SOME REFLECTIONS ON HISTORICAL AND INTERNATIONAL DIMENSIONS OF - PowerPoint PPT Presentation

SOME REFLECTIONS ON HISTORICAL AND INTERNATIONAL DIMENSIONS OF LABOUR MARKET AND INEQUALITY IN INDONESIA Chris Manning Adjunct Assoc. Professor 1 Indonesia Project, ANU

I NTRODUCTION  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 2

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S HARE OF TOTAL WAGE 31.87 2012 12.9 Share of total wage by 5.4 the highest decile Share of total wage by the second 20% 25.04 Share of total wage by the lowest 20% 2004 16.2 7.7 Per cent 0 10 20 30 40 4

OUTLINE A framework for thinking about labour 1. transitions and inequality Historical episodes that favoured 2. more equitable labour outcomes in Indonesia Learning from international 3. experience : the East Asian Tigers and China Factors contributing to worsening wage 4. inequality 5 Rethinking labour policies to lower 5. inequality in Indonesia

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 6

Output per Full Time Equivalent Worker in Indonesia 2011 (Rp. Million) 40 35 30 25 20 15 10 Rp. Million 5 0 7

 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 of jobs offered outside agriculture 8

 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 9

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. 10 see Figure and Table

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 The table shows the substantial number of 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. 12

Share of All Employment Contributed by Export Activities by Major Industry, Indonesia Pre- and Post Crisis, 1985- 2005 Industry Total no. of jobs % of all jobs in % of all new jobs created by (million) export industries exports 1985- 1995- 1985 2005 1985 2005 95 2005 5.0 9.6 110.5* Primary 37.7 43.6 9.5 2.5 8.8 ** Food Processing 1.5 1.8 16.8 Light 33.6 73.0 65.6 Industries 2.7 6.4 54.9 H & C 13.8 28.7 61.2 Industries 1.3 3.0 28.1 7.5 27.3 36.0 Services 23.3 40.7 17.4 13 ALL 7.1 26.7 67.4 INDUSTRIES 66.5 95.5 16.6

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 14

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) 15

Agricultural Employment in Indonesia (1986-2014, 3year moving averages) 50 Millions 40 30 Self employed Employee Family Worker 20 TOTAL 10 0 16 1987 1990 1993 1996 1999 2002 2005 2008 2011

Agricultural Employment Java and Outer Islands, 1990-2014 (3 year moving averages) 24 Millions 22 20 18 16 14 12 10 1991 1995 1999 2003 2007 2011 Java Outer Islands 17

 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. 18

 China shows a similar but slower transfer of 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. 19

Manufacturingk, Construction and Migrant Worker Wages in China (from Cai Fang, 2014) 20

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 21

IV W HY 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 22

Real Minimum Wages in Selected Urban Locations in Java (2014 prices 2.50 R 2.00 u p i 1.50 a h 1.00 M i Sharply rising minimum l 0.50 wages at the end of SBYs l second term rejection of low wage policy 0.00 2004 2006 2008 2010 2012 2014 Jakarta Kota Tangerang Kota Bogor Kota Bandung Kota Semarang Kota Surabaya

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 24

 See Papanek (2014) for recommendations on 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) 25

 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 26  Provide new arrangement for severance payments in these zones once pension benefits are put in place

 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 27 higher value-added market in these products

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 28

 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 29

E XTRA TABLES 30

T ABLE 5: G ROWTH IN M ANUFACTURING E MPLOYMENT , T IGERS AND C UBS , 20 Y EARS FROM T AKEOFF (% 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 31

Table 7: Growth in Labour-Intensive Manufacturing Exports, in the Tigers and Cubs After Takeoff 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 32