Abstract

Like in the Asian financial crisis of 1998, many jobs have been lost during the first year of COVID-19, especially for young people locked out of the labour market. The informal sector seems to have been hit much harder than during the Asian financial crisis, partly because of mobility restrictions and lockdowns. So too have industries heavily dependent on international markets, such as tourism and labour-intensive manufacturing, while non-tradeable transport and construction have also suffered badly. Nonetheless, despite the severity of COVID-19, the Indonesian economy and labour market are doing better than several more globally networked countries in Southeast Asia. Extensive use of the internet has facilitated work from home and skills development, such as through the new Kartu Prakerja (Pre-employment Card). The Unified Database has facilitated government help for the poor, despite delays in disbursals. However, the wide geographic spread of COVID-19 and its effect on labour supply makes support for jobs costly and uneven. Although off to a rocky start in October 2020, reforms seeking to promote investment and employment in the omnibus law Cipta Kerja have the potential to create better jobs during the recovery if managed more wisely.

Introduction

In the first six months of 2020 the spread of COVID-19 was already a severe setback to labour markets in countries across the globe (IMF 2020a). Indonesia has not been spared, with gross domestic product (GDP) growth declining by a huge 5.3 per cent in the second quarter of 2020. Measures to control the spread of COVID-19—social distancing, lockdowns and restrictions on mobility—that were introduced from April to June 2020, had significant effects on economic activity, which have been reflected in job and labour incomes.

In this chapter I explore Indonesia's labour market adjustments in the first eight months of 2020, covering the six-month period from March to August when COVID-19 spread across the country. It is clear that the impact of COVID-19 on jobs and hours of work—and hence on labour earnings—was already severe in the period of large-scale social restrictions (pembatasan sosial berskala besar, PSBB) from March to June 2020, even though the database for evaluating these effects on labour is slim.

INTRODUCTION

In 2014, President Joko “Jokowi” Widodo took office with strong nationalist party credentials. He is also the first president with significant and successful business experience. It is an unusual combination of a nationalist inclination combined with a pragmatic approach that focuses on action and results more than programmes and planning. Both these characteristics suggest an approach that is different from that of his predecessor Susilo Bambang Yudhoyono (SBY) in regard to social issues and the labour market.

Like Yudhoyono, Jokowi has strongly supported agriculture and food self-sufficiency, as well as self-reliance in the public documents that set out his five-year term plans and policy directions. The country's overall economic policy framework has not undergone a dramatic change in focus under Jokowi — continuities are especially evident in regard to macroeconomic policies. But microeconomic reform has emerged as a priority. Simplification of administrative processes and concrete reform packages across a wide range of areas of the economy have quickly become a hallmark of his presidency. Jokowi has been more wedded to the nuts and bolts of microeconomic reform than Yudhoyono. This bodes well for employment and skills.

When it comes to labour market issues, Jokowi's approach has emphasized combining fair wages with greater business certainty to make sure sufficient better jobs are created. In the policy domain, he has been assisted by the Minister of Manpower, Hanif Dhakiri, who has also been pragmatic and committed to labour reforms in contrast to several predecessors in this position. In areas like international migration, Jokowi reaffirmed the government's strong commitment to improve labour standards. On the ground, there was a major shake-up as his cabinet sought to promote more investment (and hence more jobs) and improved living standards for working families. Emphasis has been on programmes that raise the productivity and skills of workers, which fits well with the president's private sector background. With some modifications, most programmes oriented directly towards poverty alleviation — a hallmark of the Yudhoyono era — have continued. But like in other areas of public policy, the sheer volume of policy initiatives has not always been backed up with institutional arrangements that ensure effective implementation.

June 2011 was a month that encapsulated the highs and lows of Susilo BambangYudhoyono's (SBY's) policies on international migrant workers. On the eleventh of that month the Indonesian president proudly announced his support for the migrant worker convention in one of his many eloquent speeches, on this occasion given as a guest at the 100th annual meeting of the International Labour Organization (ILO) in Geneva. A week later this socially responsive approach was sharply questioned by the execution of the Indonesian maid Ruyati Binti Sapubi in Saudi Arabia, in part signalling a foreign policy failure on the part of SBY, and one that was widely criticized at home. Some have argued that international migration was one area among many where SBY promised more than he could deliver; while introducing a number of innovations, and eventually taking a hard line with several of the host countries for Indonesia migrants, it is said that the government struggled to get beyond “rhetoric” in devising practical policies and building the institutions to support them (Budianti, Chandrakirana and Yentriyani 2015, p. 210).

The government continued to strongly support international migration as a source of employment and of foreign exchange during the SBY years. During this period the number of Indonesians working abroad increased substantially and its composition changed, first more in favour of females and domestic workers and later back to a greater reliance on males and formal sector workers, mainly as a result of government reassessment of priorities. However, there was a policy shift during SBY's second term after shortcomings were increasingly exposed in the media and by civil society groups. Because of continuing reports of exploitation of female domestic workers in particular, culminating in the execution of Ruyati in 2011, the government temporarily halted the sending of domestic workers to the main recipient countries, Malaysia (in 2009) and later Saudi Arabia. At the same time, there were a number of important new institutional developments. These included bilateral agreements with receiving countries that had the potential to improve migrant conditions overseas. Regrettably, reform was slow and piecemeal. The regulatory and institutional changes did not have a positive impact on the welfare of migrant workers, which officials had promised and many observers had pressed for.

In the current digital era of rapid technological change, globalisation of labour markets deals with a much broader range of issues than simply the effects of international trade and investment on jobs. Historically a major concern of governments, international trade and investment played a major role in job creation across the globe until the global financial crisis of 2007–08. Since then, the links between computerisation and industrial development—or between cyber and physical systems—have intensified, leading to revolutionary changes in modes of service delivery (Baldwin 2016). These developments have changed the nature of the debate on the labour market consequences of globalisation in Indonesia.

The shift in focus away from the labour market effects of trade in goods is partly a result of the slowdown in world trade since the global finan¬cial crisis. This is likely to be exacerbated by the Trump administration's threat to turn its back on the multilateral and regional trading system that has evolved over the past half-century. In addition to the effects of trade, many countries are concerned about the impact of foreign investment on employment, the benefits and costs of international migration and, more generally, the effect of globalisation on inequality (IMF 2007; Helpman 2016). Analysts are increasingly debating the indirect effects of foreign trade and capital movements for the labour market, as well as the direct effects through migration to and from developing countries.

Indonesia became more wary of trade, capital and labour interactions with the world economy after the Asian financial crisis of 1997–98. Restrictions that slowed the growth in trade and investment accelerated during the second term of the Yudhoyono administration (2009–14), as the boom in resource industries peaked and then came to an end (Hill 2015). At the same time, online shopping and other internet-based services spread rapidly in Indonesia, as in the rest of the world. In the Indonesian case, local start-ups such as app-based transport provider Go-Jek have expanded quickly, usually by gaining an initial foothold in Jakarta before moving quickly to other major cities. In the process they have created new job opportunities, while also threatening old ones (Ford and Honan 2017; Pangestu and Dewi 2017).

INTRODUCTION

Around 2010–11, observers of the Indonesian labour market were surprised by a sudden surge in formal sector employment after almost a decade when the informal sector and casual jobs had grown more strongly and a high percentage of the workforce was still engaged in agriculture. Unemployment and underemployment also showed signs of declining quite sharply. While growth had increased moderately after the global financial crisis of 2008–9, this was seemingly not enough to lead to such a major reversal in labour market trends.

Could the country be going through what has often been referred to as the “turning point” in economic development, slightly over a decade after one of the biggest economic downturns in modern history? This is denoted by a point (or a period) in time when unskilled labour begins to become scarce, wages rise, and the country begins to move into a phase of capital deepening and technological advancement (Lewis 1954). The changes mentioned above come just fifty years after the famous U.S. anthropologist Clifford Geertz wrote a brilliant but deeply pessimistic (and, in some respects, deeply flawed) account of agricultural involution on Java, the main island of Indonesia.1 In this treatise, in essence, he described the sort of process poor Asian countries went through prior to industrial transformation. That is, traditional societies based the distribution of output on average rather than marginal product rules — dividing up the pie — which enabled many more people to survive overcrowding in rural areas, under conditions of relative economic backwardness.

The dramatic rise in manufacturing exports in Japan and the East Asian “tigers”, in the 1950s to the 1980s, seemed to provide empirical support for the potential of a turning point, as an important phase in the development of rapidly growing and densely populated Asian economies. Identification of the turning point had important implications for industry and trade policy.

Outcomes in the general area of job creation, poverty and income distribution were ambiguous during the Yudhoyono years. Jobs growth flip-flopped between rapid expansion of informal jobs in President Yudhoyono's first term, and then of formal employment during the resources boom in his second term. On the positive side, rates of poverty declined almost continuously throughout his period in office, and policy in this area was one of the big achievements of his presidency. But these improvements for the poor were not reflected in a better distribution of income. In fact, inequality worsened strikingly during Yudhoyono's second term of government.

Although strong and sustainable jobs growth can be associated with both declining poverty and improvements in income distribution, in Southeast Asia rapid economic growth has quite often been associated with rising inequality (Booth 1999). Indonesia appeared to be the exception during the Suharto period but there are good reasons to expect that this may not be the case now. While poverty alleviation is widely accepted as a legitimate focus of government policy, middle-class interests have more influence in a democratic polity, and these will not always favour rapid employment growth or more equitable fiscal arrangements. Moreover, organised labour did not support policies that could have achieved a more rapid expansion of blue-collar jobs in Indonesia in the early reformasi period, and subsidised energy and other fiscal arrangements have mainly benefited the better-off, facilitating growing inequality (Manning 2010; Dartanto 2013).

President Susilo Bambang Yudhoyono projected a greater concern for and a deeper knowledge of policy alternatives in areas affecting the welfare of the poor than any of Indonesia's first three reformasi presidents, B.J. Habibie, Abdurrahman Wahid and Megawati Sukarnoputri.1 This chapter will show that he oversaw considerable progress in social programs oriented towards overcoming poverty, and that he personally supported some major innovations in this field. At the same time, the president's extreme caution in policy-making in areas affecting the poor, his aversion to conflict and his need to take political calculations into account all meant that his government avoided making some difficult decisions that could have benefited lower-income groups much more.

Professor Hal Hill has been a tower of strength and inspiration for economic research on the Indonesian economy over almost three decades, both for international as well as Indonesian scholars. This author's academic career spanned much the same time period as Professor Hill's, both as a PhD scholar and a decade later as a researcher for 20 years at the Australian National University (ANU). Our interests have been similar—understanding the diversity and resilience of the Indonesian economy, often against all odds, internationally, and often in spite of the interventions by politicians in Jakarta. The author personally owes a great debt of gratitude for Hal Hill's support and a wonderful friendship, for much of this period, especially during his 20 years as a researcher at the ANU in 1991–2011. Terima kasih Pak.

During his career, Professor Hill developed a healthy scepticism of regulated markets in the Indonesian context. Partly, this scepticism reflects changes in the approaches to development policies among main-stream economists since the 1960s and 1970s when he began his career. It also manifests a judgment that successive Indonesian governments have been unable to keep their promise of improving efficiency and erasing inequities through market interventions, partly because of weak legal institutions and poor governance. In this chapter, I take up this theme by focusing on some of the effects of regulations of Indonesia's labour market in recent times.

One of Indonesia's main development problems is that a high proportion of the workforce—around two-thirds—are employed in low-productivity agriculture and in the informal sector. Mainly, this is related to Indonesia's stage in economic development as a lower middle-income country. The meagre stock of both physical capital per worker and human capital reflects Indonesia's stage of development. Not enough workers have moved into higher productivity jobs especially in manufacturing, and that transfer slowed after the Asian financial crisis of the late 1990s, despite reasonable and improving rates of economic growth in the 2000s (World Bank 2010b).

It has been suggested that both low productivity and high wages in some segments of the economy have contributed to high and rising unit labour costs relative to productivity, compared with neighbouring countries (Nellor 2013). That process has also contributed the poor employment record. Part of the problem relates to the dualistic structure of output in manufacturing, which is related to technology and market orientation.

OVERVIEW

Like many large countries, Indonesia has a geographically fragmented labour market. Physical and economic contrasts between and within the major islands govern patterns of employment, wages and unemployment. The labour market still bears the signs of a dualistic division, dating from colonial or even pre-colonial times, between densely populated, poorer Java–Bali and most of the more land-abundant Outer Islands. Rapid national economic growth based on both export-oriented development and resource booms altered that historical pattern during the Soeharto years. The process became more complicated in the post-Soeharto democratic reform era after Indonesia's radical decentralization. Manufacturing stagnated in Java, while in the Outer Islands better governance and the return of revenue to resource-rich provinces provided more opportunities in some regions than in others for human resource development and economic diversification.

The widely varying rates of poverty discussed by Ilmma and Wai- Poi (Chapter 5) and Sumarto, Vothknecht and Wijaya (Chapter 12) are reflected to a large extent in differences in labour productivity across island groups and provinces. Labour productivity in Jakarta and East Kalimantan is more than twice the national average, whereas in Gorontalo and East Nusa Tenggara it is less than half. Most people in the former two provinces work in the formal sector in services, mining and manufacturing. In contrast, high levels of poverty and low labour productivity in the latter two provinces are closely associated with a concentration of employment in agriculture and the informal sector.

At the same time some indicators, such as inter-regional migration, suggest quite high levels of integration for a country of Indonesia's size and spread. There are also signs of convergence in labour productivity among some provinces and regions, as poorer provinces shed agricultural workers.1 Remarkable similarities across the country in trends towards greater formalization and improvements in unemployment rates and wages also suggest a degree of integration in the national economy. This has meant that some of the worse-off provinces have not been left behind. Nevertheless, in other provinces, high rates of population growth, low levels of schooling and associated low levels of outmigration have kept much of the workforce trapped in low-productivity agriculture.