Manufacturing jobs in global industry are the main driver of middle-class job creation in Indonesia

When Tjokrosaputro started his family textile company in 1974 in Solo, Central Java, his only employees were his two sons. Yet, within a few decades his company, Dan Liris, would turn itself into one of Indonesia’s largest fully integrated textile and garment manufacturers, supplying products for well-known global firms in over 20 countries and domestic Indonesian market.  In the process, it expanded its workforce to over 8,000 individuals and now prides itself on its fair compensation and educational scholarships offered to family of employees.

According to a World Bank report, Pathways to Middle-Class Jobs in Indonesia, new sources of good job creation in Indonesia are found in domestic firms with direct links to global industry  like Dan Liris or in global firms that set up local affiliates in Indonesia. Besides providing more employment, jobs from such firms also tend to pay higher-than-average salaries that allow more Indonesian households to join the middle class.  To stimulate Indonesia’s creation of “middle-class jobs” -  defined as jobs that allow an average Indonesian household to afford a middle-class way of life - requires supporting the development of a new generation of such firms.

In 2018, the manufacturing sector as a whole contributed the highest number of middle-class jobs in Indonesia compared to other economic sectors. Many of these jobs came from the medium and large manufacturing firms .  However, Indonesia’s job creation in the medium and large manufacturing firms has fluctuated significantly in the last three decades (Figure 1). Starting in the early 1990s, growing manufacturing exports resulted in a rapidly growing labor force. This was brought to a sudden stop by the Asian financial crisis in 1997-1998. This period was followed by a “hollowing-out” decade (2000-2009) when the average annual job creation in the medium and large manufacturing firms declined to only 12,798 new jobs, compared to 258,681 new jobs between 1991 and 1996.  The development and dynamism of Indonesia’s manufacturing firms post the Asian financial crisis were stunted with fewer new firms entering and surviving, leading to jobs increasingly being absorbed by old and large firms .    

However, between 2010 and 2015 Indonesia experienced a turnaround with manufacturing jobs growing at an average rate of over 150,000 jobs per year, although the job creation rate did not resume to its pre-crisis level. Most of these new jobs were found in export-oriented manufacturing sectors such as textiles, garments, and apparel.

Two types of firms are driving this new job creation: productive domestic firms with links to global industry and foreign-owned firms. Foreign-owned firms have been instrumental in job creation in the medium and large manufacturing industry. Further, in 2015, these firms employed more than seven times as many workers as they did in 1990. Along with that, the share of foreign-owned firms out of total number of firms in this industry rose from 7 percent in 1990 to 26 percent in 2015.  In 2011, about half of such employment was in these firms that exported 50 percent or more of their production.  Such firms have the additional benefit of paying considerably higher average wages than domestic firms (Figure 2) and are more likely to provide remuneration related to a middle-class job (Figure 3), largely due to higher productivity. Additional job growth came from domestic firms with higher productivity, that tended to export more of their production. In both cases, the link to global industry is key for middle-class job creation.

To create more middle-class jobs going forward, Indonesia should focus on unlocking new firm entry and growth linked to global value chains .  To support this effort, it is important to relax foreign direct investment (FDI) restrictions in sectors that create middle-class jobs, increase access to inputs, markets, and high-skilled foreign talents that are in need in Indonesia. Along with continuing reforms to close gaps in infrastructure, human capital, and financial services, a more predictable regulatory framework is key to this reform effort.  Moreover, investment promotion strategies should be directed to sectors that create middle-class jobs that are accessible to low-skilled workforce and women, such as the low-skill manufacturing sector. 

More work is also needed to help domestic firms and workers benefit more from FDI, including from interaction with multinationals through links or imitation. The Indonesian government is recommended to support partnerships between domestic and multinational firms by providing information services, for example, on multinational product requirements or potential local suppliers. It could also offer proactive support through firm-based training programs. Such increased interaction helps to strengthen the capacity of local firms and workers, and in turn offers a powerful source of middle-class job creation.

To find out more about the jobs reform agenda in Indonesia, access the World Bank report, Pathways to Middle-Class Jobs in Indonesia, here.