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

Months of Severance Pay for Dismissed of Workers, Economic Cause, Indonesia 1986,1996, 2003

IndiaMalaysiaPhilippinesSingaporeThailandIndonesia 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 omost 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

 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=100)

Index of work status jobs outside agriculture, Indonesia (2001=100) Casual jobs as a % of all jobs in major sectors,

Real Monthly Wages, Casual and Regular Workers

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

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