high informality. Rural and remote provinces with a less developed industrial structure tend to have substantially higher levels of informality (see Figure 4.18). The Special Capital Region of Jakarta achieves almost 70% formal employment, while formal employment accounts for as little as 22.4% of jobs in Papua. The near totality of employment in agriculture in Papua, as well as in East and West Nusa Tenggara, is informal. However, informality in agriculture is generally high across provinces, with 28 out of 34 provinces characterised by informal employment in agriculture above 80%. The Special Capital Region of Jakarta is the only province where a majority of the workers employed in agriculture are in formal employment: only 48.7% of employment in agriculture is in informal. Similarly, informal employment in non-agricultural sectors can amount to almost 60% in West Nusa Tenggara, while it amounts to only 30.1% in the Special Capital Region of Jakarta.

Local labour market services can play an important role in boosting the quantity and quality of jobs in Indonesia. This can be achieved through training subsidies, active labour market programmes or more indirectly, for example through the effective matching of people to job opportunities. Effective labour market services can support youth to access employment and inclusive growth across provinces. Services can leverage the resources of partners and stakeholders through strong integration and co-ordination, particularly at the local level, where they can better target services to specific labour market contexts (OECD, 2015[40]). Well-functioning governance mechanisms are needed to ensure that labour market services are connected to the organisations involved in job creation, economic development and productivity efforts.

The overall management of labour market services in Indonesia is one of the main functions of the Ministry of Manpower. At the local level (i.e. municipalities and districts), labour market services are implemented by local and regional Manpower representative offices. Some other national level ministries as well as local governments have their own labour market information (LMI) systems in place to collect vacancy information on local job opportunities and autonomously undertake job placement initiatives.

Within the Ministry of Manpower, the Directorate General of Manpower Placement and Expansion of Employment Opportunities (DGMPEEO) is directly in charge of labour market services. DGMPEEO formulates and implements policies, develops norms, standards and regulations and provides guidance and evaluation in the following fields: labour market information and job guidance; job creation; placement and protection of domestic and foreign workers; development and expansion of employment opportunities; control over the employment of foreign workers. DGMPEEO is composed of one Secretariat, five Directorates, and a Centre for Labour Market Development and Expansion of Employment Opportunities. DGMPEEO provides job placement services and employment opportunities either directly or through the local Manpower offices across provinces in Indonesia. The objective of the Directorate is to generate integrated, inclusive, effective and satisfactory employment. The Directorate General has developed a list of policy priorities and strategies to achieve these in order to foster job creation in Indonesia (see Table 4.2).

The Ministry of Manpower has developed two online platforms to support job search and placement. The Info Pasar Kerja website allows for the online registration of individual jobseekers and business, and present a list of current job openings, while the 3 in 1 Kiosk is provided within work training centres (BLK) and online, combining vocational training, skill certification and employment placement (see Box 4.6 for more information). Between January and April 2020, the Info Pasar Kerja website had around 350 000 people registered as active jobseekers and 25 000 job vacancies. Over the same time period, the website has contributed to around 5 000 placements. Users can create their own online profile and filter available job vacancies based on filters, such as position, level of education and region among others. The website also includes a section on job vacancy recommendations, which provides users with recommendations of jobs that fit their profiles. Jobseekers and business representatives can physically go to local BLKs and register in the 3 in 1 Kiosk. The information provided is then uploaded on the platform, and the jobseeker is contacted once a job opening corresponding to their background appears. For the matching of demand and supply, data collection on job openings and business requirements is crucial. However, private sector engagement is often challenging and limited by the underdeveloped capacity of 3 in 1 Kiosks.

Local labour offices across provinces in Indonesia also provide face-to-face interaction and consultation to jobseekers and employers. An important challenge is to raise awareness among the population of the availability of such services. Especially in rural and remote provinces across the country, not only are local labour offices understaffed, but they can also be difficult to reach as a consequence of poor transport infrastructure. Due to these challenges, the local population might be unaware of the counselling services provided.

The Ministry of Manpower, as well as local governments, occasionally organise job fairs. These include nation-wide events as well as province and city-level fairs. In addition, universities across Indonesia have started to organise autonomous job fairs, aiming to place students in jobs. The increased number of job fairs organised by institutions such as universities, together with the increased competition from internet service providers, might be among the reason why the number of registered jobseekers with university degrees that use labour market services in Indonesia has been decreasing in recent years (Allen and Kim, 2015[41]).

The Indonesian government has recently introduced a pre-employment card (kartu prakerja), aiming to provide vocational training assistance to young people, workers and those affected by job loss. Initially announced in 2019, the government has anticipated the disbursement in order to tackle job loss challenges linked to COVID-19. A budget of IDR 10 trillion was initially allocated to the programme, which, before the COVID-19 outbreak, was expected to be distributed to 2 million participants in 2020, with 1.5 million participants trained through digital skills programmes and the remaining 500 000 taking face to face training. The government has announced a doubling of the budget in light of COVID-19, with the objective of reaching more than 5 million people.

Labour market services are open to the general population of jobseekers, while targeted programmes for disadvantaged segments of society, such as vulnerable groups, youth or women, are rare. Some youth-specific labour market services are provided by the Ministry of Youth and Sports Affairs, although not in a comprehensive and systematic way.

The capacity of employment offices could be further developed across Indonesia, with the number of total staff amounting to approximately 300 in 2015, to serve a population of around 7 million unemployed (Allen and Kim, 2015[41]). The caseload ratio, defined as the number of unemployed per employment service staff, amounts to almost 25 000 in Indonesia. On the other hand, there are on average 170 unemployed per employment service staff in Europe and 282 in the Asia-Pacific region (OECD/IDB/WAPES, 2016[42]). In rural and remote provinces, underdeveloped hard and soft infrastructure can make the provision of services even more challenging. Consequently, labour market services in Indonesia also fail to get people to work. The number of jobseekers registered within labour market services in Indonesia is very limited and varies substantially across provinces. While 144 217 jobseekers were registered in Central Java, only 28 people did so in North Sulawesi in 2018. Within the OECD, one proxy for looking at the capacity of employment services is the staff to jobseeker ratios. However, collecting a comparable standardised measure is difficult. Those services with decentralised structures may not be able to accurately report the number of staff serving jobseekers, and distinguishing between administrative and frontline staff is not always evident. Research from within the EU shows that caseloads vary from an average of 170-180 to over 500 clients annually (Manoudi et al, 2014[43]).

In an attempt to improve the effectiveness of the services provided, Indonesia has allowed the private sector to become a provider of labour market services, establishing the Lembaga Penempatan Tenaga Kerja Swasta (LPTKS), which can provide services upon approval from the Ministry of Manpower at the national level or the Governor at the provincial level. In 2011, there were 97 LPTKS. The location of the centres does not seem to be determined by the level of unemployment, formality of the labour market or the number of large enterprises, but rather by the number of sub-districts and population size and influenced by access to internet (Allen and Kim, 2015[41]). This suggests that the emergence of new centres might not take place in provinces and areas most in need. In addition, collaboration between public and private providers of labour market services is often challenging. Public and private services share little information with each other.

Few jobseekers find a job by registering in the online job placement platform managed by the Ministry of Manpower. In 2018, there was a total of 539 730 registered jobseekers on the Info Pasar Kerja website and 485 212 job vacancies posted on the website, but only 3% of registered jobseekers (about 17 600) found a job through the website. In addition, there is substantial variation in the availability of employment opportunities across provinces. For example, there were almost 200 000 vacancies registered in Bengkulu, while no vacancy was reported in North Kalimantan and North Sulawesi. Recruitment is also concentrated geographically, with 40% of registered jobseekers who found a job in Central Java in 2018. The information collected in some provinces is also incomplete, hampering the effectiveness of online job platforms. For example, in Bengkulu and the Special Capital Region of Jakarta, among other provinces, no data is reported on the number of jobseekers who found a job through the online platform.

While job placement services can play a crucial role in the functioning of the labour market, they tend to be rather weak. The national budget provides local governments with allocations to support the functioning of these institutions; however, there is often insufficient budget to cover all districts. Private providers also operate labour market services, but reporting and co-ordination between the private sector and the government is limited (Allen, 2016[2]). In addition, limited budget contributes to the use of outdated software for job placement, which hampers their effectiveness.

Most young people in Indonesia currently find a job through personal connections. Over 40% of young people aged 19-29 report contacting friends or relatives to find a job, making it the most common job search method. Most 19-29 year-olds still search for jobs through their social network and only one in five look for jobs using digital technology. Limited ICT access and skills, as well as poor basic education outcomes and cultural barriers might be among the factors causing poor use of digital technologies to look for jobs.

Labour market information data is instrumental in informing education and skills planning as well as workforce development programmes. Two core types of labour market information are collected in Indonesia: macro data, collected by Statistics Indonesia, and micro data collected by the Ministry of Manpower (Allen and Kim, 2015[41]). On one hand, Statistics Indonesia gathers data through labour surveys of households and provides information on the characteristics of those employed, such as sectoral employment, occupation, wages, working hours and status in employment. On the other hand, the Ministry of Manpower gathers administrative data on jobseekers, job vacancies and placements through public and private services as well as its online systems. Administrative data on labour demand (job vacancies) and labour supply (jobseekers) are crucial to monitor employment outcomes across the economy, providing signals for policy interventions. For example, they can provide information on matches or mismatches between the skills of jobseekers and those required by employers at the local level. They can also capture occupational growth by sector and segment of society, providing a detailed picture of local labour markets. The Indonesian labour market information system lacks a labour market signalling framework, which can provide detailed analysis on labour demand and supply fluctuations in different local labour markets (Allen and Kim, 2015[41]).

Although both the 3 in 1 Kiosks and the Info Pasar Kerja provide useful tools to collect labour market information, jobseekers and job postings across the country, there is room to enhance the comprehensiveness of such data. In some rural and remote provinces, provincial labour office staff collect information on jobseekers and businesses’ employee needs, pointing to personnel shortages as a relevant constraint hampering the effectiveness of labour market services. The quality of data collected is also influenced by decentralisation and the mobility of civil servants, as the movement of staff at the district and province levels has seen trained staff being promoted and replaced with new staff that needs training (Allen and Kim, 2015[41]). In addition, information sharing between local employment offices and other institutions dealing with vocational education and training, including SMKs and BLKs, is limited. Information sharing would allow for a better targeting of vocational education and training programmes, which could result in the development of a “work-ready” workforce. Furthermore, companies are sometimes reluctant to share information with the government.

As most countries in the ASEAN region, Indonesia does not have fully functional labour market services. Within OECD countries, the main functions of services often include job-brokerage; development of labour market information; administration of labour market adjustment programmes; and administration of unemployment benefits (OECD, 2015[40]). There are a number of common strategies, which could inform the future development of labour market services in Indonesia.

Human capital and talent management systems could be at the core of labour market services in Indonesia. Effective human capital management requires an understanding of how to drive skills and competencies development to nurture talent for meeting current and future needs. It includes an understanding of sectoral developments, critical occupations, existing and emerging skills and competency requirements, career pathways, information on training programmes and skills recognition. Effective human capital management can help facilitate the modernisation of education and training programmes and related policies, by enhancing the relevance of skills for a more competitive and employable workforce, while also assisting businesses in technology transformations.

In the face of the economic consequences of the ongoing COVID-19 pandemic crisis, improved local labour market services will be needed to get people back into work. The pandemic crisis is likely to heavily affect the economy and lead to workers lay-offs, with some sectors and segments of the population being hit particularly hard. Building the institutional capacity of government, engaging local employers and ensuring coverage reaches rural and remote areas can support recovery in the labour market in the aftermath of the crisis. The use of digital technologies and online delivery represents an opportunity for labour market services in Indonesia, which could become even more important given lockdown measures linked to COVID-19.

The considerable diversity in the institutional arrangements, service delivery structures and overall provision of services demonstrates that there is no one size fits all approach to delivering labour market services (OECD, 2015[40]). One cross-cutting issue for these services ‒ especially in emerging economies – is overall capacity limitations (e.g. ensuring coverage of rural areas, and having adequate numbers of staff per office). Thus, basic institutional development may be the first step needed to strengthen services in some countries. In the Philippines, recent reforms have been introduced to “professionalise” the employment services function (see Box 4.7).

The channels available for the provision of labour market services have changed dramatically over the past 25 years, from traditional face-to-face and mail channels and the introduction of electronic channels such as websites and e-mail, to the arrival of social media, mobile applications and services (IADB/WAPES/OECD, 2016[45]). Additionally, the use of new technologies for more back-office functions such as collecting labour market information is also taking on increasing importance. The internet has become an increasingly important channel for delivering services. Online technologies can be used for standardised procedures such as initial registration and posting job vacancies; personalised interactions between staff and clients; casework counselling functions; and skills training and development (OECD, 2015[40]). As an example, in France, the website Bob Emploi uses Artificial Intelligence (AI) to provide jobseekers with a diagnostic of their profile and of the target job market, and offers personalised counsel to improve the efficacy of job search. Online vacancy databases are the most used vacancy platforms as measured by the proportion of all vacancies in the economy notified to the employment services database. For instance, in Germany, around 50% of all vacancies are reported to the public employment service (Bundesagentur für Arbeit, 2015[46]). A recent initiative in Cambodia aims to improve the effectiveness of the already existing online job platform (see Box 4.8).

While online services can be a cost effective way of reaching a broader audience, their use should be monitored carefully. The success of web-based channels is predicated on the level and quality of internet access, and the degree of internet usage and skills of client groups (OECD, 2015[40]) (IADB/WAPES/OECD, 2016[45]). In some provinces and regions of Indonesia, face-to-face contact may continue to be the most effective way of delivering certain types of services.

Profiling tools used during initial registration can help in the development of individualised action plans to tailor services appropriately. For example, in Australia, jobseekers are allocated to one of three streams with varying intensities of supports to them get back into work (OECD, 2014[48]). As highlighted above, new technologies can provide efficiencies in terms of expanding the scope and coverage of these services. They can also help in profiling jobseekers and better matching their skills to the needs of the labour market (see Box 4.9).

Some OECD countries have specialised offices or service delivery organisations that serve specific target groups. Labour market services in Indonesia often fail to reach out to those most in need. The pre-employment card recently introduced by the government, Kartu prakerja, represents an important tool to support youth, jobseekers and workers upgrade their skills and find jobs. The pre-employment card program offers 900 courses, including English for tour guides, accounting, information technology and business management, in partnership with local institutions. The card has gained even more prominence in Indonesia in light of COVID-19 as it can provide help to furloughed workers navigate the labour market in times of crisis. Indonesia can also look at other countries who are implementing effective employment programmes for young people. Examples from Malta and Iceland highlight the importance of providing career guidance and counselling services, together with services that foster skills development and inform young people about job opportunities (see Box 4.10).

In order to develop services which are more responsive to the needs of local businesses and jobseekers, these could establish closer linkages with local stakeholders and find joint solutions on how to improve services. Moreover, more needs to be done to better engage employers in gathering vacancy information and job matching. Research in OECD countries identifies two general models for employer engagement: (i) organisational models in which the same employment service counsellors work with both employers and jobseekers, and (ii) organisational models in which employment services have dedicated employer relationship staff (OECD, 2015[40]). For example, in Australia, employment services providers often have a “reverse marketing” function that actively works with employers to identify job vacancies (Box 4.11). The latter can be further broken down based on whether employment services staff specialise in particular sectors or business sizes and whether there are account managers that deal with particularly large clients. For example, in France, the employment service has formal agreements with large company networks and industry sectors concerning recruitment support (OECD, 2015[55]). France also provides dedicated spaces for jobseekers and new businesses to come together, which creates opportunities for recruitment (see Box 4.12). Another approach is to engage with job vacancy platforms and other platform service providers.

The capacity of labour market services in Indonesia is generally limited, but it is even more challenging in rural and remote provinces, which are characterised by lower population density levels, a business population made of micro-enterprises and sparsely distributed jobseekers over the territory. Leveraging digital solutions, as well as building capacity of the staff and ensuring that the mobility of staff that have already been trained does not hamper the effective provision of services, can help reach a broader audience, especially in scarcely populated regions. The importance of leveraging digital solutions to provide labour market services has become even more prominent in light of COVID-19, and many countries have adopted digital technologies to expand the provision of services (see Box 4.13). Innovative approaches can also be taken to bring services to more rural and remote regions.

Within the Russian Federation, Mexico, Argentina, and Turkey, a decentralised approach has been adopted where employment services focus on delivering services to jobseekers in large urban areas while using partnership arrangements with other stakeholders to deliver services in smaller remote communities and rural areas. These partners include local governments at the provincial, municipal and county levels, NGOs, and private agencies. In China, a network of public employment services supports rural migrant workers in securing decent jobs in cities. These centres follow a “Three in One” model, which consists of ensuring training, employment and labour rights for these clients.

Going forward, local labour market services will play a critical role in tackling disparities in employment outcomes across segments of the population and provinces in Indonesia. They can help to bring workers out of the informal economy and provide opportunities for young people to find a job. Indonesia could take further steps to tackle challenges linked to labour market services, such as lacking capacity and coverage, limited engagement with jobseekers and employers, and incomplete labour market information. While effective labour market services connect people to good jobs, these services should be complemented by efforts to improve skills outcomes and foster skills development opportunities, to ensure that workers and students develop the skills needed in local labour markets. Human capital and talent management information systems, including understanding of sector developments, critical occupations, emerging skills needs and requirements, information on training and skills recognition, could help facilitate the modernisation of education and training programmes and related policies.


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