Performance in the labor market has been weak, with slow job growth and high levels of labor underutilization. Different groups of workers, particularly youth, women and rural dwellers, have had disparate labor market outcomes, highlighting problems posed by labor market segmentation. Increasing investment in education has expanded the pool of educated workers; although, these investments have not translated into substantial gains in labor productivity. Under-qualified workers still fill many positions, with skills shortages a continuing challenge. Access to up-skilling and re-skilling opportunities are limited; however, analysis shows that without investment in better quality education and training, access to quality jobs and career mobility is extremely limited.
Over time, regular wage employment has expanded, while informal employment has declined. However, the majority of workers are employed on short-term contracts and/or earning an income that is below the minimum wage. An over reliance on short-term contracting has discouraged skills investment and is reinforcing segmentation in the labor market. Growth in minimum wages has been outpacing growth in average wages and this may be one reason for weak demand labor market performance.
Moving forward, the key priority is expanding productive employment, including better quality jobs and boosting the employment elasticity of growth. Strengthening linkages between economic growth and employment outcomes can support the expansion of quality jobs. In addition, it is important to strengthen incentives for skills formation in order to promote labor productivity improvements. In this regard, training policies that support structural transition from school to work are needed, including the strengthening of vocational training and apprenticeship systems.
A more flexible labor market is needed to ensure that the ongoing structural transformation process does create quality jobs. Ensuring that the regulatory framework provides the right combination of flexibility for enterprises and security for workers is critical. Current incentive systems in the labor market tend to discourage stable employment and career progression. Labor law provisions on short-term contracting, worker dismissal, severance payment and unemployment insurance, should be should be reviewed in the light of the need to accelerate skills formation and foster productivity gains.
Sustainable solutions are needed for wage policies. Trends indicate that the minimum wage is becoming close to the average wage and efforts are needed to return the minimum wage to its safety net function. This includes strengthening alternative avenues for wage negotiation at the industry and enterprise level and building a culture of good faith bargaining. In parallel with this, it will be important to strengthen labor market governance to ensure that a larger majority of Indonesian workers benefit from the standards outlined in regulations.