The Impact of Job Security Regulations on Employment and Hours of Work: Empirical Evidence for Indonesia

This paper presents results of the effect of job security regulations in terms of dismissal costs on firms’ employment choice decisions. A measure of job security over the 1998-2003 for manufacturing sector at the ISIC 2 digit level is first constructed to show the extent of the labor market rigidity in Indonesia. The index is then used to assess the impact of job security on firms’ employment versus workers’ hours of work decision. We found significant negative effect of job security on employment of regular wage workers in the manufacturing sector overall as well as across segments of workers for females, and older workers. At the same time, firms’ appear to make adjustment through reducing the working hours of female and prime-aged full time workers while increasing the working hours of older part time workers. The results show that job security has exactly the opposite effect than it was intended to be, i.e. to have it more difficult and costlier for firms to dismiss workers. It has on the other hand been an inefficient and inequitable mechanism because it has reduced overall labor demand for females and prime-aged workers in a significant manner. Further research is urgently needed to formulate a job security regulation that will have the beneficial effect of protecting the workers while at the same time does not act as disincentive to the firms.