Labour Underutilization: Concept and Measurement (1/3)

Section 1: Unemployment and Labour Underutilization

According to Sakernas 2018 or the 2018 Indonesia’s Labor Force Survey, the estimated total of the working age population (WAP) of Indonesia (2018 ILFS) is around 194.8 million. Out of the total, 131 million are classified as labor force (LF) and seven million are the unemployed. The unemployment rate is then about 5.3%.

While many might view the unemployment rate is comparatively low, it is basically sensible given these two facts:

    • Around two-thirds of Indonesia’s employment are engaging in the informal sector, and
    • There are no social security systems applied for unemployment in this country.

In addition, given the big population of Indonesia, even such a low unemployment rate equivalent with 1.2 total population of Singapore. For further discussion on this see THIS.

Perhaps only a few (if any) who disagree on the importance of the statistics of the unemployment rate as is a leading indicator for labour market. Likewise, perhaps only a few who disagree with the notion that the unemployment rate alone already reflects the situation of the labour market appropriately.

Many believe that changes in the unemployment rate is an insensitive indicator to track the real situation in the labor market. The economic crisis, for example, this indicator does not provide a clear signal to policymakers to anticipate. In the case of the 1997 Indonesian crisis, as another example, “a puzzle” was even found: during the Mid 1997 period (before the crisis) and the end of 1998 (when peak of the crisis ended): the number of employment increased by about 1.5% and the number of unemployment decreased by 12.3% [1].

The question would be then what other statistical measures– beside unemployment rate– that can be used to reflect and monitor the dynamics of the labour market in clearer, more realistic, and more sensitive way. The 19th International Conference of Labour Statistician in 2013 (ICLS-19) accentuates such an issue and promote pose the concept of “labour underutilization” (LU).

ICLS-19 (Par. 40) proposes this concept that includes these three elements; namely, unemployment, time-related underemployment (TRU),  and potential labour force (PLF). Here are the definitions of them.

    1. Unemployment = (not in employment) AND ((seeking work AND available for work));
    2. TRU = (in employment) & ((worked less than a normal working hour) & (seeking and available for more job)).
    3. PLF (Pars. 51-55):
      • (not in employment) & ((seek empolyment) & (were not :currently available”)); i.e., unavailable job seekers, OR
      • (not in employment) & ((not “seek employument”) & (“currently available”)); i,e., available potential jobseekers.

These measures are

the basis to produce headline indicators for labour market monitoring. For more comprehensive assessment they can be used with other indicators relating to the labour market, …. in particular skill-related inadequate employment and income-related inadequate employment.. ” (Par. 41)

It is worth noting that while the first component mentioned above belongs to labour force, the third belongs to “outside labour force” as generally understood. A reference for ICLS-19 can be accessed HERE.

Graph 1 provides a schematic presentation of the components of LU as just mentioned. The graph shows among others that unemployment is only a fraction of a much larger LU category.

Graph 1: Composition of working age population

[1] Puguh Irawan and Uzair Suhaimi (1998:11) in Crisis, Poverty, and Human Development in Indonesia, BPS-UNDP.

[Proceed to Section 2: Data Availability]

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