# I1. Existing Income Security Mechanisms in Indonesia

The _SAKERNAS_ data illustrate clearly the dimensions of the problem of underemployment, and suggest that workers in the informal sector face not only low, but also uncertain, incomes. Many households in Indonesia, however, do not have to face the problem of income insecurity without any protection. Private household strategies to spread income uncertainty over time are the first line of defense. Even when these fail, the Government of Indonesia provides a second line of protection through an array of income and welfare programs. While these programs may not protect everyone from suffering the effects of income fluctuations, the problem of underemployment as described above cannot be understood without looking at the context of existing private and public income security mechanisms.

# _Private Income Security Mechanisms_

The danger to household welfare of income loss is not a new concern in Indonesia. Thirty years ago, before the introduction of modem irrigation and high-yielding varieties, incomes were much lower on average and, as a result, households were far more vulnerable to seasonal fluctuations. The Indonesian government, moreover, had far fewer resources than it does today to provide income insurance. In this context, households and communities were forced to develop their own forms of income security. Two strategies that are still seen in Indonesia today involve households diversifying income sources and communities provide a minimal levels of income security.

The household strategy of diversifying income sources may have been used in the past, but the booming urban and modern sector provides rural households with countless new opportunities. In fact, it may be wrong to look at many workers in the informal sector in isolation, as their income stream may be closely connected with extended families that remain in the rural sector; uncertain incomes in urban areas (even if they are more uncertain than incomes in rural areas) may increase the level of income security at the household level.

There is some evidence that this security mechanism is important in Indonesia. One study of urban poverty in Jakarta found that almost all poor households, including those living in extremely destitute conditions, remit significant portions of their urban incomes to family members remaining in rural areas.<sup>12</sup> These transfers, moreover, flow not only from urban to rural areas. Nearly three-fourths of rural households in Java, for example, made private transfers to other households.<sup>3</sup> The important implication of these transfers is that, even if income security for a given individual were to fall as that worker leaves agriculture for employment in the urban sector, overall income security for the household may improve through the diversification of income sources.'<sup>4</sup> In fact, the rural

> **12** M. J. Breinholt, 1992.

> **13** World Development Report, The World Bank, 1995, p. 87.

**14** In a recent paper on the connection between labor markets and poverty, A. Mason and J. Baptist provide strong evidence of income diversification, even as they describe a much less important role for

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