May 2014 Policy Brief 89222 Indonesia’s Higher Education System: How Responsive Is It to the Labor Market? Major Findings: Facts and • The number of workers with at least some tertiary education has doubled in the Numbers: past ten years; • In 2000 about 5 million workers had at least some tertiary education; by 2010 more than 10 million did; Likelihood to be • Tertiary graduates have higher possibility to be in the labor force compared to all hired: other levels of educational attainment; Skill match: • Tertiary education grads are generally finding jobs compatible with their skills and have the better working conditions than workers with lower levels of education; Supply and • Labor force growth demanded for 21% with tertiary degree, however Indonesia has demand: about 8% only; Returns to HE: • Returns to Higher Education (HE) is twice as high as that of senior secondary graduates; and several times higher than that of basic education degree holders; • On average, overall returns to HE remain high despite the large increase in the supply of graduates; • Returns to higher-level skills continue to be in high demand by private firms. Managers, leaders, and key technical personnel remain in demand and command premia on salaries and working conditions; • Subsequent policy changes have led to fewer high-paying teaching jobs and more low-paying contract job in teaching, with corresponding lower salaries and returns; Labor force • The segment of the labor force under age 35 has accounted for most of the increase composition: in supply of graduates; returns to this segment are trending downward slightly but still remain significantly above return to all other levels of education; Public vs. private • Returns to private sector employment for HE graduates continue to increase despite sector jobs: increases in supply of graduates seeking these jobs; • Erstwhile policies setting high salaries for teachers have attracted many HE grads to seek public sector employment. 1. Why this paper? Indonesia is at a development crossroads. A skilled labor force is crucial to leveraging these Indonesia’s economy is now one of the largest 20 opportunities. Without the right skills in the labor economies in the world, and it has ambitious plans to force, opening up to ASEAN may pose a problem achieve high-income status and join the G-7 by 2030. more than an opportunity. Without the right skills Yet the challenges it faces are daunting. Its status quo of urban migrants, urbanization will not bring about may not be enough to maintain current growth rates. the benefits of scale. Without the right skills of youth, Accelerating growth is therefore crucial to achieve the growing demand for higher quality products the intended goals. The growing middle class and and services may be met by importing them rather subsequent growth in the internal market, rapid than increasing the value added of Indonesian firms. urbanization, and the opening up of ASEAN markets And without ensuring that poorer segments of the bring both opportunities and challenges. population have the skills to benefit from these trends, 2 Policy Brief University graduates generally get jobs that match their skills the benefits will fail to trickle down to disadvantaged As the system expands so rapidly, it is important groups. Innovation-driven economies therefore to ensure that the sector is preparing graduates require a labor force with a high level of skills, and for the labor market. The recent literature on higher education is the main provider of these skills. skills highlights the complexity of the skills that are demanded and used in the labor market -- beyond The Government of Indonesia has made a great technical and cognitive skills to include behavioral commitment to education by drastically increasing and social skills -- and the need to see if there is investment in the sector and instituting important evidence of mismatches or of graduates entering the reforms at all levels of education. This has led to rapid labor market without the right skills. increases in access, especially for the poor and at the level of secondary education. The number of higher Analysis in Indonesia suggests that there are education students has doubled in five years, and reasons for concern in this regard. overall spending for higher education has tripled in  Most higher education graduates go into the real terms to over 30 trillion rupiah. Plans for further services sectors, especially public services expansion are aggressive – to triple the number of (mainly education, health, and government students in technical programs and increase the administration). Teacher training colleges in number of doctoral students fivefold by 2025, to particular account for almost 1/3 of all higher establish a community college in every district, and, education graduates entering the labor through higher secondary school enrolments and force, perhaps driven by the higher incomes more scholarships, increase the pool of entrants to promised by the Teacher Law of 2005. higher education institutions (HEIs) and get close to  There is evidence that other sectors are meeting its 2014 Gross Enrollment Rate (GER) target severely skill constrained, especially in of 30 percent. professional and managerial level positions. But despite the increase in access and the policy  The demand for Diploma 1 (D1) and Diploma changes, 2/3 of employers questioned in a recent 2 (D2) graduates is declining. By 2010, a survey complained that finding employees for graduate of a D1 or D2 program received a professional and manager positions was difficult salary only about 10 percent higher than a or very difficult1. This might be that employers have senior secondary graduate (versus 100 percent a hard time finding workers who are ready for new for D3 and above). technologies. However, it may also be a sign that the education sector is not providing graduates with the right skills. 1 World Bank. Skills for the Labor Market in Indonesia (2011) Indonesia’s Higher Education System: 3 How Responsive Is It to the Labor Market? 2. Why would institutions respond to employer demands? A framework Higher education institutions do not respond system will not respond to the demands in the labor naturally to the demands for skills in the labor market. market. This is one of the main disconnects seen across most Asian countries and identified in the Figure 1 puts this logic into a basic framework. In this recent World Bank regional report, Putting Higher framework, institutions are in the middle and have Education to Work (World Bank, 2012a). HEIs naturally potential and current students as their main “client”. tend to respond to their “clients”: current and They are either privately owned or publicly owned. potential students. They also tend to respond to their The connection with employers is therefore indirect: owners and regulators. So if students’ demands are only by aligning the demands of potential students not in line with the labor market or the regulatory and the regulations and incentives provided by the framework prevents institutions from responding to governance and financing system to the demands of the demands of their “clients”, the higher education the labor market will institutions respond. Figure 1: A framework of accountability of higher education institution owner and/or regulator Main clients for Government Recipients of the tertiary education graduated, but rarely institutions direct client Potential Fututre students Higher Education employers Institution (public/private) 1. Information - Labor market opportunities - Quality of institutions (quality assuarance) 2. Incentives - Autonomy and accountability This alignment between the labor market demands In Indonesia, both information and incentives and what students demand from institutions depends seem problematic. Information about labor market on a system, not a single policy. And while the policies opportunities is limited as is information about the in the system may differ, two key elements need to quality of institutions or programs of study – the latter, be in place: (1) providing information about labor largely because the national accreditation system is market trends and about the quality of institutions still underdeveloped. In terms of incentives, while and (2) providing the right incentives, which the lack of autonomy may limit the incentives to try requires autonomy and accountability, incentives for to respond to labor market demands for most public performance and opportunities for direct links between institutions, those that have some level of autonomy institutions and employers. and the large number of private providers should, in 4 Policy Brief principle, be more flexible in their response. However, HEIs on almost all fronts: operational costs, lecturer private institutions receive no public funding; as a and education personnel salaries, investments, and consequence, they may focus more on surviving development costs. For private HEIs, the government financially rather than on maximizing the returns of is only mandated to support professional allowances their graduates in the labor market which in turn may for lecturers, distinction allowances for professors, push them to establish low cost programs (e.g., in investment and development. administration, teacher training). More than half of all study programs in Indonesia What does the system look like? are located on Java and Bali, the most populated islands in the country. Another 30 percent of the There are five types of HEIs in Indonesia: total study programs are in Sumatra and Sulawesi. universities, institutes, schools of higher learning, polytechnics and academies. The recent Law Except for S3 programs, the majority of the on Higher Education introduced a sixth type, the study programs are accredited at levels B and community college. All forms of institutions can open C, echoing the need to focus not only on access and deliver study programs but also on quality. Such in the vocational stream; There are five types of HEIs in Indonesia: an accreditation level however, polytechnics, universities, institutes, schools of higher does not give a full and academies and community learning, polytechnics and academies. The detailed picture of quality; colleges cannot deliver recent Law on Higher Education introduced it is a measuring progress study programs under the a sixth type, the community college. All forms against the minimum academic stream. Each of institutions can open and deliver study standards in seven areas.4 can either be publicly or programs in the vocational stream; however, In general, study programs privately established. polytechnics, academies and community in public HEIs have a better colleges cannot deliver study programs under accreditation level than In total there are 3813 the academic stream. Each can either be those in private institutions. HEIs, with ten times as publicly or privately established. It remains an open question many private HEIs as whether HE “clients” (i.e., public ones; 96% of these potential students) are are managed by the Ministry of Education and well-informed regarding the various accreditation Culture (MoEC) and the Ministry of Religious Affairs levels granted by BAN-PT when they apply to study (MoRA). Most of the public HEIs are universities program(s). There are three separate websites that which also enroll most of the students. Private HEIs contain this information, but they are all somewhat have a different picture with more than 65 percent of different in their content, and they could be integrated the institutions taking the form of schools of higher to better inform potential students and employers as learning and academies with less student capacity well as policy makers. and/or enrollment. The latest available data register 17,005 study programs across all those streams, One out of every five HEIs students in Indonesia levels, types of HEIs and methods of delivery with the studies economics, law and social science, while exception of community colleges which will only start the majority of students in public HEIs enroll in opening study programs in late 20132. teacher training programs. The high enrollment in teacher training can be attributed to the increased In practice, senior secondary graduates tend to attractiveness of the teaching profession after the have limited options due to the (relatively) high enactment of the Teacher Law in 2005, providing cost to attend HEIs and the high competition certified teachers a professional allowance amounting to enter public HEIs. It is estimated that students to 100 percent of the basic monthly salary. There attending higher education spent an average of IDR was a growth of five times in the number of student 13 million a year for their studies (mostly in annual living costs)3. The government subsidizes public 4 (1) vision, mission, objective, aims and attaining strategies, (2) governance, leadership, the management system and quality 2 DGHE web page (www.evaluasi.dikti.go.id) accessed on June assurance, (3) students and graduates, (4) human resources, 17th, 2013 (5) curriculum, instruction and academic atmosphere, (6) 3 See world Bank (2013), Equity, Access and Success in Higher financing, facilities, infrastructure and information systems, (7) Education research, community service and partnerships. Indonesia’s Higher Education System: 5 How Responsive Is It to the Labor Market? 30% compared to 2001, but there was a decrease to approximately 25 percent between 2010 and 2012. But the expansion will resume as the country opens up new D1 and D2 programs under Community Colleges. The fact that more women are enrolling in HEIs may soften the rise in earning inequality between men and women as more women increase their productivity with more years of education. But expansion in access has not been translated into an expansion in equity. The majority of HE students come from the top two richest quintiles of the society, with the biggest proportion coming from the richest group. There is only a fraction of enrolled students who come from the poorest households. Female enrollment in tertiary education has surpassed male in the Nevertheless, their desire to enrol despite the cost and past decade. effort reinforces the perception that higher education is important and that there is an urgency to provide targeted scholarships in order to improve equity. enrolled in teacher training programs between 2005 and 2010 -- from 200,000 in 2005 to over one million students in 2010.5 There has been an impressive increase in the enrolment rate in the past decade, with female enrollment higher than male enrollment in recent years. By 2010, the GER had doubled to Figure 2: Number of students by household per capita consumption quintile, 2012 2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 Private Public 600,000 400,000 200,000 - Poorest Q2 Q3 Q4 Richest Source: Susenas, 20125 5 Teacher Reform in Indonesia: The Role of Politics and Evidence in Policy Making (2013a) 6 Policy Brief Students from the poorest quintiles opted more In summary, the higher education system for D1 and D2 programs in both public and private has grown quickly in recent years. Supply is HEIs, with a strikingly high share in private HEIs. concentrated in Java/Bali, followed by Sumatra. A bigger share of the richest entered D4 and above The growth in enrollment has come mainly from programs, while at D3 there seems to be a more the top two income quintiles, from D4/S1 programs balanced proportion among the different quintiles. (as opposed to D1-D3), and is biased towards social D1 and D2 entail less study time (only 1 to 2 years) sciences (economics, law) and teacher training. and focus on getting graduates to be employed in the Students from the poorest quintiles are no more labor market. Lower expenditures (i.e., tuition fees, likely to attend public institutions, but they are accommodation, books) as a result of less study time more likely to attend private D1 and D2 programs. may have been the rationale for the choice of these programs by poor households. 3. How do higher education graduates fare in the labor market? The natural test for how well graduates are prepared population of working age with basic education or to enter the labor force happens in the labor market. less and senior secondary education, respectively, is If graduates are active in the labor force, have “good out of the labor force, fewer than 10 percent of higher jobs” and get a high return on their education, education graduates are. This seems to indicate these are signs that their skills are demanded in the that labor market opportunity for higher education market. But this is not necessarily definitive evidence. graduates has been expanding significantly in recent Graduates may still not be realizing their potential if, years. for example, many are employed in sectors with low value-added or slow growth. An analysis of the data Most of these graduates are also employed supports the expansion of access to higher education in jobs according to their level of education. as there is clearly room for more higher education Most of the growth in jobs for higher education graduates in the labor market. However, it also shows graduates has been in professional and managerial a disconnect between institutions and labor market occupations, an indication that the demand for an demands, with the system producing graduates in advanced level of skills is high. By 2010, 60 percent sectors with very limited demand (teaching) while of higher education graduates were in “manager” others are starved of graduates needed by employers or “professional” functions which require a certain (manufacturing). degree of specialization and a high level of skills. An additional 30 percent were in semi-skilled functions How well do workers in the labor force without necessarily a high level of specialization, and with higher education do? about 10 percent were in low-skilled production and blue-collar jobs. Between 2001 and 2010, the labor force with higher education doubled, from almost 5 million The returns to education have remained relatively to almost 10 million. This is a very sizeable increase constant despite the big influx of graduates, which signals that there is room for a significant in the number of workers with higher education. expansion of the system. Thus, the demand for Despite this large increase, however, higher graduates seems to be keeping up with supply. education graduates only accounted for 8 percent of the workforce in 2010. The returns to higher education for young graduates have been declining in recent years. Higher education graduates are more likely to If the decline is due to a mismatch between what be active in the labor force and work under much graduates bring into the market and what employers better conditions (e.g., being employed for wages demand, this may be a problem, especially as the or owning a business) but are also more likely system continues to grow quickly. to be unemployed. While almost ¼ and 1/5 of the Indonesia’s Higher Education System: 7 How Responsive Is It to the Labor Market? Public sectors, especially education, has the highest absorption of new graduates. Industry, on the other hand, absorbs fewer number of graduates, followed by the financial sector and real estate Most of the increase in the number of graduates in The influx of new graduates from teacher training the labor force has been in urban areas, though in colleges has resulted in a sharp drop in the returns percentage terms the number of workers with higher to education in the public sector. Despite what the education in rural areas has more than doubled. And teacher certification law promises, the distribution of most of the growth was in Java and Sumatra: the teacher salaries is well below what the salary scale of two islands are host to 80 percent of graduates in a certified teacher promises. In fact, about 40 percent Indonesia (60 percent in Java alone). of teachers (or 1.8 million) are below the starting salary of a civil servant teacher under a different kind In which sectors are higher education of contract which means that their salaries are more graduates employed? likely to be driven by supply and demand. Most higher education graduates in Indonesia It is difficult to determine whether the higher -- almost 2/3 of the total – work in the service education sector is supplying what the labor market sectors, essentially public services (education, demands. In principle, social service sector jobs may health, government administration, and other add value to the economy and may be demanded in social services) with ¾ of them are employed in the the market. If enough public sector jobs are being education sector, mostly as teachers. Private services, offered, with the monetary and non-monetary which include wholesale trade, hospitality, the benefits associated with them, it is only natural that financial sector, construction, etc., employ the second the higher education sector reflects these demands. largest share of graduates – about 1/3 of graduates. This may explain the high demand for economics, The manufacturing sector employs a very small share law and social science degrees, as well as teacher of graduates – only 7 percent. Natural resource- training colleges. But what about other sectors of the related sectors (agriculture, fisheries, mining) employ economy? Teachers and government administrators a tiny share of graduates (3 percent). alone are unlikely to be the force for competitiveness in Indonesia. In fact, manufacturing and natural resource-related sectors are higher providers of jobs and bigger contributors to GDP growth. 8 Policy Brief 4. Identifying disconnects: Employment growth versus returns to education There are two main ways to identify skill constraints. out in 2008 by the World Bank, firms in non- One is asking employers who are the recipients of education services and manufacturing were already graduates and are best positioned to assess the complaining about difficulties filling skilled positions. skills of applicants and employees. The second is to In the manufacturing sector, 69 percent of firms said compare the growth in employment and in wages to it was hard or very hard to fill professional positions look for indications of supply constraints. If there is a (engineers, for example). A worrisome trend is that severe shortage of skilled graduates of a certain kind compared to other countries in the region, more (sector, type of degree), one would expect the returns employers in Indonesia consider worker skills as an to education to increase more in that group while obstacle to business. employment remains relatively constant. If graduates are too plentiful, however, employment may or may Asking employers also reveals important not grow, but the returns will not increase and may differences in the nature of the constraints: decline. quantity or quality of skills. In many sectors employers attribute the shortage of skills in the If we apply this logic to the different types of degrees sector to a lack of graduates more than to the quality (D1 D2, D3 and D4 and above), it is clear that the of the skills of graduates; in other, it is the opposite. demand for D1 and D2 graduates is decreasing While the data does not allow for much analysis at rapidly. The returns to these this level, these differences types of programs in the labor are further indication that the A worrisome trend is that compared market have fallen rapidly system is not responding to to other countries in the region, more over the last decade, and this demand. This disconnect is employers in Indonesia consider worker indicates that the demand for well illustrated in the palm oil skills as an obstacle to business. these types of programs as industry where local public they are currently delivered is higher education institutions very low, perhaps because of their poor quality. are not responsive enough to fulfill the demand for professional labor by the industry. There are several When applying the same logic to sectors of factors explaining such a disconnect: (1) internally, the employment, there is a clear shift in the choice of lack of connection between the curriculum at higher sector for new graduates, from private sector jobs education institutions and the needs of the industry; to public sector jobs. The sector that has received the lack of funds and experts to develop relevant the largest share of new graduates, by far, is the curricula; and the lack of teaching staff with industrial public sector, especially education. Industry, on the experiences and (2) externally, an observed lack of other hand, is the sector that has received the fewest incentives for civil service staff in HEIs to take the graduates, followed by the financial sector and real extra mile in communicating and institutionalizing estate . partnerships with industry. At the same time, the returns to education follow The evidence presented suggests a significant the opposite trend: returns in industry and private disconnect between the higher education system services are increasing, while returns in the public and the labor market. While the sector has almost service sector are decreasing, driven mainly by the one million students getting prepared to become returns to teacher training. The fact that this is not teachers, there are no plans to expand the current preventing increased demand for teacher training number of civil servant teachers. If one does not programs despite the known oversupply of teachers become a civil servant teacher, the returns to is an indication that the system is not responding to studying at a teacher training college are very small. labor market demands. Meanwhile, employment growth is slow in some sectors where returns are increasing. When coupled Asking employers reinforces the evidence of with employer surveys, the disconnect is evident. these mismatches. In an employer survey carried Indonesia’s Higher Education System: 9 How Responsive Is It to the Labor Market? 5. Improving the relevance of the system for current and future labor market needs: Focusing on the system The two key messages in this brief are as follows: to information about job opportunities, their choices are unlikely to reflect those opportunities.  there is still significant room in Indonesia to Some countries have established labor market absorb more higher education graduates, so observatories to address this lack of information. increasing access to higher education should These observatories are searchable data platforms be a priority to compare employability and salaries across  the current system is not responding to types of degrees or institutions, as well as provide the dynamics of the labor market thereby to information about the quality and cost of producing important skills mismatches. programs. They also provide forums and lists of job openings for both students and employers to Higher education relevance will depend on an use. Because these systems rely on the quality of effective system with information and incentives as the data available at the Ministry, it is crucial that the most important components of the system. As this institutions collect more and better data on their brief has shown, the shortages in these components graduates’ performance in the labor market. (information and incentives) are preventing the system from responding to labor market demands. 2. Future development of the higher education quality More concretely, the analysis suggests three areas for assurance and accreditation system and process improvement and subsequent recommendations: be guided by a road map and by clearly articulated objectives and action plans. The quality of the i. availability of labor market information, institutions and programs they are considering ii. an improved quality assurance system, to attend is another key piece of information that including accreditation, and parents and students need in order to make the iii. the financing and governance of institutions. right choice. Thus, the accreditation system should be transparent and agile, credible and current, to Policy Recommendations: be able to respond to the continued growth in programs and institutions. 1. To increase the knowledge of the system and to The availability of websites is a step in the right further unpack skill mismatches. In particular, a direction, but they need to be consolidated into complete mapping of the demand for and supply one expanded and improved system. Efforts to of skills in different economic sectors, including unify or better integrate them may help potential cognitive, technical and non-technical (social and students to make more informed decisions on the behavioral) skills, would provide a clearer picture quality of the various streams and of the thousands of what graduates are missing and where they of study programs across the country. Additional show strengths. Tools such as the World Bank information such as the cost of studying, the Skills toward Employment and Productivity (STEP) average income provided by future employers, survey underway in some countries in the region and scholarship opportunities would enrich the would be of great value for policy makers. integrated database. Such mapping only becomes useful, however, 3. Autonomy in decision making, a pre-requisite for if the resulting labor market information is both institutions to respond appropriately to incentives, increased in volume and better distributed. When should go hand in hand with accountability. HEIs parents and potential students do not have access should be given adequate incentives to fulfill their 10 Policy Brief objectives; these incentives should be aligned with performance indicators which cannot be too ambitious or complicated to monitor. HEIs’ performance should be measured by their responsiveness to the need of industries and communities, their contribution to quality teaching and academic excellence, and their contribution to local economic development. Because public and private institutions respond to different incentives, it is important to align them so that institutions respond to labor market demands. The specific financing of public institutions creates a clear set of incentives for these institutions. For example, non-autonomous universities which Comprehensive mapping of skills supply and demand is only useful if the resulting are financed based on inputs have many fewer labor market information is both increased in volume and better distributed incentives to adapt. Per capita financing of universities may increase their incentives to adapt and therefore attract more students. An even market demands. However, direct incentives stronger incentive to capture students is faced by in the form of financing based on results private institutions. Since they receive no public (employability of graduates, for example) may resources, they are likely to focus on low-cost work in Indonesia. programs.  a mix of per-student financing, performance- based financing, and competitive grants may Thus, because the way institutions are financed be best suited to address the wide variety of shapes their incentives, it is important that the institutions in Indonesia6. financing system provides the right incentives. These can include the following: 4. There may be a need to explicitly establish and  expand support to private institutions. Since incentivize active forms of collaboration between there are externalities from higher education higher education institutions and the private quality, public support of private providers is sector. These may take the form of contracts for justified; research, internships, and apprenticeships and staff exchange programs. Institutionalizing them  move to performance-based financing of might require providing specific incentives and public institutions. While moving to per-capita linking them more explicitly to financing and/or financing is a step in the right direction, it may accreditation. still not encourage adaptability to the labor 6 See options for Higher Education Financing in Indonesia (2013), draft Indonesia’s Higher Education System: 11 How Responsive Is It to the Labor Market? As parts of its support for the Indonesian Tertiary Education, DFAT (Department of Foreign Affairs and Trade, previously known as AusAID) through the World Bank has funded studies to support the Directorate General for Higher Education’s strategic planning and provide on-demand policy recommendations. The findings, interpretations and conclusions expressed in this publication does not necessarily reflect the views of the Government of Indonesia and the Government of Australia. Human Development Sector World Bank Office Jakarta Indonesia Stock Exchange Building, Tower 2, 12th Floor Jl. Jenderal Sudirman Kav. 52 – 53 Phone: (021) 5299 3000, Fax: (021) 5299 3111 www.worldbank.org/id/education