Structural Transformation and Labor Productivity in Indonesia

Abstract

By some measures, the Indonesian labor market has never looked better. Underpinned by sound macroeconomic policies, steady economic growth of about 5 percent per annum over the past decade was associated with strong job creation. This article focuses on one driver of the quality of jobs in Indonesia: labor productivity growth and, in particular, the (limited) contribution of structural transformation. It shows how structural change - here defined as the reallocation of workers from low- to high-productivity economic activities - has contributed only a small share of labor productivity growth in the recent two decades. The main takeaway is that Indonesia need not worry as much about the quantity of jobs as the quality of those jobs. Both demand-side and supply-side interventions are needed to boost labor productivity so that more Indonesians can have middle-class jobs.