Income insecurity and underemployment in Indonesia's informal sector

Recent legislation to provide income security to workers in Indonesia covers only those in the formal sector, initially. Workers in the informal sector are at an even greater risk of income loss and are more vulnerable to shocks due to lower average incomes. The author addresses the question of whether there is a rationale for income security schemes for Indonesia's informal sector. Research suggests that, through a range of existing public programs, Indonesia's government already provides important security mechanisms for informal sector workers, and must continue to do so. The author finds no compelling evidence of the need for a nationwide income security scheme for such workers. The author's argument against a new income security scheme is based on three main conclusions. First, only about 12 percent of the informal sector workforce and even less of the formal sector is underemployed. Second, this level of underemployment does not represent compelling empirical evidence of income insecurity. The connection between underemployment and income insecurity is problematic in theory and remains unsubstantiated by national survey data. Third, many mechanisms already exist in Indonesia to mitigate the disruption caused by income insecurity. Households and communities use private strategies to smooth consumption and investment and the government is already active in providing additional income security. Not only does empirical evidence fail to justify a major new policy response, but most evidence suggests that such a response is not presently necessary. The author suggests that any new initiative directed at income insecurity should be limited in scope and should focus on Eastern Indonesia and on remote or isolated areas of Java, areas with below average incomes. If concerns about income insecurity persist, money should be spend finding out where it actually is before implementing a nationwide scheme to deal with it.