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Contents:


  1. Linking Education Policy to Labor Market Outcomes
  2. Skills for the Labor Market in Indonesia : Trends in Demand, Gaps, and Supply
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  4. Skills for the Labor Market in Indonesia : Trends in Demand, Gaps, and Supply

An over reliance on short-term contracting has discouraged skills investment and is reinforcing segmentation in the labor market. Growth in minimum wages has been outpacing growth in average wages and this may be one reason for weak demand labor market performance. Moving forward, the key priority is expanding productive employment, including better quality jobs and boosting the employment elasticity of growth.

Strengthening linkages between economic growth and employment outcomes can support the expansion of quality jobs. In addition, it is important to strengthen incentives for skills formation in order to promote labor productivity improvements. In this regard, training policies that support structural transition from school to work are needed, including the strengthening of vocational training and apprenticeship systems. A more flexible labor market is needed to ensure that the ongoing structural transformation process does create quality jobs.

Ensuring that the regulatory framework provides the right combination of flexibility for enterprises and security for workers is critical. Current incentive systems in the labor market tend to discourage stable employment and career progression.

Linking Education Policy to Labor Market Outcomes

Labor law provisions on short-term contracting, worker dismissal, severance payment and unemployment insurance, should be should be reviewed in the light of the need to accelerate skills formation and foster productivity gains. Sustainable solutions are needed for wage policies. Trends indicate that the minimum wage is becoming close to the average wage and efforts are needed to return the minimum wage to its safety net function.

Traditional Labor Market Analysis Example

Rules discouraging temporary contracts and making dismissals costly lengthen both job tenure and unemployment duration. These two effects, together, explain the common finding of modest or insignificant overall employment effects of stricter employment protection laws.

Skills for the Labor Market in Indonesia : Trends in Demand, Gaps, and Supply

At the same time, the pace of labor reallocation slows when job security protections are strong, resulting in a less dynamic labor market, with smaller flows between jobs and between employment and non-employment. Does the strictness of employment protection legislation have implications for productivity? The results are mixed for developed countries, which have been studied most often. The results are also inconclusive for some limited analyses for developing countries.

Another study concludes that stricter employment protection does not robustly affect labor productivity, although it does affect output, primarily through a decline in new firms [6]. These results reflect the diverse, and often opposing, ways in which employment protection legislation may affect productivity. By slowing labor reallocation, strict job security rules can limit the potential efficiency gains from the movement of workers from low- to high-productivity sectors and firms.

However, higher productivity can result where firms adjust to lower flexibility by investing more in capital or in the training of the existing workforce. Overall, the empirical evidence on the effects of labor regulations is mixed and, in some ways, inconclusive. To summarize what we do know: Minimum wages and job security rules have clear distributional effects, most obviously by narrowing earnings inequality, at least in the case of minimum wages.

These regulations can also shift the composition of employment away from groups such as youth, women, and the less skilled. Effects on efficiency are less evident. Negative employment effects of higher minimum wages and stricter employment protection appear to be modest and sometimes lack significance. Studies on the productivity effects do not reach strong conclusions either way, though more research is needed. The results for efficiency employment and productivity may come as a surprise to those who base their intuitions on textbook models.

How can policies that raise the price of labor not always lead to fewer jobs?


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And how can policies that slow labor reallocation not inevitably have negative consequences for productivity? Three factors come into play in accounting for these results:. First, firms and workers make adjustments when faced with changes that raise the price of labor or alter the balance between flexibility and security. For example, employers can respond to higher minimum wages by cutting back on employment, but they can also take another route, such as substituting more skilled workers for less skilled ones, or adjusting other labor cost components.

When reforms to job security rules reduce flexibility, employers can invest more in training or other productivity-enhancing measures—and they may reduce these investments when rule changes increase flexibility. When minimum wages rise, low-wage jobs may decline in many situations, but in others the change can induce more workers into the labor market and, under certain conditions, lead to higher employment. Second, the modest efficiency effects observed in developing countries must take into account the large informal sectors, which limit the coverage of regulations, and weak compliance where the rules do apply.

Certainly, weak enforcement of bad rules should not be recommended for regulating the labor market. However, while improvements in coverage and enforcement would alter the effects of labor regulations in developing countries, the findings are not that different in developed countries, where compliance is much higher [7]. Third, most countries appear to understand the risks of labor regulations at the strong and weak extremes, so they usually set rules in a range where many of the potential negative effects are avoided.

Within this range most of the effects of labor market regulations are redistributive, while the effects enhancing efficiency roughly cancel out those undermining it. While the empirical literature suggests that most countries operate on this plateau, this does not mean that policymakers never set regulations that lead to undesirable outcomes.

Most familiar to economists is the cliff, where overly protective job security rules or too high minimum wages become an obstacle to employment or productivity growth. The other cliff may be less familiar but should be of equal concern for policymakers seeking good regulation. That cliff is characterized by minimum wages or job security rules that do not exist, are too lax, or are too weakly enforced. For example, almost 40 countries, mostly developing countries, have no minimum wage. Countries on this cliff do not address the labor market imperfections that motivate rule-setting in the first place, such as imperfect information or uneven bargaining power between employers and employees.

The challenge, then, is to set regulations that mitigate these imperfections without falling off one cliff or the other. What kinds of information and analysis are needed for policymakers to determine whether their regulations are on the plateau or on a cliff? While there is no clear-cut answer, good monitoring and evaluation are important inputs into decisions about whether a reform is desirable and, if so, what sort of change is needed. As a starting point, it should be recognized that plateaus and cliffs are country-specific. This does not mean that the experiences in other countries cannot be helpful—in fact, benchmarking against similar countries is important.

There are informational and analytical challenges in determining the contours of the plateau. Other factors may be having an effect as well as the regulation under review. For example, if the introduction of more protective job security rules is followed by higher unemployment, that might not mean that the reform has had a negative impact if the economy has been slowing at the same time. Another challenge is to assess the effects of a regulation over a long enough time.

Studies too often focus on short-term effects of half a year to a year, when the real effects may take longer to emerge. Some research has shown that the longer-run effects of the minimum wage, both positive and negative, can be stronger than the contemporaneous ones [8]. Another challenge is to consider all of the important effects that regulation-setters should be taking into account.

Employment, wages, and productivity get most of the attention from analysts, while more difficult-to-measure outcomes such as economic insecurity and fairness are not assessed, even though they are clearly important. These challenges can be addressed to some extent.

Gathering information from a variety of sources can help in understanding the effects of labor market regulations. Household, firm, and administrative data can be used to track how outcomes of interest differ before and after regulatory reforms are introduced. In countries where regulations are determined by states or provinces, variations by jurisdiction can be exploited to identify effects. Different econometric techniques can be used to isolate the effects of regulatory changes by controlling for other factors that might influence the outcomes of interest.

Qualitative information can also provide useful insights.

Skills for the Labor Market in Indonesia : Trends in Demand, Gaps, and Supply

Although the contours of plateaus and cliffs are context-specific, benchmarking with similar countries can provide guidance on whether minimum wages or job security rules are within a reasonable range. Insights can also be gained from subjective perceptions of employers and workers. While these surveys are limited by their subjectivity, they do capture perceptions based on the actual effects of regulations. The importance workers attach to job security and decent pay can be identified through national opinion surveys, and internationally comparable estimates are available through the World Value Survey and similar data-collection efforts [11].

The ultimate test of whether regulations are on the plateau is whether the costs of the rules are reasonable and whether reforms would have a substantial positive effect on the outcomes that regulators care about. Two questions can help evaluate this:. First, is there evidence that employers or workers are trying to overcome or bypass the regulations? One obvious indicator is the level of informal employment in the labor market.

However, care must be taken in interpreting this finding. Higher than expected informality could be due to employers trying to avoid the costs of compliance, which would signify that the country is on the overregulation cliff. However, if the informality is the result of workers having little incentive to work in the formal sector because there is no advantage in wages or job security, then the country might be on the underregulation cliff.

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Second, is there evidence that firms that are inherently more likely to be heavily affected by the regulations are experiencing worse outcomes than firms for which the rules are less relevant? As a case in point, when job security legislation is very protective, industries that are naturally more volatile, with high turnover, are more likely to grow slowly, while more stable industries might exhibit no significant ill effects [6].

Ideally, countries would possess regularly generated and representative data on workers and firms in both the formal and informal sectors. Panel data, which follow workers or firms over time, are especially useful in assessing the effects of regulatory changes. Having good data is only the first step. The data must also be accessible to analysts, and there must be channels for conveying the results of analysis to the policymaking process.

Skills for the Labor Market in Indonesia : Trends in Demand, Gaps, and Supply

The data and analytical requirements for assessing labor market regulations can be difficult for developing countries to meet. Collecting representative data is inherently difficult in developing countries because of the large informal sectors. Data that can be used to monitor more intangible outcomes, like economic insecurity and social cohesion, are particularly scarce.

And many countries lack the administrative and technical capacity to implement high-quality surveys or to conduct sophisticated analyses, although technical assistance is often available from donors and international organizations. Even when good empirical analysis can be conducted, political dynamics too often influence decisions on regulatory reform.

Minimum wages and job security protections are contentious issues, with strong—and usually opposing—positions taken by labor and social organizations, on the one hand, and business, on the other. Where political parties base their constituency on these groups, this dynamic can be transmitted directly into the political process. This can be a difficult environment in which to implement evidence-based policymaking. The appropriate level of regulation, which depends on the country context, lies between these extremes and can alleviate market failures and offer some protection to workers without unduly burdening businesses or imposing major costs on the economy.

However, positions that are often lobbied for in the political process may be more extreme. If policymakers accede to these demands, the result can be various negative economic and social effects. This can be the case for proposals that advocate both very strong and very weak regulation. While these may serve the immediate interests of their sponsors, they are unlikely to be in the wider social interest.