From an agricultural nation to a manufacturing nationIndonesia's large, relatively low-cost labor force of over 144 million people makes it a suitable market for labor-intensive industries. Most of Indonesia's labor force is employed in the agricultural sector, followed by wholesale and retail trade, and manufacturing. As the economy of Indonesia has been highly dependent on agriculture, it is no surprise that this sector has been the largest employer for decades. But as its economy matures, Indonesia has moved beyond just producing agricultural products, and has placed the manufacturing sector in a central position.
The growth of the manufacturing and services sector’s output has led to employment growth. In 2022, Indonesia’s manufacturing sector directly accounted for over 14 percent of total employment, increasing by 3.3 million workers from 2013. The unemployment rate is on the decline as job creation increases. Today, workers in manufacturing earn more than agricultural workers, ranging from around 1.4 million Indonesian rupiah to more than five million Indonesian rupiah, depending on their location.
Omnibus Law in Indonesia: is it for better or worse?Although Indonesia has experienced extensive economic development, there are several challenges limiting inclusive growth. There is still a significant difference between the mean monthly income of men and women across classes, sectors, and nature of employment. Indonesian men have higher wages than women, and women tend to have higher rates of informal employment.
Furthermore, informal employment and open unemployment in Indonesia are estimated to increase in the coming years. Wages and insurance coverage are lower in informal employment. Rural areas have higher rates of informal employment than cities, and employment in rural areas is concentrated in the agriculture sector. Hence, many Indonesians migrated from rural to urban areas to seek better jobs. However, migrating to urban areas often fails to improve their livelihoods, as many do not find well-paying jobs due to high competition and skill mismatches.
Recently, the Indonesian government enacted the controversial Omnibus Law on Job Creation in March 2023, following the previous regulation ratified in November 2020. Through the Omnibus Law, many restrictions on foreign investors were lifted, making it easier for foreign investment in Indonesia. However, the new law significantly reduces worker protections, including minimum wages and maternity benefits, and abolishes legal protections in permanent employment contracts. Despite the numerous problems surrounding the law and persisting disagreement from the Indonesian labor union, by making Indonesia more open to foreign investors, the government is convinced that this adjustment will create more employment opportunities and enable the country to recover from the drop in the job market caused by the COVID-19 crisis.