Education, Training and Labor Market Outcomes for Youth in Indonesia 58916 Policy Brief October 2010 secondary education. The share in manufacturing is lower­40 percent, but it is still double that of agriculture (20 percent)1. The growing importance of the service sector in the economy and the increased sophistication of the manufacturing sector is expected to result in a sustained demand for skilled workers. The overall trend should ensure sustained and potentially increasing demand for skills in the economy. At the macro-economic level, there is evidence of sustained demand for skilled workers but there are signs that integration of educated workers into the labor market is becoming more difficult. Despite the large influx of more educated youth into the labor market, the returns to education have remained largely constant in the last decade, indicating that the demand for educated workers has so far Photo by: University of Indonesia Photo Archive. been able to absorb the increased supply without decreasing returns. The supply of educated workers, however, is likely to continue increasing significantly with the expansion of education, so it is critical to ensure Economic Context: Growth, Transformation and the that new graduates can access good quality jobs. Demand for Skills Figure 2: Returns to Levels of Education (Relative to Primary Education)(1994-2007) Over the last two decades Indonesia has experienced fast sustained 1.6 Wage Ratio vs Primary growth and rapid urbanization, significantly increasing the share of 1.4 nonagriculture GDP despite an important set-back during the 1997 1.2 Education 1 financial crisis. The achievements are impressive­GDP per capita in real 0.8 terms increased 160 percent during the two decades, and the share of 0.6 0.4 agriculture in GDP decreased from 20 to 13 percent by 2006, although 0.2 this rose slightly in 2008 (14 percent). 0 Primary Junior Sec./Primary Senior Sec./Primary Tertiary/Primary Figure 1: GDP per Capita and Share of Agriculture in GDP (1990- 1994 2001 2007 2006) Source: Indonesia Skill Report 2010, Sakernas 1994-2007 4500 22 Note: Only includes salaried employees GDP per capita, PPP (current international $) 4000 20 Each year over 3.3 million youth leave the formal education system Share of Agriculture in GDP 3500 3000 18 to enter the labor market, and the younger generations are more 2500 educated than ever before. In 2008, the proportion of entrants who 16 2000 have completed senior secondary or higher education (that is those 1500 14 considered "skilled") surpassed 50 percent, confirming the trend of increased educational attainment in the population. However, the 1000 12 occupational share of skilled jobs has not kept pace with the increase 500 in education. The share of jobs considered "skilled"2 increased during 0 10 1 2 3 4 5 6 7 8 9 10 11 5 12 16 17 18 9 1 13 14 1 the 1990s but has remained broadly constant during the last decade, questioning the ability of the labor market to absorb these new graduates GDP per capita, PPP ( current international $) Agriculture (% of GDP) at their appropriate education level. This has resulted in over-qualified Source: World Development Indicators (1990-2008) entrants and a difficult transition into the labor market, especially for senior secondary school graduates who are the least skilled workers. Employment by economic sector followed a similar pattern as the share of GDP, but lower labor intensity in the education intensive 1 Source: Sakernas 1994-2007. manufacturing and service sectors has resulted in slower job 2 Skilled jobs are defined as those usually requiring a senior secondary creation for educated youth. Almost 70 percent of workers in the education or higher qualification, like managerial, professional, skilled production, office/admin and sales positions. Unskilled jobs include manual service sectors who are employed for wages have completed senior labor, agricultural laborers, transportation and unskilled production workers. 1 Figure 3: Share of Skilled, Unskilled and Skilled Production Jobs Figure 5: Share of Labor Force in Salaried Jobs by Age Group (1994-2007) and Education Level 1 0.9 Share of workers in salaried jobs 0.8 0.9 0.7 0.8 0.6 Share of total jobs 0.7 0.5 0.6 0.4 0.3 0.5 0.2 0.4 0.1 0.3 0 0.2 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 0.1 Primary JSS SSS Tertiary 0 Source: Sakernas (2007) 1994 1997 1999 2001 2003 2005 2007 Skilled Skilled production Unskilled Source: Sakernas (1994-2007) Senior Secondary Education, Skills and Labor Note: Only includes salaried employees Market Entrance A Difficult Transition to the Labor Market The share of workers employed for wages who have a senior secondary education or higher qualification has increased In Indonesia, the unemployment rate of youth in the 20 to 24 age significantly during the last 15 years (from 35 percent to over 50 group is about two and a half times that of the overall population, percent), but the growth mainly occurred during the 1990s and has and it is higher for more educated youth, especially senior remained constant in the last decade. A lack of mechanisms to access secondary school graduates. Over 40 percent of 15-24 year olds with information about the labor market, returns and types of work available completed senior secondary school in the labor market are unemployed, may be a reason for difficulties in transition to work for young graduates. and although the rate decreases for older age groups, it does not As senior secondary education expands, the new students who converge to the country average until the 35-39 year age group. Rural progress through the education system are more likely to come from areas, with less educated workers and greater availability of unskilled disadvantaged backgrounds and may have less access to job networks jobs have lower unemployment rates; stressing the current dichotomy or limited information about labor possibilities from peers. In the absence in the types of jobs in urban and rural areas in the country. of efficient mechanisms to gain access to this information, this may lead to inequality in labor market outcomes even if all graduates meet the Figure 4: Unemployment Rate by Age Group and Education skill requirements of existing jobs. Also, the observed differences in Level (2007) returns by parental education may also reflect differences in the quality 60% of the education received by students. According to PISA3, the average cognitive skills in math and language have increased in recent years, 50% but there are vast differences in skills by socio-economic characteristics, 40% which are largely driven by parental education. 30% 20% The results from a recent Employer Skills Survey4 confirm that the skills of senior secondary graduates do not meet the expectations 10% of employers. A quarter of recent hires with a senior secondary 0% education are considered of poor or very poor quality. Only 7 percent of 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 them are considered very good, and most of them are considered "fair". Primary JSS SSS Tertiary While employers are concerned about the quality of graduates from both streams, the types of skills and jobs of graduates vary. Vocational Source: Sakernas (2007) school (SMK) is geared towards more job-specific skills, seeking to equip graduates with the skills necessary for a quick and effective transition In terms of type of employment, there is a clear positive association to the labor market, whereas the general stream (SMA) aims to prepare between education and formality, but access to salaried jobs is students for further education.5 difficult for senior secondary school graduates. Only 60 percent of young senior secondary school graduates in the labor force have a salaried job and the share falls with age. Unlike the case with unemployment patterns, in terms of quality, the outlook for workers with junior secondary school or lower qualifications is especially bad, 3 Programme for International Student Assessment with only one-third of junior secondary school graduates in the labor 4 The results of the survey are explored further in World Bank. 2010. Indonesia force holding a salaried job. But while senior secondary school graduates Skills Report: Trends in Skills Demand, Gaps and Supply in Indonesia. Jakarta: fare better, on average only about 50 percent of senior secondary school World Bank graduates are salaried employees. 5 The curricula of both tracks are different except for some basic subjects (English and Bahasa Indonesia), and while the general (SMA) stream offers three general majors, the vocational (SMK) stream offers seven majors for specific skills and/or sectors. 2 Figure 6: Employers Opinion of Quality of Employees with enrollment, suggesting instead that the priorities should be to Senior Secondary Education (%) improve the quality of both streams and pay special attention to 100 equity in access. 90 80 70 Very Good Meeting the Demand for Skills 60 Fair Cognitive skills matter more than the education stream for future 50 earnings and better cognitive skills are associated with higher 40 Poor wages­even more so for general stream graduates. The exit exam 30 Very Poor in junior secondary school is a good predictor of future earnings, 20 which implies that a strong knowledge base in basic cognitive skills is 10 critical for success in higher levels of education and ultimately in the 0 labor market. Since cognitive skills are usually correlated with socio- Average Senior SMA SMK Secondary economic characteristics and they also affect the future education path (better cognitive skills are more likely to attend the general stream), Source: Indonesia Skills Report , World Bank (2010) the inequalities in cognitive skills observed in PISA scores need to be addressed through specific interventions targeting low-performing Despite the differences in the skills provided by the two schooling students and schools in early grades. streams, the unemployment rates for recent SMA and SMK graduates with no higher education are high and very similar (30 In line with the observed earnings, employers value basic percent). In principle, the SMK stream is geared towards imparting the mathematics and reading skills as very important, but complain professional skills necessary for the labor market, while SMA should about inadequate generic skills, which may be a driver of the provide a more general education which serves as the basis for further difficult transition to the labor market.7 Core skills are in high demand, education. As such, one might expect that if demand for specific skills especially basic mathematics and reading, thinking and behavioral is high, SMK graduates would be better suited for the labor market in skills, which are the cornerstones of general education. However, few their initial years. However, the unemployment rate of recent SMA and employers consider that their employees have a significant gap in SMK graduates 20-24 years of age is very high (30 percent), with SMK their basic skills. On the other hand, however, 40 percent of employers graduates faring only slightly better. In the overall population, SMK consider their staff to lack thinking and behavioral skills, which points graduates used to have significantly lower unemployment rates, but it to the need to strengthen generic/life skills for Indonesian graduates. has converged to the level of SMA graduates. Vocational skills that are transferable between jobs like computer literacy and English language proficiency are also noted as important gaps in Figure 7: Unemployment Rate for SMA and SMK Graduates, Age employees' skills. 20-24 (1991-2007) 36 34 While transferable vocational skills should be part of the vocational Unemployment Rate (%) 32 school curriculum, the education sector cannot aim to provide all 30 the skills necessary to perform any job in the productive sector. 28 Private firms should participate in the provision of job-specific skills, 26 24 both through on-the-job training and through copayment of institution- 22 based training for their employees. It is clear from the employer survey 20 that the productive sector values practical on-the-job training more 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 than theoretical training, which is difficult to adapt as quickly as shifting SMA SMK demands in the market. Source: Sakernas (1991-2007) A strong system of nonformal vocational training should serve two In terms of income, there is a small positive wage premium for the purposes: provide tangible skills to unskilled workers (dropouts) general stream, especially when considering the higher transition and meet the increasing demand for sector/industry-specific rate to higher education.6 The transition rate to higher education is training for individuals with completed formal education. The higher for general than for vocational school graduates (30 percent effectiveness of the system, however, depends on the provision of compared to 15 percent), which, combined with the very high returns quality training, the crucial connection with the productive sector from higher education, results in a higher adjusted salary for SMA and, ideally, some form of interaction with the formal education sector graduates. There is also a large wage penalty for vocational school for that allows dropouts to return to the path of formal education upon males, especially those with low ability (as measured by test scores), completing basic competencies. Standards for different training courses which has become larger in recent years. Furthermore, the negative and providers are not developed and the quality assurance systems are wage premium of vocational school for males has worsened in still in very early stages. Resources devoted to training are still inadequate recent years, indicating either a deterioration of the quality of and the coordination between agencies is limited. graduates or a lower demand for their skills. A comparison of the labor market outcomes of both streams does not support a drastic guided expansion of vocational school 7 See the Indonesia Skills Report for a complete diagnostic of the skill deficits 6 See Newhouse and Suryadarma (2009). and trends in the demand for skills. Education, Training and Labor Market Outcomes for Youth in Indonesia 3 Recommendations · Focus on preventing early dropouts and improve the quality of basic education. · Improve cognitive skills of students before they reach senior secondary education and ensure an adequate supply of senior secondary schools in the desired stream. · There is a need to take a closer look at the supply and demand for senior secondary education, with a special emphasis on the availability of public senior secondary schools. · Do not plan supply-driven expansions of vocational school, but focus on broadening the skill base and improving quality. · Explore alternative modes of delivering vocational education, increasing practical training and linkages with the private sector. · Improve the capacity of the nonformal training system to compensate the lack of skills, as well as provide a viable way to train unskilled workers and retrain and upgrade skills for educated workers. · Strengthen quality assurance mechanisms through the establishment of competency-based standards and a clear and enforceable accreditation mechanism. · Entrepreneurship programs may be a viable way to assist youth to improve earnings prospects, but they are not substitutes for providing adequate and relevant skills for the labor market. Preparation of this document received partial funding from the European Commission and the Government of the Netherlands under the supervision of the World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Government of Indonesia, the Government of the Netherlands or the European Commission. For more information, please contact Mae Chu Chang, mchang@worldbank.org or Sheila Town, stown@worldbank.org. Human Development Sector, Prepared by the Education Unit, World Bank Indonesia World Bank Office Jakarta Based on Cerdán-Infantes, Pedro et al, 2010 Indonesia Stock Exchange Building, "Education, Training and Labor Market Outcomes for Youth in Tower 2, 12th Floor Indonesia", World Bank, Jakarta, Indonesia Jl. Jenderal Sudirman Kav. 52 ­ 53 Phone: (021) 5299 3000, Fax: (021) 5299 3111