Deni Ghifari, Jakarta – Indonesia's workforce is projected to grow strongly over the upcoming decade, but new research from the World Bank and Morgan Stanley finds the country is struggling to create jobs for its youth, and a short-term push for gross domestic product growth will not help much.

The latest edition of the World Bank's East Asia and Pacific Economic Update, published on Tuesday, states that the employment rate in the region is "generally high, but the young struggle to find jobs".

"Especially in countries like China and Indonesia, as many as one out of seven people might not have a job when they're young," the World Bank's chief economist for the region, Aaditya Mattoo, said in a press conference on Tuesday.

Job creation depends heavily on economic growth, and hence on policies and regulations that encourage economic activity like investment and consumption.

Indonesia, Mattoo said, had "been trying to grow faster than its potential growth rate," which the government was trying to achieve by providing support in food, transportation and energy subsidies.

The report states that such a strategy might sustain growth today but "may not be conducive to growth tomorrow" and suggests instead to pursue deeper structural reforms focused on addressing nontariff barriers and simplifying business procedures and licensing, which "could enhance potential growth and productive job creation".

It elaborated that Indonesia was among the countries that had not seen productivity-enhancing structural transformation, as reflected in a manufacturing employment share that remained virtually unchanged over the last three decades.

The government has pursued economic reforms in the past years, notably with its push to develop downstream industries and with the Job Creation Law, but both have had only a limited impact on employment.

The downstream push did reel in a large chunk of foreign investment, but that has not so far resulted in large-scale spill-over to other manufacturing activities and employment, because of high input costs and regulatory restrictions, according to the World Bank.

The Job Creation Law, a complex piece of omnibus legislation, meanwhile, was "ambitious" but weak in implementation, Mattoo said, hence the lackluster result in attracting investment.

The report also finds that the net job creation at state-owned enterprises (SOEs) in Indonesia was on average 6 percent lower than at private firms, and the presence of SOEs was associated with reduced job creation.

"Preferential treatment of SOEs – in regulation and in public procurement – can limit the entry [of private businesses into the same industry], distort competition and lead to inefficient allocation of capital and labor," reads the report.

Morgan Stanley also arrived at the conclusion that Indonesian youths were struggling to get jobs in a new study titled The Viewpoint: Asia Faces Rising Youth Unemployment Challenge.

The report, published on Tuesday, places Indonesia as the second-worst performer among several countries assessed for youth unemployment, with only India having a higher youth unemployment rate than Indonesia's 17.3 percent.

Indonesia's working age population is expected to increase by 12.7 million in the next decade, according to the global investment bank.

The report notes that a significant proportion of jobs created over the past decade paid below the minimum wage, and the majority of them were in the informal sector, which Morgan Stanley branded as "signs of underemployment".

It identifies underinvestment as the root cause of Indonesia's employment issues, pointing out that the country's investment at 29 percent of GDP is below the pre-pandemic rate of 32 percent.

It noted that, given the backdrop of "weak corporate sentiment" on account of domestic policy uncertainty, the capital expansion cycle would remain "weaker for longer", implying persistent pressure on job creation.

"From a medium-term perspective, the advent of artificial intelligence and automation will also affect the creation of jobs and further exacerbate the youth unemployment challenge," reads the Morgan Stanley report.

The World Bank, meanwhile, argued that the incentive for organizations to automate processes ultimately depended on costs and wages: "If robots are too expensive or labor is very cheap, firms will not adopt robots".

Statistics Indonesia (BPS) data shows that Indonesia struggled to create high-skill jobs over the past few years, as unemployment among people holding a bachelor or higher degree rose from 4.8 percent in August 2022 to 6.23 percent in February this year.

Andalas University economist Syafruddin Karimi told The Jakarta Post on Wednesday that "attracting investment is important, but creating high-qualification jobs requires a wider ecosystem" and recommended that the government establish data-based career centers, facilitate job-matching and provide vacancy-based training.

Fiscal resources had to be focused on upskilling, improving economic efficiency and technology adoption, he said, warning that government spending to achieve "temporary vigor" instead of increased productivity "will only lengthen the queue of unemployed youngsters".

Source: https://asianews.network/indonesia-struggles-to-create-jobs-for-its-youth