Chris Manning Arndt Corden Division of Economics

Crawford School, ANU

Reconciling a minimum standard of labour protection for insiders with providing better jobs of outsiders ◦ Past lessons

◦ Policy issue: Transitioning to a unemployment insurance scheme?

Timing

Sequencing and speed of transition

Like many countries with a civil law tradition, extensive legislation of labour standards (Revised Law 13, 2003) ◦ Most standards similar to many other

countries: hours of work, child and female employment, health and safety

◦ Legislated by Central Government (some

countries by the regions) ◦ Two outliers in the Indonesian case and two

other controversial areas Severance pay and contract employment:

severance is probably much more important

Many countries have severance regulations

◦ Some countries leave severance pay conditions up to parties to determine within their CLAs

◦ Most countries set low to moderate severance rates

◦ Entitlement generally limited to redundancies/layoffs

◦ Complemented with legal recourse for unfair dismissal claims

Indonesian severance strict by international standards (Law 13,2003): ◦ High rates of severance ◦ In combination with extensive minimum

wages, which are set at the average wage not a social safety net a burden for some firms (especially small scale,

competitive?)

no alternative options such as individual worker accounts

0

5

10

15

20

25

30

0

2

4

6

8

10

India Malaysia Philippines Singapore Thailand Indonesia

Severance pay in no. of monthly wages

A worker with 4-years experience at the firm

and dismissed for economic reasons

Source: GIAT-UNPAD (2004)

Common types of employment arrangements found in countries ◦ Permanent employment contracts

◦ Fixed term employment contracts

◦ Temporary workers hired through temporary work agencies (outsourcing manpower)

Many countries do regulate employment arrangements but ‘regulatory strictness’ varies across countries

In recent years many countries have begun relaxing restrictions on employment contracts

OECD EXPERIENCE o Contract renewals

o most countries permit contract renewals more than 2 times (19 of 26 circa 2000)

Cumulative duration of contracts ◦ most countries have no limit on contract duration

(only 5 of 26 for 3 years or less)

Temp worker agreements: more countries have restrictions

OTHER COUNTRIES However, Indonesia not too different from

several other countries

Country Fixed term Contracts Temporary work through

TWAs

Indonesia Strict Strict restrictions – non-

core activities

Japan No restrictions Restricted to certain sectors

Korea No restrictions Restricted to certain sectors

Malaysia No restrictions --

Philippines Strict Temp work permitted but

considered direct hires

Thailand No restrictions

Two main effects: ◦ Contributed to slower employment growth in the

formal sector

Regular wage jobs stagnate in both agriculture and non-agriculture

◦ Probably one explanation for the casualisation of employment in the main sectors

Low wage, casual jobs almost double, take up much of the new jobs since around 2005 in the major sectors

Index of employment by Major Work Status Group, Agriculture & Non-Agriculture, 2001-9 (2001=100)

Regular wage Casual

Agric Non-Agric Total Agric Non-Agric Total

2001 100 100 100 100 100 100

2002 83 95 93 124 150 133

2003 75 89 87 125 132 128

2004 75 92 89 123 154 134

2005 77 98 95 152 172 159

2006 83 97 95 153 184 164

2007 84 102 99 163 181 169

2008 93 100 99 165 217 183

2009 107 107 107 162 233 187

Informal All Jobs

2001 100 100 100 100 100 100

2002 101 97 101 102 99 101

2003 106 89 103 106 92 100

2004 102 91 100 102 97 100

2005 100 83 97 104 100 102

2006 97 97 97 101 104 102

2007 99 109 101 104 110 106

2008 99 125 103 104 115 109

2009 98 120 102 105 120 111

Index of work status jobs outside agriculture, Indonesia 2001-2009 (2001=100)

0

100

200

300

2001 2003 2005 2007 2009

Regular w age Casual Informal Total

0.0

5.0

10.0

15.0

2001 2003 2005 2007 2009

Agric

Manuf

Trade

Services

Total

Casual jobs as a % of all jobs in major sectors, 2001-9

0

250000

500000

750000

1000000

2003 2005 2007 2009

Male Casual

Male regular

Female casual

Female regular

Real Monthly Wages, Casual and Regular Workers 2003-2009

Level of Schooling Regular Casual-Agric. Casual Regular Casual-Agric. Casual

Non-Agric

Non-Agric

% of Workers Wages per month (Rp.000

Primary or Less 25.1 83.4 61.7 712 413 638

Lower secondary 17.7 12.2 23.8 916 498 696

Upper secondary 43.7 4.3 14.3 1443 586 790

Tertiary 13.5 0.0 0.2 2602 1158 1632

Total 100 100 100 1322 431 675

Total Number (000) 29114 5879 5670

Percentage of Workers and Average Wages of Regular and Casual Employees by Level of Schooling, Indonesia 2009

Once the UU13 was passed, revision of the law became controversial and efforts at reform failed ◦ One problem was that the workers were not offered

sufficient incentives to negotiate a new deal

One future option is to convert the severance pay system to unemployment insurance ◦ Not an option in 1998 (unlike Thailand)

◦ Win-win for workers and employers

◦ Needs to be a gradual process

by type of establishment (size of firm)

level of benefits to avoid major cost blow outs and poor of implementation

ALMP critical to the success, and needs careful prepartion (LMI and training factilities etc.)

Labour market context: ◦ Regular wage employees remain a small proportion

of total employment of at least another 10 years

◦ Policies for informal sector workers also very important

TERIMA KASIH

Female Male

Manufact. Services Non-Agric Manufact. Services

Non-Agric

Regular wage

2001 100 100 100 100 100 100

2002 94 94 94 82 96 95

2003 83 83 83 76 94 92

2004 84 99 92 76 95 92

2005 102 99 100 80 94 97

2006 86 118 102 85 100 94

2007 93 115 104 85 104 101

2008 93 128 110 93 102 94

2009 97 148 123 104 117 99

Casual

2001 100 100 100 100 100 100

2002 153 144 148 132 105 150

2003 113 121 120 140 91 134

2004 107 163 132 134 91 158

2005 178 196 185 172 97 169

2006 217 178 200 175 101 181

2007 224 167 197 177 97 178

2008 271 226 248 180 119 212

2009 289 217 253 176 118 229

Regular and casual wage employment in selected industries by gender, Indonesia 2001-2009