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Informal Employment in Indonesia: Good Jobs, Bad Jobs, or Both?

04 Jun 2021
By Christine Ablaza
The lives of Indonesian women home workers and their families in Malang, East Java, engaging in informal employment practices without receiving regular or minimum wages, written contracts, social security and other benefits. Source: ILO/ Ferry Latief.

According to the latest estimates from the International Labour Organization (ILO), 60 percent of the global workforce, are informally employed. Informal employment exists everywhere, but it is primarily concentrated in Asia and Africa.

Informal employment is a global issue that has persisted since its “discovery” in the 1950s. The ILO defines informal workers as individuals who are “not subject to national labour legislation, income taxation, social protection, or entitlement to certain employment benefits.” The unregulated nature of informal jobs means that informal workers do not have access to key benefits enjoyed by most formal workers, such as health insurance, pension, severance payments, and paid leave. As a result, informal workers are more vulnerable to various types of shocks including, for instance, the COVID-19 pandemic. Apart from its unregulated nature, a large body of research has further documented other disadvantages faced by informal workers such as low and irregular incomes and poor working conditions. For these reasons, informal jobs are widely considered “bad jobs.” This association has motivated labor market policies to reduce informal employment and encourage transitions to formal jobs.

Nevertheless, the widely held assumption about the quality of informal employment has been challenged for several reasons. First, informal employment can offer unique benefits to workers such as autonomy and flexibility, which could appeal to some such as women with caring responsibilities. Informal jobs can also serve as a stepping stone for workers wanting to transition to the formal sector or to build their own small enterprises. Whether these benefits sufficiently outweigh the costs of being informally employed remains an open question.

A number of scholars have suggested that informal employment is heterogeneous in terms of its quality. While some informal jobs may be “bad jobs,” others may actually be “good jobs” when compared to alternatives in the formal and informal sectors. While this conceptualisation of informal employment has important implications for policy, the view that all informal jobs are qualitatively similar continues to dominate. Consequently, we have little evidence to address questions such as “Are informal jobs mostly good jobs or bad jobs?”, “What types of informal jobs can be considered good jobs?”, and “Who has the good (or bad) jobs in the informal economy?”

In a recently published paper, my co-authors and I explored the idea of good and bad jobs within informal employment using Indonesia as a case study. Indonesia is a good example because it has a vibrant informal economy that continues to provide jobs and livelihoods to millions of workers. It is also highly diverse in terms of its geography, population, and economic development. Additionally, Indonesia has undertaken significant policy and institutional reforms over the last few decades, including the introduction of the 2004 Manpower Law, which was widely believed to have aggravated the rates of informality across the country.

Defining what makes a good or a bad job is both conceptually and empirically challenging. We looked at income – as proxied by hourly earnings – to measure job quality. While income only captures one aspect of employment, it is consistently ranked as one of the most important job characteristics by Indonesians.

Comparing the average earnings of informal workers relative to formal workers who share similar socio-demographic characteristics, there is an earnings differential of approximately 11 percent after controlling for typical measures of human capital such as education and labor market experience. Looking at the overall income distribution, informal workers at the bottom of the earnings distribution – i.e., those that earn the lowest incomes – have the largest earnings differential out of all informal workers. Specifically, informal workers at the tenth percentile of the earnings distribution earn approximately 30 percent less than similar workers holding formal jobs. Moreover, the size of the differential narrows as earnings increase until it reaches just eight percent for informal workers at the 90th percentile of the earnings distribution. The size of the earnings differential is significantly smaller once time-invariant characteristics such as ability are accounted for.

We also examined the characteristics that distinguish informal workers with bad jobs from those with good jobs. To do this, we compared informal workers comprising the bottom 30 percent of the earnings distribution with other informal workers. In doing so, we found that gender, human capital, and industry of employment predicted the quality of informal jobs. In particular, women were more likely to be at the bottom 30 percent of the distribution compared to men. Informal workers with lower levels of educational attainment as well as those working in agricultural jobs were also more likely than other informal workers to hold bad informal jobs.

What do these findings mean?

Both good and bad informal jobs, at least insofar as earnings are concerned, can co-exist. Moreover, the earnings penalty facing many informal workers is not merely a result of human capital shortages, but also reflects a structural divide between the formal and informal sectors in Indonesia.

All in all, a “one-size-fits-all” policy approach is inappropriate in the context of informal employment. Rather, a more nuanced approach that targets the most disadvantaged informal workers and improves their labour market outcomes is needed. There is also a need for a well-rounded policy approach that simultaneously addresses both supply- and demand-side factors influencing informal employment. While improving the quality of the Indonesian workforce remains crucial, policies that encourage the creation of more and better formal jobs are equally important. More broadly, policymakers should consider expanding social safety nets to include informal workers. Ensuring universal access to key programs such as health insurance would go a long way towards improving the welfare of informal workers, particularly in the COVID-19 era.

Christine Ablaza is a Postdoctoral Research Fellow at the School of Social Science of The University of Queensland Australia. Her research focuses on different forms of disadvantage, with a particular focus on labor market issues.

This article is published under a Creative Commons License and may be republished with attribution.