Name: Aldy Rostyawan

Student Id: 20145216020

Paper Title
Effect of Wage Differential to Unemployment Risk in Indonesia
Abstract
Workers in less-secure jobs are often paid less than identical-looking workers in more
secure jobs. This lack of compensating differentials for unemployment risk can arise in
equilibrium when all workers are identical and firms differ only in job security.
Unemployment becomes persistent for low-wage and unemployed workers, a seeming
pattern of unemployment scarring created entirely by firm heterogeneity. Higher in the
wage distribution, workers can take wage cuts to move to more stable employment.
Key Words: Wage Differential, Economy, Unemployment, Management Risk, Job
Security.

1. Introduction
Indonesia as developing country
still has the same problem as every
developing country in the world,
unemployment. As the global recession
happen, there is an increase in
unemployment rate in Indonesia as it also
happen in every country that caught in the
impact of recession. The aftermath effect
of recession in Indonesia is wage
differential that happen toward same
workers in different firms. Several firms
believe that the worker most likely to
choose jobs with better security rather
than higher wage, which other firms
believe otherwise and thus there are two
arguments toward the idea.
Labor forces in Indonesia often
get lower wage than other labor forces in
1

the world, the minimum wage itself vary

in region and district authorities1. It
happen even before the global recession,
and now the labor forces in Indonesia
began to demand their right in wage and
job security by looking for the right job
and right payment in their standard and
often time they choose to become
unemployed and wait for the right job
offer, resulting to the rise of
unemployment rate in the country.
Recently, the indicator of decrease
in unemployment began to show in recent
years (2011-2014) with the decrease of
unemployment both from male and
female gender, although the labor forces
still
categorized
as
vulnerable
employment as stated by World Bank in
20012.

Established by provincial and district authorities, which vary by province, district, and sector; the
lowest minimum wage was in the province of Central Java at rupiah 910,000 per month and the
highest was in Jakarta at rupiah 2,441,301 per month
2
Report of Development Country Labor Force by World Bank, 2001.

Often say that given increase in

the job security is valued more in highwage than in low-wage jobs, ceteris
paribus (Robert & Ludo, 2015). In several
case indicates that Labor Forces will
eventually move to the more stable job
with higher wage than what he/she
currently have, the process itself can
create a job opportunity in the firm whom
lose its labor, however, if the said job is
not desirable it will create a vulnerable
employment which will eventually search
for more desirable job with higher
payment available. The process of job
search will create unemployment as it
says in unemployment theory (book).
This paper will explain how wage
differential will effect the unemployment
risk based from the view of job security
of identical job and worker in Indonesia
by looking from unemployment rate,
labor force statistic and different wage for
same job in different province and district
authorities which caused worker to move
into different district or province with
better wage for the same job.
In the last part of the paper will
focus on the suggestion which can be
used for country with different district
authorities like Indonesia and how to
manage the unemployment risk that come
from wage differential.
2. Unemployment in Indonesia
During the course of Suharto's
New Order, economic development added
many new jobs to Indonesia's job market,
thereby pushing down the national
1

unemployment rate. Particularly the

industry and services sectors saw major
increases in its employment shares
towards national employment, at the
expense of the agriculture sector. In the
1980s around 55 percent of Indonesia's
working population was concentrated in
the agricultural sector but recently this
number has been reduced to 40 percent
(Agrawal, 1996).
The Asian Financial Crisis that
erupted in the late 1990s, however,
reversed these developments temporarily
and caused the country's unemployment
rate to reach over 20 percent, with
underemployment rising equally rapidly.
Most of the people that lost their jobs in
urban areas went to join the - already
large - informal sector in rural areas
(particularly in agriculture).
Although Indonesia has been
experiencing robust macroeconomic
growth in recent years and, in many ways,
can be regarded as recovered from the
crisis, this informal sector - both rural and
urban - still plays an exceptionally large
role in Indonesia's economy today.
Although it is difficult to pinpoint the
number exactly, it is estimated that
between 55 and 65 percent of
employment in Indonesia can be called
informal. Today, around 80 percent of this
informal employment is concentrated in
the rural areas, particularly in the
construction and agriculture sectors
(Indonesia Statistic Analysis, 2015).
More than a decade of
macroeconomic growth has succeeded in

Established by provincial and district authorities, which vary by province, district, and sector; the
lowest minimum wage was in the province of Central Java at rupiah 910,000 per month and the
highest was in Jakarta at rupiah 2,441,301 per month
2
Report of Development Country Labor Force by World Bank, 2001.

pushing Indonesia's unemployment rate

into a steady downward trend. But, as
around two million Indonesians enter the
labor force each year, it will be a
challenge for the Indonesian government
to stimulate job creation so that the labor
market can absorb this group of annual
newcomers; youth unemployment (among
the freshly graduated) in particular is a
cause
for
concern
and
action
(Feridhanusetyawan et. al. 2000).
With around 250 million people,
Indonesia is the fourth most populous
country in the world (after China, India
and the United States). Moreover, the
country has a young population as around
half of the total population is below the
age of 30 years. Combined, these two
features imply that Indonesia currently
contains a large labor force; one that will
grow larger in the foreseeable future.

The table below indicates

Indonesia's unemployment rate in recent
years. It shows a steady downward trend,
in
particular
regarding
female
unemployment. Female unemployment
has declined rapidly and is reaching the
male unemployment rate. However,
gender equality, as in most countries,is an
issue in Indonesia. Although considerable
1

progress has been made in several key

areas (education and health), women are
still more likely to work in the informal
sector (twice as much as the amount of
men), in poorly remunerated occupations
and are paid less than men for similar
work.

A characteristic of Indonesia is
that the unemployment rate is highest for
people between the age of 15 and 24, far
above the country's national average.
Freshly
graduated
students
from
universities, vocational schools and
secondary schools have difficulties
finding their place in the national
workforce.
Almost half of Indonesia's total
number of workers possess a primary
school degree only. The higher the
education degree, the lower its share
towards Indonesia's workforce. In recent
years, however, there is a changing trend
visible: the share of higher education
degree holders rises, while the share of
those that went to primary school only
decreases.

Established by provincial and district authorities, which vary by province, district, and sector; the
lowest minimum wage was in the province of Central Java at rupiah 910,000 per month and the
highest was in Jakarta at rupiah 2,441,301 per month
2
Report of Development Country Labor Force by World Bank, 2001.

3. Effect of Wage Differential

In deciding whether to take a new
job, there are many factors to consider.
Traditional matters of concern include job
location, employer characteristics, and
work-life balance. For many, one of the
most important considerations is pay
(Benjamin, 2014).
In examining pay, it is important
to consider wage differentials the ratio of
occupational wages to average pay earned
by all workers in a specific area. Because
the cost of living in the Indonesia
fluctuates from region to region, earnings
by occupation tend to vary accordingly.
Here, wage differentials may offer further
insight into the value that specific
communities place on certain occupations
and the standard of living enjoyed by
workers
in
these
occupations
(Feridhanusetyawan et. al, 2001).
Many studies have been done on
the relation between wage differentials
and economic growth. These studies
generally focus on either the Williamson
thesis, in which there is a negative
relation between economic growth and
the skill premium due to increased
investment in education, or on the
Kuznets thesis which advocates a positive
1

relation because economic growth tends

to be skill-biased (Bas, 2014).
The wage equation is based on a
standard model of earning function, in
which earning is a function of personal
characteristics, local characteristics, and
employment characteristics. Following a
classic specification by Mincer and
Polacheck (1974) and also Mincer (1974),
earning is a function of education,
experience,
and
other
personal
characteristics such as marital status and
number of dependent children. Job and
local characteristics are represented by
the industrial and regional dummy
variables.
As stated before, the living cost in
Indonesia is vary from region to region,
earnings by occupation also vary even at
the same job. The manufacturing worker
average wage in Indonesia is 2177.40
rupiah/THO (TradingEconomics.com), it
means the worker earns about 800.000
rupiah/month. In the big city like Jakarta,
Bandung or Surabaya the same worker
could earn more than 800.000
rupiah/month. The reason is because there
is a law that dictate the lowest earning
worker can get in each region and each
region have different number.
Because of that law, the big city in
Indonesia became most sought by fresh
graduate to search for opening job. This
made the competition for opening become
harsh and resulting in job scarce and
raising in unemployment as the available
job opening and unemployed labor force
number is uneven.

Established by provincial and district authorities, which vary by province, district, and sector; the
lowest minimum wage was in the province of Central Java at rupiah 910,000 per month and the
highest was in Jakarta at rupiah 2,441,301 per month
2
Report of Development Country Labor Force by World Bank, 2001.

As long as there is wage

differentials in each region in Indonesia
there will be no end in the unemployment
risk, because the worker will eventually
looking for the higher pay rather than low
pay at same job even if they had to move
toward other region in Indonesia.
4. Conclusion and suggestion
Indonesia as developing country
with big number in labor force should be
in advantages in the economic growth
rate. Although as same as other
developing country, Indonesia also suffer
from high unemployment rate that happen
in other developing country (India,
Congo, Djibouti, Haiti, etc) though the
reason in this case is the differential wage
at the same job in different region, which
caused by the different region wage law
in Indonesia.
Each region in Indonesia can
make their own law as long as it is still in
the quorandum of the nation, it is because
each region have different resource and
different income which result in different
way to manage each region.
Now if we cant change how each
region has their own power to decide their
wage for worker, we still can prevent the
mobilization of fresh graduate toward big
city that can result in rise of
unemployment rate, by, making more job
opportunity in each region to facilitate
fresh graduate with or make better
investment in new area that result in rise
of labor force demand that can bring
1

higher equilibrium rate of wage than

before.
References
Agrawal, Nisha (1996). The Benefit of
Growth for Indonesian Workers,
World Bank PolicyResearch Working
Paper 1637, Washington, D. C.
Benjamin Cover, Wage differentials:
how jobseekers can use them to
analyze occupational wage and cost of
living data by U.S. area , Beyond the
Numbers:
Employment
and
Unemployment, vol. 3, no. 20 (U.S.
Bureau of Labor Statistics, September
2014).
Bas van Leeuwen, Towards a Global
History of Prices and Wages, 19-21
Aug. 2004.
Feridhanusetyawan, Tubagus, Haryo
Aswicahyono and Ari A. Perdana
(2001). Some Determinants of the
Female and Male Labour Forces
Participation in Indonesia. The
Indonesian Quarterly, Vol. XXIX, No.
4. 2001.
----and Haryo Aswicahyono (2001).
Gender
Assessment
in
the
Indonesian Labour Market, report of
an individual research project for
EADN, CSIS.
-----and Arya B. Gaduh (2000).
Indonesias Labor Market During the
Crisis: Empirical Evidence from the
Sakernas,
1997-1999.
The
Indonesian Quarterly, Vol. XXVIII,
No. 3. 2000.

Established by provincial and district authorities, which vary by province, district, and sector; the
lowest minimum wage was in the province of Central Java at rupiah 910,000 per month and the
highest was in Jakarta at rupiah 2,441,301 per month
2
Report of Development Country Labor Force by World Bank, 2001.

R. Pinheiro, L. Visschers / Journal of

Economic Theory, 157. (2015), 397
424.
V. Lutgen, B. Van der Linden / Regional
Science and Urban Economics, 53.
(2015), 5067.
World Bank's GDP per capita, PPP
(current international $), World
Development Indicators database.

http://www.tradingeconomics.com/indone
sia/unemployment-rate.
http://www.indonesiainvestments.com/finance/macroecono
micindicators/unemployment/item255.

Established by provincial and district authorities, which vary by province, district, and sector; the
lowest minimum wage was in the province of Central Java at rupiah 910,000 per month and the
highest was in Jakarta at rupiah 2,441,301 per month
2
Report of Development Country Labor Force by World Bank, 2001.