Labour Market Situational Report
As among the top 20 economies in the world, Indonesia aspired to be one of the economic decision makers in the future, boosted by its high population number, some 270 mil people, about the size of Russia and Japan combined. However, the labour market situation of the country is less than favourable due to a few major issues. First, the labour market situation in Indonesia has an over-reliance on short-term contracting. Short-term workers are those who have a work tenure of fewer than 36 months. Youth, women and individuals with lower levels of education attainment tend to dominate this short-term contracting group. According to Indonesia’s Badan Pusat Statistik, about 40% of the regular workers in Indonesia have work contracts that last not more than 36 months. High severance or high worker dismissal requirements are among the important reasons for employers to deploy these temporary contracts. On top of that, based on the latest Omnibus Law, under Government Regulation No. 35 of 2021 (GR 35/2021), Indonesia’s new fixed-term contract system based on the completion of work does not have a specific maximum period, where more and more workers will fall into the short-term contracting trap. Short-term contracting disincentivise employer from investing skills development of this group of workers which will eventually negatively impact the overall productivity of the labor. According to a survey by PricewaterhouseCoopers, Indonesian workers have a high willingness to upskill themselves but more than 50% of them do not have the capacity and support from their employers.
Secondly, Indonesia as a country is having difficulties in generating highly skilled jobs. In Indonesia, financial services, education and healthcare services are among the top sectors that have always been known as the source of high-quality jobs as more than 50% of the persons employed under these sectors have at least a tertiary diploma. Interestingly, about 44% of the individuals employed in the public administration sector are highly skilled. This finding is in line with the outcome of a survey conducted by PPM Manajemen where 29.4% of Gen-Z (below the age of 26) want to be public servants due to the salary and benefits of this group of employment.
On the other hand, although the manufacturing industry contributed more than 20% to the country’s gross domestic product (GDP) annually, the sector is still highly dependent on low-skilled labourers where more than 90% of the workers employed do not have at least a tertiary degree. The reluctance of micro and small firms in the manufacturing industry is hampering the modernisation of the space, hindering the increased utilisation of highly skilled workers. To illustrate, large manufacturing firms account for approximately 80% of value-added and only 30% of employment within the sector. The larger firms are more likely to innovate, attract foreign direct investment, and become more efficient over time. Micro and small firms account for 10% of value-added and two-thirds of employment within the sector. They use simple technologies, have low productivity, and are constrained by limited access to finance.
Thirdly, the national education system is facing a dual dilemma of not creating enough graduates and when they do, the graduates do not have the right skills that meet the demands of the industry. For the first part, the supply of workers with more years of schooling has been increasing positively, especially with the younger population. However, these gains in the rate of education attainment could not be translated into an increase in productivity rate due to the low quality of education. Indonesia always scored below the OECD average in the country’s performance in the fields of mathematics, science and reading literacy. Moreover, the Government provide a comparatively low level of funding to universities, especially if you put the country side-by-side with its neighbouring Malaysia and Singapore.
Moving on, most of the workers are underqualified. More than 70% of trade workers and professionals are underqualified. Although these statistics present a major opportunity to upskill and reskill the said workforce, however, access to upskilling opportunities is limited. The probability increases as your education attainment increases, evidently only 9% of senior high school get the chance to enrol in training compared to 25.7% for those with tertiary qualifications.
For this year, the Government allocated about USD1.12 mil for the purpose of workforce development in the country. The figure is a far cry compared to what its neighbours, Malaysia and Singapore spend on training yearly. However, the private sector in the country is picking up the buck, spending comparatively the same, based on our internal analysis of the 10 major companies in the country. For example, based on a comparison of the top 10 major companies in Indonesia and Malaysia, Indonesian companies spent USD101.2 mil while Malaysian companies spent USD98.9 mil. As per the fundamental economic principle, when the public sector cannot provide, the private sector will come in to provide the best solution based on a resource-effective methodology. According to the Economist Impact Survey in 2023, 60% of Indonesian employers stated that digital skills are the most important skills that employees need to have, followed by self-management skills (49%) and analytical skills (49%). The rising need for talents equipped with digital skills is mainly due to the expansion of Indonesia’s digital economy – forecasted to contribute USD303.4 bil to its GDP by 2030 or 16% of GDP – and the subsequent increased demand for technology sector – between 20 mil to 45 mil new tech jobs in Indonesia.
Labour Market Situational Report