Indonesia is at a developmentcrossroads. It successfully weathered the 2008 internationalfinancial crisis, and it has shown resilience in the currentturbulent times. Its economy is now one of the largest 20economies in the world and it has ambitious plans to achievehigh-income status and join the G-7 by 2030. Yet thechallenges it faces are daunting. As highlighted in therecent Indonesia Economic Quarterly report by the WorldBank, the status quo may not be enough to maintain currentgrowth rates in light of domestic and policy pressures. Andeven maintaining the current rates of growth will not bringthe country to high income status by the target year. Thispaper is organized as follows. Section two presents aframework to look at incentives and argues that without theright system in place, the tendency of the education sectorwill not necessarily be to align its supply with the demandsof the labor market. The section discusses some of keyfeatures of the system in Indonesia. Section three looks atthe performance of higher education graduates in the labormarket, their labor force participation, unemployment rates,the types of jobs they obtain and trends in the returns tohigher education. Section four takes patterns in employmentand returns to education, as well as employer surveys, tofind signs of misalignment between supply and demand in thetypes of degrees of graduates, the sectors where they areemployed and the skills they bring with them. Finally,section 5 concludes with some suggested policy directionsand future research.
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