Ary Hermawan, Jakarta – The government's efforts to reduce unemployment and alleviate poverty will come to naught if it fails to make the manpower system more flexible by overhauling the prevailing legislation, a discussion held Wednesday by Bank Indonesia concluded.

"It is perhaps a bitter pill to swallow, but it's the best way to revive the real sector and improve the investment climate," Indonesian Chamber of Commerce and Industry (KADIN) chairman M.S. Hidayat told the discussion. Such an overhaul of the manpower legislation was the best remedy for rising employment, he stressed.

It has been two years since the government made its last attempt to amend the Labor Law (No. 13/2003) back in 2005, but to date there have been no signs that the matter will be resolved any time soon. "The latest information we have received is that the government has neither the intention nor the courage to revise the legislation," he said.

"It is now drafting a government regulation on severance pay and benefits for dismissed employees. But we disagree with this as we are convinced that a wholesale revision is the best way forward."

Hidayat pointed out that more stable macroeconomic conditions and the robust growth achieved last year had failed to create more jobs for the country's surging workforce. "The number of people unemployed and the number of people living in poverty are in fact soaring," he said.

Bank Indonesia deputy governor Budi Rochadi expressed the hope that the government would urgently seek solutions to the problems plaguing the manpower sector. "Investors are waiting out there for the revision of the labor legislation, and the introduction of strategic policies from the government to improve worker productivity," he said.

Labor intensive firms have long been complaining about the prevailing labor system in which employers are required to pay severance pay amounting to up to nine times the last monthly salary received, making Indonesia one of the developing countries with the highest labor costs. Severance pay here is 10 times more costly than in India, three times more than in Malaysia, Bangladesh and China, and two times more than in Thailand.

Sudarno Sumarto, the director of the SMERU Research Institute, said that a survey conducted by his institute found that lack of flexibility in Indonesian labor legislation was one of the most severe constraints on business and one of the main hindrances to job creation.

The survey also found that 35 percent of respondents believed that the prevailing manpower legislation reduced their competitiveness. The cost of settling labor disputes, the survey found, amounted to some 4.6 percent of total production costs.

Central Statistics Agency (BPS) figures show that about 10.28 percent of the country's 106-million-workforce was unemployed last year, compared to 8 percent of the 98-million-strong workforce in 2001.

Besides improving the education levels of workers, the government also needed to introduce new regulations that would pave the way for job creation by reducing the cost of hiring new workers. "The cost of both hiring and firing must be rationalized," he said.

Meanwhile, the Manpower and Transmigration Ministry's secretary-general, Hari Heriawan Saleh, said that increasing unemployment could also be due to a mismatch between the needs of industry and the type of graduates being churned out by the education system.

He said there were actually five jobs for every 10 job seekers, but only three were hired. "Businesses always complain about the difficulty of finding qualified job applicants," he said.