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Journal of International Development J. Int. Dev. 25, 549 – 561 (2013) Published online 3 January 2011 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/jid.1763

SECTORAL GROWTH AND JOB CREATION: EVIDENCE FROM INDONESIA 1

DANIEL SURYADARMA1*, ASEP SURYAHADI2 and SUDARNO SUMARTO2 Arndt-Corden Department of Economics, Australian National University, Canberra, Australia 2 SMERU Research Institute, Jakarta, Indonesia

Abstract: We develop a growth-employment model that decomposes the Indonesian economy into six components, based on a combination of economic sectors and location, and ascertain the sectors that created the most jobs in Indonesia over the past two decades. We find that urban employment is mostly driven by higher growth in the services sector, especially areas that require skilled personnel. Meanwhile, the agriculture sector growth still drives employment in rural areas, although it appears that the services sector also creates a significant number of jobs. Based on these findings, we provide some policy recommendations. Copyright # 2011 John Wiley & Sons, Ltd. Keywords: employment; economic growth; Indonesia JEL Classification: J21; J23

1

INTRODUCTION

There is ample empirical evidence in the growth literature that economic growth creates more employment opportunities. Considering the composition of growth in more detail, however, it is theoretically plausible for different sectors in an economy to have different job-creation potential. As put forward by Gutierrez et al. (2007), the assumption of the existence of dual economies, where different sectors require different skill sets, stipulates that growth of different economic sectors may have different effects on employment as worker mobility between sectors is limited. As an example, growth in a labour-intensive sector would potentially create more jobs than a similar growth in a capital-intensive sector.1 In this paper, we develop a model that enables us to empirically test which sector in an economy whose growth has the highest elasticity to employment. We then apply the model

*Correspondence to: Daniel Suryadarma, Arndt-Corden Department of Economics, Australian National University, Coombs Building, Fellows Road, Canberra, ACT 0200, Australia. E-mail: [email protected] 1 This concept originates from the poverty literature, with studies finding that growth in the services and agriculture sectors have a much higher capacity for reducing poverty compared to growth in the industrial sector (Ravallion and Datt, 1996; Suryahadi et al., 2009).

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to Indonesian data. The reason for choosing Indonesia is because Indonesia’s datasets are relatively more complete than other developing countries. We are able to gather relatively long-spanning provincial panel data, from 1987 to 2002, albeit trienially. Moreover, this period coincides with an unfettered period of relatively high growth from 1987 to 1997, deep economic recession in 1998 and 1999, and the early recovery period of 2002. Hence, we have sufficient variation that enables us to acquire meaningful results. In addition, unemployment is a real issue for Indonesian policymakers. In 2003, the official rate of 9.5% was more than twice the unemployment rate in Malaysia, and about six times higher than the rate in Thailand. Furthermore, in the 15-year period of our study, there were no major changes to the labour legislation.2 Therefore, our results would not be confounded by changes in legislation, but rather mainly driven by long-term characteristics of the Indonesian economic sectors. We find that different sectors indeed have different job-creating capacities. The highest employment-generating sector in urban areas is services, while agriculture is still the champion to increase rural employment. Although the industrial sector in each area is also significant in creating jobs, its elasticity is only one-third that of the services sector. Examining the existence of rural-urban linkages, we find that none of the rural sector growth has a significant impact on urban employment. In contrast, urban industrial growth reduces rural employment. We organise the rest of the paper as follows. The next section describes the data used in the analysis. Section 3 examines in more detail the Indonesian labour market, focusing on the problem of unemployment in the country. Section 4 plots the trends in economic growth and employment growth in the country between 1987 and 2002. We then explain the model used to estimate the growth elasticity of employment in section 5. The penultimate section discusses the estimation results, and the final section concludes. 2

DATA

We use two datasets, both published by Statistics Indonesia. The first one is Sakernas, the National Labour Force Survey. Sakernas is an annual, nationally representative, and repeated cross-section labour force survey that collects activity data of individuals in the sampled households. On average, every round of Sakernas has around 200,000 observations on individuals at or above 15 years of age, the labour force age threshold used in Indonesia. We use six rounds of Sakernas: 1987, 1990, 1993, 1996, 1999, and 2002. The second dataset, meanwhile, contains Regional Gross Domestic Product (RGDP) figures. In line with the Sakernas data, the RGDP data covers the period from 1987 until 2002, with the value fixed at 1993 Rupiah. 3 3.1

THE INDONESIAN LABOUR MARKET Labour Market Policies and Job Informality

A recent report on the Indonesian labour market (World Bank, 2010) classifies the labour market conditions in the country since 1990 into four categories: rapid growth (1990– 2 A new labour law, which has brought about fundamental changes in the Indonesian labour market was issued in 2003.


J. Int. Dev. 25, 549–561 (2013) DOI: 10.1002/jid

Sectoral Growth and Job Creation

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1997); crashing and coping (1997–1999); jobless growth (1999–2003); and job recovery (2003–2007). Since this study covers the first three periods, the discussion on the Indonesian labour market in this section is limited to the period between 1990 and 2003. Specifically, we summarise the report’s discussion on two aspects of the labour market: policy and job informality. Policy-wise, the early 1990s saw the government establishing provincial minimum wages, resulting in a significant increase in minimum wages between 1993 and 1995. In addition, the government also began promoting the use of collective labour agreements, although the workers could only join one union, which is government controlled. With regards to job informality, this period of rapid growth saw a large number of workers who had been employed in the agricultural sector move to urban areas and engage in formal work. During this period, the share of formal sector employment increased from 35% in 1990 to 45% in 1997 (World Bank, 2010). The large expansion of formal sector employment, however, was halted as Indonesia plunged into the economic crisis in 1997. The share of formal sector employment fell to 41% in 1998 as formal jobs disappeared and workers reverted back to agriculture and other informal jobs. The share of formal sector employment then recovered slightly to 43% in 1999. In terms of policy, the crisis period saw the new government, which came into power in 1998, ratified four core ILO conventions on freedom of association, minimum age, forced labour, and discrimination. In addition, labour unions also proliferated as restrictions were eased. While Indonesia managed to recover well from the crisis, the recovery was not accompanied by an expansion of formal sector jobs. The share of formal sector jobs decreased slightly to 42% by 2003, driven by significant job losses in the public sector and an expansion of the agriculture sector. In the next section, we discuss further the issue of open unemployment in the country.

3.2

Unemployment in Indonesia

In this paper, we use a different unemployment figures from the official ones for 2001–2004 because we focus on the narrow measure of unemployment – those classified as not having a job and actively looking for one. The current official unemployment figures in Indonesia conform to the broad measure of unemployment—those under the narrow measure of unemployment plus the discouraged workers – starting in 2001 (Suryadarma et al., 2007). Therefore, we have to recalculate the 2001–2004 unemployment rates using the narrow definition to acquire comparable rates for the whole period of 1994–2004. Figure 1 shows the open unemployment rates in Indonesia between 1994 and 2004 based on the narrow definition.3 Open unemployment rate increased from 4.4% in 1994 to 6.5% in 2004, or a 47% proportional increase. Unemployment had been relatively stable between 1994 and 1997, just prior to the economic crisis. During the crisis, it skyrocketed to almost 6.5% in 1999 before starting to descend in the following year and reaching 5.5% in 2001. Afterwards, the rate went on a generally upward trend up until 2004. 3 The unemployment rates prior to 1994 were not comparable to 1994 onwards, because the government changed the timeframe in the question on job seeking in 1994. Prior to 1994, there was no limit on job seeking. Starting in 1994, an individual is considered to be actively seeking a job if he or she had done so in the week previous to the survey (Suryadarma et al., 2007). For this reason, we do not present the unemployment rates prior to 1994.


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7 6 5 4 3 2 1 0 1994

1995

1996

1997

Figure 1.

1998

1999

2000

2001

2002

2003

2004

Open Unemployment in Indonesia, 1994–2004 (%).

Comparing between the rate during the peak of the crisis in 1999 and the rate in 2004, unemployment rate was relatively stable. However, the new equilibrium is almost two percentage points higher from the pre-crisis equilibrium in 1997. It is possible that the crisis has altered Indonesia’s natural rate of unemployment, an issue we leave for future studies. We now examine the characteristics of the unemployed. Table 1 shows that more than half of the unemployed are highly educated, having at least 12 years of education. Examining the trends, we find the shares of the tertiary and senior secondary educated to be relatively constant. The unemployed with a senior secondary school certificate made up almost half of those unemployed. In contrast, the share of those with 9 years of education had constantly increased, from 17% in 1994 to almost 26% in 2004. This phenomenon is related to the increasing average education attainment of the Indonesian working age population in the past decade from merely graduating from primary school to graduating from junior secondary school. Table 2 disaggregates the unemployed into urban and rural areas. There is clear difference in the education level of the unemployed between the two areas. The majority of the unemployed living in urban areas are highly educated, with more than 60% having at least senior secondary school certificates. In contrast, the average share of the lowest educated for the whole period is 14%. In terms of trend, there is not much change in the share of those with 12 years or more of education, while starting in 2000 there has been a decrease in the share of those with only 6 years of education or less, while the opposite trend happens to those with junior secondary certificate. Table 1.

Education level of the unemployed, 1994–2004

Column percentages Primary or less Junior secondary Senior secondary Tertiary Primary or less Junior secondary Senior secondary Tertiary

1994 24.8 17.13 49.62 8.46 2000 24.71 23.37 43.98 7.94

1995 24.62 17.64 48.89 8.87 2001 21.79 22.07 46.93 9.21


1996 24.43 18.14 48.15 9.28 2002 22.63 23.54 45.95 7.88

1997 23.27 17.54 50.18 9.01 2003 20.74 24.27 47.96 7.03

1998 23.09 19.44 48.98 8.48 2004 18.58 25.87 47.46 8.09

1999 23.71 19.23 47.86 9.2

J. Int. Dev. 25, 549–561 (2013) DOI: 10.1002/jid

Sectoral Growth and Job Creation Table 2.

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Education level of the unemployed, by areas, 1994–2004

Column percentages Urban Primary or less Junior secondary Senior secondary Tertiary

1994 14.58 15.58 58.69 11.15 2000 15.51 20.67 52.97 10.85 1994 39.34 19.32 36.72 4.63 2000 38.18 27.33 30.81 3.68

Primary or less Junior secondary Senior secondary Tertiary Rural Primary or less Junior secondary Senior secondary Tertiary Primary or less Junior secondary Senior secondary Tertiary

1995 23.72 16.64 49.5 10.14 2001 15.09 16.27 56.13 12.51 1995 52.94 17.84 26.15 3.07 2001 32.34 31.21 32.43 4.01

1996 14.99 15.33 57.15 12.53 2002 14.82 19.48 55.08 10.62 1996 37.43 22.02 35.76 4.79 2002 35.12 30.01 31.37 3.5

1997 14.34 14.12 58.9 12.63 2003 12.89 20.44 56.86 9.8 1997 37.33 22.93 36.44 3.3 2003 33.25 30.37 33.77 2.61

1998 15.98 15.67 56.85 11.5 2004 12.5 21.2 55.42 10.88 1998 34.36 25.4 36.53 3.71 2004 27.83 32.98 35.35 3.84

1999 16.5 16.61 54.22 12.67

1999 35.77 23.61 37.22 3.4

In rural areas, meanwhile, the share of the unemployed is more evenly distributed, with around 30% each for 6 years or less, 9 years, and 12 years or above. Looking at the trends, meanwhile, the share of the lowest educated had been decreasing while the share of those with higher education has slightly increased. While this also proves the fact that education attainment among Indonesians are increasing, there is still a sizable share of the low educated individuals in rural areas who are unemployed. The second characteristic that we look at is experience, shown in Table 3 by the proportion of those who have previous work experience among the unemployed. We only have data from 1998 to 2004 because of problems we encounter with this variable in earlier Sakernas years. To show the consistency of the proportion, the table also includes the share of experienced workers among the unemployed in urban and rural areas. Experienced workers were the minority among the unemployed in all areas. Comparing between urban and rural areas, the share of experienced were always higher in urban areas, averaging 37% compared to 29% in rural areas. This makes sense because work in rural areas normally evolves around informal type of work, where experienced workers can easily find jobs. On the other hand, there may be higher job switching in urban areas, thus at any one time there is a higher share of experienced people being unemployed.

Table 3.

National Urban Rural

Share of experienced workers among the unemployed, 1998–2004 (%)

1998

1999

2000

2001

2002

2003

2004

38.69 39.52 37.38

34.01 37.40 28.35

28.89 32.92 22.99

32.18 35.30 27.26

37.12 39.77 32.89

32.06 35.11 27.20

34.30 38.47 27.96


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Table 4. Urban Rural National Urban Rural National

Share of young people living with parents among the unemployed, 1995–2004 (%) 1995 67.30 67.49 67.39 2000 72.61 78.99 75.20

1996 72.57 79.20 75.36 2001 72.07 77.10 74.02

1997 73.97 80.11 76.36 2002 75.68 80.60 77.58

1998 70.75 77.58 73.39 2003 73.28 78.34 75.23

1999 72.92 77.44 74.61 2004 72.32 80.02 75.37

In terms of trend, at the national level, the share stayed at around one-third, with four to five percentage point increase or decrease each year. The lowest was in 2000, where only 29% of the unemployed had prior working experience. Looking at urban and rural areas, meanwhile, the shares in rural areas were somewhat more volatile. Comparing between 1998 and 2004, nationally there was a five-percentage-point decrease. Meanwhile, the share was relatively constant in urban areas but had diminished by around 10 percentage points in rural areas. The final characteristic that we examine is household status. Table 4 provides the share in Indonesia for national, urban, and rural areas. We find that young people still living with their parents on average made up around 72% of the unemployed in urban areas and 79% in rural areas, and the share remained relatively constant during the period. This indicates that a large majority of the unemployed can afford to be unemployed because they receive income transfer or other kind of supports from their parents. In summary, our results show that the majority of the unemployed in Indonesia are inexperienced young individuals who are relatively highly educated and still live with their parents. Discussing this issue, Irawan et al. (2000) state that given most of the highly educated come from better-off households, they can afford to stay unemployed while looking for better-paid modern sector jobs. Meanwhile, Dhanani (2004) suggests that this phenomenon is mainly caused by the rapid expansion of tertiary education in the early 1990s, and although initially faced with higher open unemployment rate, tertiary graduates enjoy a much better labour market than the low educated. However, Rao (1992) warns against taking this ‘waste of talent’ among the educated lightly. One reason for this is because graduate unemployment also occurs among the poor, who cannot afford to spend 1–2 years job searching (Manning and Junankar, 1998). In general, Rao (1992) states that three important issues in graduate unemployment that must be considered by policymakers are the fact that: (i) a great majority of graduates look for wage and salary employment, not self employment; (ii) there seems to be a problem of excess supply; and (iii) the services sector is the most closely tied with absorption of tertiary educated workers.

4

ECONOMIC GROWTH AND EMPLOYMENT IN INDONESIA, 1987–2002

Figure 2 shows the real output of each economic sector in Indonesia between 1987 and 2002, indexed to 1987 levels. From 1987 to 1996, the Indonesian economy grew by an average of 7% each year. The industrial sector grew the fastest and more than doubled in size just in a decade. Following slightly behind is the services sector, while the agricultural Copyright # 2011 John Wiley & Sons, Ltd.

J. Int. Dev. 25, 549–561 (2013) DOI: 10.1002/jid

Sectoral Growth and Job Creation Agriculture

Industry

Services

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Total

230 210 190 170 150 130 110 90 70 50 1987

1990

1993

1996

1999

2002

Year

Figure 2.

Sectoral Output in Indonesia, 1997–2002 (1987 ¼ 100).

Agriculture

Industry

Services

Total

250 230 210 190 170 150 130 110 90 70 50 1987

1990

1993

1996

1999

2002

Year

Figure 3.

Sectoral Employment in Indonesia, 1987–2002 (1987 ¼ 100).

sector only grew by about 50% in the same period. During the 1999 economic crisis, both industrial and services sectors contracted, while agriculture grew slightly. By 2002, it appears that industrial and services sectors have rebounded to their 1996 conditions, while agriculture continues to grow, albeit at a slower rate. Next, we examine the size of employment in these sectors. Figure 3 shows the total employment in each sector for the same period, also indexed to 1987 levels.4 Looking at the 4 It must be noted that the allocation of individuals into their employment sectors is based on the individual’s main occupation, defined based on the largest contribution to income. As such, this overlooks the fact that many individuals who are engaged in agriculture may also engage in the services sector, such as trade and transportation.


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agriculture sector, the number of jobs in the sector declined by 2% between 1987 and 1996. Given that agriculture output grew by 50% over the same period, it appears that worker productivity has increased by more than 50%. However, the opposite occurred during the crisis, where it absorbed around 6% more people compared to 1996 despite output only growing by