The significant transformation in the regulatory regime in the mid-1980s affected many aspects of the Indonesian economy. In particular, changes in the incentive regime caused shifts in the wage structure, the employment structure and average labor productivity. This chapter examines how these indicators of labor market performance changed as the reforms were implemented.
The key to the changes was the fact that, with deregulation, Indonesia was in a position to take advantage of its vast endowment of low-cost, low-skilled labor because the industries for which new and larger markets emerged initially were simple and labor-intensive. The pattern of growth that subsequently emerged was labor-friendly. Employment increased, especially paid employment, which grew by 4.6 percent per annum between 1986–1990. In contrast, in the four-year period prior to that (1982–1986), paid employment fell slightly (at an annual average rate of 0.02 percent), resulting in a net loss of 1.5 million paid jobs. During the second half of the 1980s, employment in manufacturing grew especially rapidly, by 8.5 percent per annum. While, due to the labor-surplus nature of the Indonesian economy, real wages did not show any noticeable increases until the early 1990s, average real labor earnings increased as labor entered more productive and higher-paying jobs both across and within broad sectors. This increase in earnings, combined with the increased participation of women in the labor force, was one of the major factors contributing to a substantial reduction in poverty in Indonesia that continued to take place through the period in review.