In Indonesia, the past two decades have been a time of great progress but also massive transformations and abrupt setbacks. A period of fast economic progress between 1990 and 1997 was characterized by high GDP growth (averaging 7 per cent per annum) and profound changes in the structure of employment. At a pace not seen even in other Asian countries, poor rural workers left the farms to find work in the industrial and service sectors. By 1997, almost half of all working adults were employed in the formal sector, and in just a few years the share of agriculture in total employment had shrunk by 14 percentage points, mostly to the benefit of the services sector, whose share grew by over nine percentage points. This trend came to a brutal stop when the Asian financial crisis hit Indonesia in 1997, causing a massive contraction in economic activity (real GDP fell by 13 per cent in one year), an escalation of poverty and a movement back to the farms. Between 1997 and 1999, the share of agriculture in employment again grew, at a rate of 1.3 percentage points yearly. Although the share has decreased as the economy has rebounded, the World Development Indicators database shows that 38 per cent of employment in 2010 was still in agriculture.
he recovery in economic growth in the post-crisis period has not translated into as much employment growth as previously. Although there are many reasons for the Indonesian phenomenon of jobless growth, decomposition of the factors behind the slowdown in formal-sector employment growth point to a sharp decline in the employment elasticity of growth in the services sector. In other words, there are now fewer jobs created for the same amount of growth in the economy. While ‘high’ wages have been blamed for undermining job creation, workers’ skills are an important part of the equation. It appears that the skill profile of the Indonesian workforce has not evolved in line with the demands of the labour market. The problem may therefore be a lack of skills for employability. High youth unemployment, while also related to other factors, may be another indication of this challenge.
As the Indonesian economy returns to higher growth rates, identifying and addressing potential skill mismatches will be crucial not only to boost job creation in the formal sector, but also to support higher productivity, competitiveness and growth.
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