1. Is There a Youth Unemployment Crisis in Indonesia?
Overview of youth education and employment

2. Levels of youth unemployment in Indonesia are high compared to our neighbors
As of August 2010, 18 percent of young workers are unemployed and looking for a job, compared to only 3 percent for adults; 6 times higher compared to world average of 2.5 times higher.
Composition of youth activities
Youth unemployment rate (% of labor force ages 15-24)
Source: Sakernas, Aug 2010
Source: ILO and WDI, 2007 (Indonesia calcualted from core unemployment Susenas 2007)

3. Over the next decade, Indonesia is in a position to reap a demographic dividend
The window of a falling dependency ratio will only last for another decade. The ratio of dependents to the working population has been declining over the last four decades, but will start rising again during Indonesia may enjoy a demographic dividend if the right policy choices support the acceleration of job creation.
Demographic dividend.
The dependency ratio—the ratio of children and elderly (i.e., dependents) to the working-age population—has steadily declined from over 0.8 in 1970 to about 0.5 in 2009.
Closing of the window of opportunity
Sometime between 2020 and 2025 Indonesia’s dependency ratio will begin to rise again. And it will do so because the fraction of elderly in the population will begin to rise sharply, offsetting both the decline in the share of children as well as the increases in the working-age population.
In the coming decade the number of Indonesians over the age of 65 is expected to increase by about 4 million, roughly the number by which it increased in the last decade.
Between 2020 and 2030, the number of elderly will rise by 8 million, and by 2030 the fraction of elderly in Indonesia’s population is projected to be around 10%.
Source: World Bank, “Indonesia Economic Quarterly: Back on Track?” December 2009.

4. … but there is a need to expand good work opportunities for young people
“Good” jobs tend to be formal and non-agricultural.
53 percent of youth in the workforce find jobs in the informal sector. Most of them work as unpaid family workers.
Over two-thirds of all young employed workers are in agriculture, manufacturing and trade.
Source: Sakernas, August 2010

5. Why are young workers in Indonesia facing difficulties in finding good jobs?
Possible explanations:
Job creation is not keeping pace with new entrants to the workforce.
Rigid labor regulations stunt job creation and entrepreneurship, especially for young workers.
Barriers to self-employment: micro- finance, entrepreneurial skills, etc.
Youth prefer to wait for a better job (unemployment as a luxury good).
Youth lacking work-relevant skills, and not finding jobs in their field of study (mismatch).
Youth do not have access to information about the jobs market.

6. Distribution of active workforce Employment shares by sector (percent)
Youth are entering a highly informal labor market with not enough “good jobs”
Job creation is picking up. However, despite sustained economic growth, not enough “good” (formal and non-agricultural) jobs are being created for the expanding workforce.
Disappointing job creation has reinforced a labor structure that is highly informal and agriculturally- based.
Distribution of active workforce
by employment status
Employment shares by sector (percent)
1990 – 1997: Growing Rapidly.
Combination of strong economic growth, a rise in urban employment and a better-educated workforce led to strengthening the Indonesian labor market.
More workers were finding better jobs and earning higher wages. Wage inequality fell as many workers moved off of the farm and found jobs in the booming industrial and service sectors. Poor workers also moved out of agricultural jobs and into the formal sector, contributing to a remarkable reduction in poverty.
1997 – 1999: Crashing and Coping.
Despite drop in real GDP, employment remained surprisingly stable during the crisis. Farms and the informal market absorbed laid-off workers and women entered the workforce in record numbers.
Workers felt the full sting of the crisis through devastating wage cuts that pushed many near-poor workers into poverty.
Wage drops among rural, self-employed farmers were buffered by large increases in rice prices.
1999 – 2003: Jobless Growth.
Legislative overhaul: the Trade Union Law (No. 21/2000) and the Manpower Law (No. 13/2003).
Salaried workers – especially urban and non-poor workers – benefited from large increases in wages and legislated severance pay during this period of economic recovery, democratization, and legislative reform.
Availability of formal jobs declined, both because of the rising wages and a massive downsizing of the civil service. Workers continued to be pushed back onto the farm, but at a slower pace than during the crisis. Poor, rural and less educated workers were particularly susceptible to being pushed into informal and agricultural jobs.
: Job Recovery.
Real wages fell sharply in 2005 and have stagnated since, except for high-wage workers.
More workers found formal jobs and more workers, especially poor workers, were finding jobs off the farm.
Latest labor market data shows positive signs for the period. Employment is picking up, buoyed by more women finding jobs. More workers are both moving out of agricultural sector and, especially for rural men, entering the formal jobs market. Wages are recovering, but more quickly for top earners and women, especially those who are more educated and living in urban areas.

7. Informality is not always a trap: many youth
use it as a stepping stone to a better job
53 percent of working youth are employed in the informal sector. With higher education levels, they are less likely to be informal employed than adult workers (60 percent).
Informal jobs tend to be traps for adult workers who would earn more if they had a formal job. For youth, however, informal jobs are more likely to be opportunities than traps.
Informal Workers
15-24
25+
Stayed in the informal sector
Trap
19.7
43.6
Preferred outcome
10.1
33.6
Moved into the formal sector
Stepping stone
39.9
13.9
Unlucky
30.2
8.8
Total
100.0
Formal Workers
15-24
25+
Stayed in the formal sector
Sub-optimal
31.1
15.3
Preferred outcome
40.3
46.3
Moved into the informal sector
Stepping stone
7.8
16.3
Safety net
20.8
22.1
Total
100.0
Source: Bank staff calculations based on IFLS 2000, IFLS 2007.

8. Total investment in infrastructure, by sectors
Improvements in infrastructure and investment regulations essential for accelerating job creation
Indonesia is less competitive than other countries in the region largely due to an inefficient bureaucracy, inadequate infrastructure, and regulations that hamper investor interest and infrastructure development.
Total investment in infrastructure has not returned to pre-crisis levels, but the government now has the fiscal space to expand infrastructure spending.
Total investment in infrastructure, by sectors
Source: Doing Business, 2010
Source: World Bank, 2010

9. …but tough labor laws shrink opportunities for young workers entering the formal sector
Stiff regulations disadvantage young workers. High de jure severance rates and restrictions on temporary contracts discourage entrepreneurs and stunts creation of “good” jobs. Young people in rigid labor markets are more likely to experience high unemployment
Trapping employers and most workers in a “lose-lose” situation. Low de facto pay (as reported by workers) leaving the majority of employees unprotected, especially young and low-wage workers.
Receipt of severance pay, as reported by terminated workers
Redundancy costs (weeks of salary)
Doing Business 2010
The 2010 Doing Business report ranks Indonesia 14 out of 15 countries in the East Asia region.
Redundancy cost indicator measures the cost of advance notice requirements, severance payments and penalties due when terminating a redundant worker who has worked for the company for 20 years (based on de jure, not de facto rates).
Severance Pay
The Manpower Law (No. 13/2003) raised the rates further for workers with 3 or more years of service and added a gratuity amounting to 15 percent of all severance and long-service payments in compensation for the loss of housing and health care benefits. The maximum severance pay in case of dismissals for economic reasons is now close to 30 months of wages.
After increases in Manpower Law (No. 13/2003), severance pay is equivalent to “hiring tax” of 34 percent of annual wage, or 4.1 monthly wages (up from 2 in 1996 and 3.4 in 2000).
Severance Compliance by Sub-groups
Age and Tenure: Young (i.e., under 25 years of age), short-tenure (i.e., less than 4 years) and low-wage employees (i.e., wages of less than Rp 1 million per month) are less likely to receive severance pay.
Firm Size: Medium- and large-sized firms (i.e., employing more than 20 employees) more likely to be compliant than small firms.
Fixed-term Contracts
The Manpower Law introduced tighter restrictions on the use of temporary contracts. Previously, fixed-term contracts (FTCs) were allowed for a maximum of 5 years. FTCs only permitted for work that is: temporary, time-bound (i.e., work that can be completed within three years), seasonal or experimental work.
Indonesia falls into the group of countries with more restrictive regulations governing FTC work.
While only 18 percent of permanent contract jobs are held by youth aged years, this same age group holds 43 percent of fixed term contract jobs.
International Research on Labor Rigidity
International studies find that developing countries with rigid labor regulations are more likely to experience high unemployment rates, especially among women and young people.
Feldman (2008) estimates that if Indonesia maximized the flexibility of its labor regulations, youth employment could drop by 5.8 percentage points.

10. A skills shortage in the labor market promises high returns for graduates
There is a short-supply of skilled and educated workers in Indonesia. Only one- fifth of workers have finished senior secondary school; only 6 percent have a tertiary degree.
Employers, however, are looking for increasingly higher skill levels resulting in high wage premiums for educated workers, particularly for senior secondary and university graduates.
Transition between Education Levels, by cohort
Returns to Education
Source: World Bank 2010 based on Susenas (2007)
Source: World Bank 2010 based on Sakernas, various years

11. … but higher educated workers have difficulties in finding work and stay unemployed longer
Unemployment rates, by education attainment
Unemployment may be a “luxury good” for better-educated youth who can afford to wait for a better job.
The relative odds of staying unemployed (and seeking) rather than working in an informal job is 28 times greater for a university graduate than for a low-educated (SD and below) worker.
The relative odds of getting a formal job rather than an informal job is 14 times greater for a university graduate than for a low-educated worker.

12. Finding a job is difficult for youth – they tend to rely on personal connections to find work
There are many ways that young workers and prospective employers can find each other: advertisements, job fairs, university career services, and customized recruitment strategies by firms. Most youth, however, rely on personal connections with family and friends to find a job.
How did you get your job?
Youth (ages 15-24)
Adult (ages 25+)
Source: IFLS 2007

13. … and with poor matching mechanisms, many youth find jobs outside their field of study
Tertiary students are increasingly studying in the fields of business and economics, language and arts, and math/computer.
In 2006, approximately 23 percent of recent tertiary graduates were in jobs outside their field of study. Mismatched graduates from business, economics and public administration earn less, but others earn more.
Source: Alisjahbana, 2008, using Sakernas

14. What can be done? Discussing possible policy responses
Improve cognitive skills for youth
Targeted scholarships
Change perceptions on returns to education
Actions to improve learning: early childhood education, quality of learning
Reduce skills mismatch
Improve on-job experience
Labor market information
Responsiveness of higher education
Upgrade skills of young workers
Improve quality and autonomy of BLK
Introduce new approaches to training: demand-side subsidies, links with labor market, coordinate accreditation
Accelerating job creation
Enabling a pro-jobs environment: infrastructure and business regulations
Negotiating a grand bargain: severance rates and reform, SJSN expansion
Supporting entrepreneurship