informal sector, and continued involvement will remain necessary in the immediate future. To the extent that isolated segments of the labor market continue to face problems of income insecurity, there may be opportunities for the governmen **t** o expand upon its current efforts. However, there is no compelling evidence indicating the need for a nationwide income security scheme for workers in the informal sector.

The argument against a new income security scheme is based on three conclusions of this study. First, contrary to the belief, widely held in Indonesia, that underemployment exceeds 40 percent of the workforce, data from a 1993 survey of Indonesian workers indicate that only about 12 percent of those in the informal sector (and even less in the formal sector) can be characterized as working too few hours.<sup>2</sup> Second, although this research yields evidence of underemployment, no empirical evidence of income insecurity in Indonesia exists to date; indeed, the connection between underemployment and income insecurity is dubious on theoretical grounds 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 employ private strategies to smooth consumption and investment patterns, and the Government of Indonesia already is very active in providing additional income security. Taken together, these three conclusions indicate that not only does empirical evidence fail to justify a major new policy response, but most of the evidence available suggests that such a response is not necessary at this time.

# I. The State of the Labor Market in the Informal Sector

The informal sector in Indonesia accounts for a large share of the total working population. As recently as 1993, the formal sector accounted for just under one-third of the workforce, leaving approximately 68 percent in the informal sector.<sup>3</sup> Of course, not everyone in the informal sector experiences income insecurity; an adequate household income levels (which permits savings), the possession of assets (which represents a form of insurance), and steady productive employment (which implies a stable source of income) all provide protection from unexpected fluctuations in household income levels.

Vulnerability in the informal sector is produced by a combination of low income levels and unstable income sources. When the poor and the near poor are forced to rely on infrequent and unpredictable employment, they are susceptible to unforeseen external shocks.<sup>4</sup> Uncertain incomes adversely affect household welfare levels, as they can distort

**2** Current trends in the labor market suggest that underemployment will decline over time. Labor flows from agricultural to non-agricultural activities and from the informal sector to the formal sector both imply higher employment rates and declining levels of underemployment.

3 Author's calculations using data from the 1993 SAKIERNAS survey. Respondents who described their primary form of work as either permanent workers _(buruh tetap)_ or workers _(buruhlkaryawan)_ were considered members of the formal sector, and these accounted for 31.8 percent of all workers in 1993. 4In addition to the roughly 15 percent of the population living below the official poverty line, there are many additional households living near the poverty line whose status as "non-poor" is probably better understood as "near poor," as a significant economic shock would likely push them below the poverty line.

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