Unemployment in Indonesia

However, the Asian Financial Crisis that erupted in the late 1990s temporarily reversed this positive development and caused Indonesia's unemployment rate to touch slightly over 20 percent, with underemployment (which refers to the situation that highly skilled workers are working in low skill jobs or refers to part-timers who would actually prefer to work full-time) rising equally rapidly.

Meanwhile, most of the people who lost their jobs in urban areas during the crisis went to join the - already large - informal sector in the rural areas (particularly in agriculture).

And although Indonesia has been experiencing robust macroeconomic growth for the past 15 years (and has fully recovered from the crisis in the late 1990s), this informal sector - both in the rural and urban areas - continues to play an exceptionally large role within the Indonesian economy today. It is difficult to pinpoint the number exactly, but it is estimated that between 55 and 65 percent of employment in Indonesia can be labelled informal. Today, around 80 percent of this informal employment is concentrated in the nation's rural areas, particularly in the construction and agriculture sectors.

Being employed in the informal sector implies certain risks as informal sector workers typically have lower - and unstable - incomes, and lack access to basic protection and services. Meanwhile, money flows in the informal sector are not taxed and informal activities cannot be included in the country's GNP or GDP calculations. Hence, it is not good for workers and not good for the economy.

More than a decade of macroeconomic growth has succeeded in pushing Indonesia's unemployment rate into a steady downward trend. But, as around two million Indonesians enter the labor force each year, it will be a challenging task for the Indonesian government to encourage job creation so that the labor market can absorb this group of annual newcomers; youth unemployment (among the freshly graduated) in particular is a cause for concern and immediate action.

With around 260 million people, Indonesia is the fourth most populous country in the world (after China, India and the United States). Moreover, the country has a young population as around half of the total population is below the age of 30 years. Combined, these two features imply that Indonesia currently contains a large labor force; one that will grow larger in the foreseeable future, and therefore it is critical that job creation is enhanced in Southeast Asia's largest economy.

Indonesia's Labor Force and Unemployment Statistics:

in million	2016	2017	2018¹
Labor Force	127.7	128.1	133.9
- Working	120.7	121.0	127.1
- Unemployed	7.0	7.0	6.9
People in the Working Age But Not in the Labor Force	63.7	64.0	59.6
- Education	15.9	16.5	15.6
- Taking Care of Household	39.3	39.9	36.0
- Others	8.4	7.6	8.0

^{¹ data from February 2018}

in million	2010	2011	2012	2013	2014	2015
Labor Force	116.5	119.4	120.3	120.2	121.9	122.4
- Working	108.2	111.3	113.0	112.8	114.6	114.8
- Unemployed	8.3	8.1	7.3	7.4	7.2	7.6

^{Source: Badan Pusat Statistik (BPS)}

The table below shows Indonesia's relative unemployment rate in recent years. A steady decline is visible between 2006 and 2012 when amid the 2000s commodities boom the Indonesian economy touched an impressive GDP growth rate. Due to rising economic activity many new jobs were created, hence pushing down the nation's unemployment rate.

This trend was interrupted by Indonesia's economic slowdown (2011-2015) when the 2000s commodities boom suddenly ended amid the global economic slowdown. It is yet another sign that the Indonesian economy is too dependent on (volatile) commodity prices. Therefore, President Joko Widodo's efforts to reduce the nation's dependence on (raw) commodity exports are applauded and should lead to a structurally stronger economy in the future. This should then also have a positive impact on the unemployment rate.

Relative Unemployment Rate Indonesia:

	2013	2014	2015	2016	2017	2018
Unemployment (% of total labor force)	6.2	5.9	6.2	5.6	5.5	5.1

 

	2006	2007	2008	2009	2010	2011	2012
Unemployment (% of total labor force)	10.3	9.1	8.4	7.9	7.1	6.6	6.1

^{Source: Badan Pusat Statistik (BPS)}

When we take a look at urban versus rural unemployment in Indonesia, then we can see that unemployment is significantly higher in the urban areas of the country compared to the rural areas. It is also interesting to point out that the gap between urban and rural unemployment widened over the past four years because rural unemployment has declined more rapidly than urban unemployment. The explanation for this is that many rural people move to the cities in search of employment opportunities.

Indonesia is experiencing a rapid process of urbanization. Currently more than half of Indonesia's total population resides in urban areas. On the one hand, this is a positive development because urbanization and industrialization are necessary to grow into the ranks of a middle income country. On the other hand, this process needs to be accompanied by sufficient job creation in the cities. Hence, (domestic and foreign) investment needs to rise in existing or new urban areas. Thus, the Indonesian government has to make the investment climate more attractive to attract investment.

Important issues (which are the responsibility of the government) are the strengthening of Indonesia's human capital (human capital refers to the knowledge, experience and skills of an employee). The quality of local human capital can be improved through improved education and healthcare. Currently many companies complain that Indonesia's human capital is too weak. This means that investors prefer to invest in another nation (where the quality of the workers are higher), hence leading to missed opportunities in terms of job creation for Indonesia.

Urban and Rural Unemployment in Indonesia:

	2014	2015	2016	2017
Total Unemployment (% of total labor force)	5.9	6.2	5.6	5.5
- Urban Unemployment (% of total urban labor force)	7.1	7.3	6.6	6.8
- Rural Unemployment (% of total rural labor force)	4.8	4.9	4.5	4.0

^{Source: Badan Pusat Statistik (BPS)}

Meanwhile, relatively few women work in Indonesia (in the formal sector). Only around half of the Indonesian women who are in the working age are employed in formal jobs. However, this is actually slightly higher than the world average of 49 percent in 2017 (World Bank data). Still, compared to Indonesian men, the female labor force participation rate is low. Around 83 percent of Indonesian men (in the working age) are employed.

There are two basic explanations for this situation:

(1) Traditional roles/culture; Indonesian women are more likely (than men) to take care of the household, especially after giving birth.

(2) Gender (in)equality; Indonesian women are more likely (than men) to work in the informal sector (twice as much as men). There are many examples of informal female workers in factories (for example garment factories), or who work as maids in households, or open a small business at home (selling self-made food). It is also worth noting that a significant portion of these informal female workers are unpaid workers. Those who do receive income usually get paid less than men for the same work. As stated above, being employed in the informal sector entails risks as informal sector workers typically have lower - and unstable - incomes, and lack access to basic protection and (health) services. Although considerable progress has been made in several key areas (education and health), women are still more likely to work in the informal sector, in poorly remunerated occupations, and are paid less than men for similar work.

Actually, the World Bank detected rapidly declining female unemployment in Indonesia in the late 2000s amid the commodities boom (presumably become it came from a very low base). In fact, female unemployment dropped much more rapidly than the country's male unemployment rate. However, the World Bank stopped releasing Indonesia's female unemployment rate after 2010.

Male and Female Labor Force Participation in Indonesia:

	2016	2017	2018
Total Unemployment (% of total labor force)	5.61	5.50
Total Labor Force Participation (% of total labor force)	66.34	66.67
Male Participation in Labor Force (% of male labor force)	81.97	82.51
Female Participation in Labor Force (% of female labor force)	50.77	50.89

^{Source: Badan Pusat Statistik (BPS)}

A characteristic of Indonesia is that the unemployment rate is highest for people between the age of 15 and 24, far above the country's national average. Freshly graduated students from universities, vocational schools and secondary schools have difficulties finding their place in the national workforce. Almost half of Indonesia's total number of workers possess a primary school degree only. The higher the education degree, the lower its share towards Indonesia's workforce. In recent years, however, there is a changing trend visible: the share of higher education degree holders rises, while the share of those that went to primary school only decreases.

	2006	2007	2008	2009	2010	2011
Male youth unemployment (percentage of male labor force 15-24 years of age)	27.7	23.8	21.8	21.6	21.1	19.3
Female youth unemployment (percentage of female labor force 15-24 years of age)	34.3	27.3	25.5	23.0	22.0	21.0

^{Source: World Bank}

The agriculture sector of Indonesia continues its leading position regarding absorption of Indonesia's workforce. The table below indicates the top four sectors that absorbed Indonesia's workforce in 2011 and beyond.

Employment per Sector:

in million	2011	2012	2013	2014	2015	2016¹
Agriculture	42.5	39.9	39.2	39.0	37.8	38.3
Wholesale Trade, Retail Trade, Restaurants and Hotels	23.2	23.6	24.1	24.8	25.7	28.5
Community, Social and Personal Services	17.0	17.4	18.5	18.4	17.9	19.8
Manufacturing Industry	13.7	15.6	15.0	15.3	15.3	16.0

^{¹ data from February 2016
Source: Statistics Indonesia}

Vulnerable employment (unpaid workers and own-account workers) for both men and women is rather high in Indonesia compared to developed countries and regional peers. For Indonesian men the figure has been around 60 percent of the country's total male employment force during the last decade, while the figure is around 70 percent for women. Most people that fall in the category of vulnerable employment belong to the informal sector.