Indonesia - Employment and Income

Employment and income

Many developing nations face a similar dilemma: although growth in the modern industrial sector is critical for increasing GDP, it can provide only a small share of total employment opportunities. Indonesia's employment pattern illustrated this dilemma: the industrial sector employed about 6.5 million workers in 1989--only about 9 percent of the total labor force, whereas the agricultural sector still employed 41 million workers--55 percent of the total labor force (services accounted for the remaining 26 million employed workers--35 percent of the work force). The distribution of benefits from economic growth depended largely on how government policies affected employment opportunities nationwide and earnings in agricultural and service sectors. Since the population was still predominantly rural, the benefits of economic growth also depended on the opportunities available in rural areas.

Another major concern of government planners in the early 1990s was the rapid increase in the labor force. Repelita V estimated that the labor force would grow at a rate of 2.4 million workers per year, bringing the total to 86 million in 1993, up from 74.5 million in 1988. (The labor force in the early 1990s was usually slightly larger than the total number of employed workers because of unemployment.) The rapid rate of growth reflected both the increase in the working age population, estimated at 2.7 percent per year, and the increasing rate of labor force participation among women. The rate of increase of the female labor force was predicted to be 3.9 percent per year, compared with 2.4 percent per year for the male labor force.

Unemployment in 1989 was estimated at only about 3 percent of the total labor force. However, this figure ignored the high degree of underemployment--or workers employed in low-skill, informalsector jobs because of the lack of better opportunities. Repelita V expressed government concern over the mismatch between the education and skills of workers and the available job opportunities. The plan noted that government employment policy should shift away from the public works employment programs of the past that generated lowskill rural jobs, in favor of vocational training and greater assistance to small-scale enterprises.

Information on wages in Indonesia was frequently difficult to interpret because of imprecise definitions of job categories and different measures of labor. In his study of the Indonesian industrial sector, Australian economist Hal Hill reviewed the available data on employee compensation among medium and large firms. In the highest paid industry--basic chemicals--labor earnings averaged Rp260,000 (about US$234) per month in 1985. In the lowest paid industry--clay products--earnings were Rp32,000 per month (about US$29). The industrial earnings average was Rp84,000 per month (about US$76). The considerable interindustry variation presumably reflected different skill levels, but no information was available on the number of hours worked or the skills and education of the workers. Compared with wage levels in 1974, these earnings reflected an average increase of 5.6 percent per year when controlled for inflation.

These average figures disguised to some degree the low wages paid to the least skilled and most numerous employees in industry. Although Indonesia in 1992 had minimum wage legislation, outside observers, including representatives of United States labor unions, observed that the minimum wage law and other labor protection were frequently violated. The American Federation of Labor filed three unsuccessful petitions with the United States government from 1987 to 1990 to eliminate Indonesian tariff concessions under the Generalized System of Preferences because of labor law violations. The only officially sanctioned trade union in Indonesia, the All Indonesian Workers Union (SPSI), was tightly controlled by the government, and, until 1990, all strikes were illegal. The government relied on the army to help quell a rash of strikes during September 1991 in the industrial area of Tangerang in Jawa Barat Province, about thirty-two kilometers west of Jakarta. Workers were protesting wages below the minimum level, set at the equivalent of US$1.07 per day in that area.

Earnings outside the industrial sector were typically lower, with the exception of earnings in some services such as finance and banking. The Department of Manpower reported the average minimum monthly wages in several economic sectors for 1989, which ranged from about Rp67,000 (about US$38) in the plantation sector to Rp213,000 (about US$120) in banking and insurance. According to this source, the average minimum monthly wage in manufacturing was Rp130,000 (about US$73).

Many scholars have researched changes in income distribution under the New Order. The conspicuous consumption of the wealthy Chinese minority and Suharto family members, a stark contrast to the very modest means of most Indonesians, underscored concern about whether the average Indonesian was better off after two decades of growth in GDP. The Central Bureau of Statistics (BPS) provided extensive data for investigation, including decennial population and agricultural censuses, ten national socioeconomic surveys between 1963 and 1987, and two major labor force surveys in 1976 and 1986. In spite of the wealth of information, disagreements and uncertainties abounded, often because of changing definitions and incomparable data among different surveys, and concerns about the quality of data collected by the Central Bureau of Statistics. Nevertheless, a consensus emerged among many scholars, including economists at the World Bank and the contributors to a major economic review entitled The Oil Boom and After, edited by Anne Booth, that income actually became slightly more equally distributed from the 1960s to the 1980s.

The series of national socioeconomic surveys, known by the Indonesian acronym Susenas, were the most frequently used source for nationwide studies of income distribution and poverty. However, Susenas, based on a representative sample of 50,000 households, only reported household expenditures, not household income. To the extent that richer households saved more in addition to spending more, the surveys may have distorted income distribution. Based on Susenas data, the World Bank reported that when ranked by expenditure, the bottom 20 percent of population accounted for about 9 percent of total national expenditure in 1987, while the top 20 percent accounted for a little over 40 percent of total national expenditure.

A study in The Oil Boom and After summarized Indonesian income distribution from Susenas data with the Gini coefficient, a measure of concentration showing the relationship between the cumulative percentage of some groups of items (for example, households) and the cumulative percentage of the total amount of some variable (for example, income) frequently employed by economists. A smaller Gini coefficient, which ranges from 0.2 to 0.6 for most countries, indicates a more evenly distributed income. The Gini coefficient for Indonesian urban dwellers fell slightly from 0.33 in 1969 to 0.32 in 1987, while for the rural population the decline was more pronounced--from 0.34 to 0.26. Although income was becoming more evenly distributed in rural areas, urban areas appeared to be benefiting relatively more from economic growth. The ratio of average urban household expenditures to average rural household expenditures increased from about 1.4 in 1970 to 1.8 in 1987.

The incidence of poverty, or the number of households living under a specified poverty level of expenditure, is also an important indicator of the benefits from economic growth. The World Bank conducted an extensive analysis of poverty trends during the 1980s based on the 1984 and 1987 Susenas surveys. The study concluded that both the percentage of the population and the absolute number of the poor declined during this period. By 1987, 30 million Indonesians, or 17 percent of the population, lived in absolute poverty, while many more lived above but near the poverty line. The poverty line was estimated on the basis of the expenditure necessary to maintain a daily intake of 2,100 calories and to meet other basic needs. In 1987 the necessary expenditures amounted to Rp17,381 per month per person in urban areas, and Rp10,294 per month per person in rural areas.

The World Bank study applauded the overall success of the New Order regime in poverty reduction. The earliest reliable estimates of poverty in 1970 showed that 60 percent of the population then lived in absolute poverty. Since most of the poor earned a living in the agricultural sector, this success was attributed to improvements in agricultural productivity, in part the result of direct government investments and appropriate macroeconomic policies such as moderate inflation and a generally realistic exchange rate. The government sustained the decline in poverty in the 1980s by avoiding major budget cuts in programs that directly affected agricultural and rural development.

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