THE SOCIAL IMPACT OF ECONOMIC CRISIS
ON EMPLOYMENT IN INDONESIA


Dr. Carunia Mulya Firdausy
(Centre for economic and Development Studies-Indonesian Institute of Sciences)

 

ABSTRACT

The Indonesian monetary crisis, which later became a full blown economic crisis, has made the country from one of the world's fastest growing economy into its slowest growing economy. The impact of the crisis on social -economic aspects of national development until now still persist, and it takes years to come to fix the problems created from the crisis. This paper specifically addressed the social impact of the crisis on employment and examine policy implication and recommendation to reduce the unemployment problem due to crisis in Indonesia.

It was no doubt that the economic crisis has increased the number of unemployment in Indonesia. Using data from National Survey of Social-Economic 1998 it was estimated that the number of unemployment was about 4.5 million people (excluding the new entrants of 1998 and the backlog of 1997). To solve the unemployment problems, at the short term, the government should reintroduced policies and programs to reduce interest rate. The importance of the interest rate policy is mainly to encourage the industrial sector to expand their production in achieving their economies of scale. However, the interest rate policy should be carefully designed as to mitigate the impact on the rupiah and inflation. In addition, the role of foreign investment needs to increase in the future. Capital is complementary to labor. During the last few months tens of billion dollars have been sent out of the country causing the huge depreciation of the rupiah and domestic capital shortages of capital, partly causing the sharp rises in unemployment. Much of this domestic capital will never return. Therefore, direct foreign investment is needed to create income by employing the unemployed, facilitate the continued production of the physical capital of bankrupt enterprises, increase the utilization of capacity of manufacturing industries, produce complementary producer and consumer surpluses, facilitate the transfer needed technology and skills from overseas, expedite exports, provide financial and other required services. An finally, the future potential of conglomerates to contribute to economic development must not be squandered. However, the bad past practice of conglomerates, such as the anti-competitive rent yielding and other special privileges granted by the Government should be abolished so that those conglomerates can become efficient, competitive and socially productive enterprises. The rate and nature of the change in the business environment must be such that the potential of the conglomerates, as well as other large enterprises and SMEs (Small and Medium Enterprises) can be realized. However, this is not saying that crimes committed by conglomerate executives and owners should be forgiven. The success of the above policies and programs in overcoming the unemployment problem due to crisis is certainly subject to financial assistance from overseas and political stability in the country. Therefore, it is a must for the government on one hand to maintain the political stability in the country and to seek for international assistance to ensure that many Indonesian do not fall more deeply well below the poverty line. And on the other hand, the government should renew their economic activity and investment that can be sustain in the future as it was before the crisis time.

 

 

 

 

 

INTRODUCTION

The Indonesian monetary crisis, which later became a full blown economic crisis, has transformed the country from one of the world's fastest growing economy into its slowest growing economy. The average annual growth rate which used to be 8 percent since 1970 until 1996 declined significantly to -14 percent in 1998. One of the result of the negative economic growth is the increasing number of unemployment. According to M. Djuhari Wirakartakusumah (1999), the number of unemployed workers in 1998 was about 32 million people or 34 percent of the nation's 94 million labour force. It consists of 13.5 million job seekers and new labor entrants from earlier years and 18.5 million as critical unemployment due to the sharp drop in construction and manufacturing activities, especially among unskilled workers. And also it is because of an increasing number of firms on banks to close their doors and or a long draught in the agricultural sector (see World Bank, 1998; Soesastro, 1998; Firdausy, 1999).

This paper has two objectives. First, to examine critically the impact of the crisis on employment. Second, to examine the policy implication and recommendation to reduce the unemployment problem due to crisis in Indonesia. The organization of this paper is as follows. Section 2 discusses the impact of the crisis on the economy. This is followed by discussion of the social impact of economic crisis on employment in section 3. Finally in section 4, some concluding remarks and policy recommendation are drawn .

Table 1.

Indonesia : Selected Key Indicators, 1990-1996

(in percent of GDP, unless otherwise indicated)

 

1990

1991

1992

1993

1994

1995

1996

Internal Stability

Gross Domestic Product

Real GDP (% of growth rate)

Agriculture

Industry

Services

Consumption

Private

Government

National Saving

Private

Public

Investment

Private

Public

Inflation (CPI)

Fiscal Balance

 

External Stability

Current Account Balance

Net Capital Inflows

Of which

Net Portfolio Investment

Net Direct Investment

Other Capital

Net Error and Omissions

Reserves (in months of import)

Ratio M2 to Reserves (%)

Total External Debt (in percent of Exports of Goods and Services)

Short term Debt (in percent of Total External Debt)

Short Term Debt (in US$ billion)

Debt-Service Ratio (in percent of Exports of Goods and Services)

Exports (% of GDP)

Exports (% of growth rate)

Oil Price (US$ per barrel

 

 

9.0

2.3

13.2

7.6

63.3

54.4

9.0

27.5

19.1

8.4

30.1

23.5

6.6

9.5

0.4

 

 

-2.8

4.9

 

-0.1

1.0

3.3

0.7

 

4.7

 

514.0

 

222.0

 

15.9

 

11.1

 

 

30.9

26.6

15.9

28.64

 

 

8.9

2.9

11.8

9.3

64.1

55.0

9.1

26.9

19.8

7.1

29.9

21.7

7.7

9.5

0.4

 

 

-3.7

5.0

 

0.0

1.3

3.6

0.1

 

4.8

 

505.7

 

236.9

 

17.9

 

14.3

 

 

32.0

27.4

13.5

20.06

 

 

7.2

6.3

8.2

6.8

61.6

52.3

9.5

26.9

20.5

6.4

29.0

20.9

7.8

4.9

-0.4

 

 

-2.2

3.8

 

-0.1

1.4

3.5

-1.0

 

5.0

 

497.4

 

221.8

 

20.5

 

18.1

 

 

31.6

29.4

16.6

18.71

 

 

7.3

1.7

9.8

7.5

64.7

55.7

9.0

27.0

20.4

6.6

28.3

24.0

7.4

9.8

-0.6

 

 

-1.6

1.9

 

1.1

1.3

1.4

-1.9

 

5.2

 

557.1

 

211.9

 

20.1

 

18.0

 

 

33.8

25.9

8.4

14.14

 

 

7.5

0.6

11.1

7.2

65.5

57.4

8.1

26.4

22.0

6.4

30.3

24.0

6.3

9.2

0.1

 

 

-1.7

2.4

 

2.2

1.2

-0.9

-0.1

 

5.0

 

602.9

 

195.8

 

17.7

 

17.1

 

 

30.0

26.0

8.8

16.11

 

 

8.1

4.2

10.2

7.9

65.9

57.8

8.1

28.0

22.4

5.6

31.3

25.8

5.5

8.6

0.8

 

 

-3.7

4.6

 

2.0

2.2

1.3

-0.9

 

4.4

 

657.4

 

205.0

 

20.9

 

24.3

 

 

33.7

26.0

13.4

18.02

 

 

7.8

1.9

10.4

7.6

66.0

58.3

7.7

26.5

22.8

5.7

32.1

26.9

5.3

6.5

0.2

 

 

-4.0

5.0

 

n.a.

n.a.

n.a.

n.a.

 

5.1

 

633.3

 

194.0

 

24.8

 

29.3

 

 

33.0

26.2

9.7

22.78

Source: IMF, International Financial Statistics, various issues.

IMF, World Economic Outlook, various issues.

J.P. Morgan, World Financial markets, Indonesia, 27 Juny 1997, p. 69.

J.P. Morgan, Emerging Market data Watch, ASEAN Currency Risks After The Baht's Fall, 7 July 1997, p. 3-4.

 

2. IMPACTS OF THE CRISIS ON THE MACROECONOMY

The impacts of the crisis on Indonesian economy has been very severe in comparison to other countries in crisis (for details of social impact of crisis, see, for instance, World Bank 1998, ILO, 1998; and literature cited therein). In less than a year the economic success which has been achieved by this country for the last thirty-two years of development has been torn apart very badly. This country which was previously ranked by the World Bank as the lower-middle income groups together with Thailand, Malaysia and other NIES (Newly industrializing countries) now becomes as one of the poor country again. Table 1 shows some macroeconomic indicators prior to the crisis in that it can be seen that this country has an average high growth rate of 7 per cent per year between 1990-1996 with relative low inflation and there has been structural adjustment from agricultural based economy to industrial based economy , although there has been problems in terms of debt service ratio (DSR) and current account balances.

As there has been many problems with the economy prior to the crisis (details discussion on these problems can be seen, for instance, in Johnson, 1997; World Bank, 1998; Cole and Slade, 1998; Firdausy, 1999), the economy becomes more unstable when the crisis hit the country. The collapse of the economy can be seen not only in terms of negative economic growth (-14% in 1998), but also in terms of other macroeconomic variables (consumption, government expenditure, investment, and imports). In terms of consumption variable by GDP contribution, for instance, the crisis has made both household and government consumption growth rate becoming negatives. The growth rate of household consumption by GDP between 1997 and 1998 become negative of 4.9 per cent, whereas government consumption by GDP contribution was minus 15.3 per cent. Similarly, the growth of investment by GDP was minus 42.4 per cent, and import growth was minus 7.7 per cent. The only positive figure by GDP contribution was export variable (Table 2).

 

Table 2.

GDP by Consumption, Investment, Government Spending,

Export and Import, 1997 and 1998 (at constant 1993 prices)

 

Description

 

1997

(Rp. Billion)

 

1998

(Rp. Billion)

Percentage change

1997 -1998

  1. Consumption
  2. Government spending
  3. Investment
  4. Export

5. Import

173 917.4

31 700.8

139 724.8

121 157.9

139 796.1

260 368.3

26 839.9

80 525.9

137 487.1

129 056.1

-4.95

-15.33

-42.37

13.48

-7.68

Total

434 095.5

374 516.6

-13.72

Source : Calculated from National Survey of Social Economic, CBS, 1998.

 

 

 

 

The positive growth of export to GDP between 1997 and 1998 was partly due to the increase in the export growth of particular commodities, excluding wood products, electronics, footwear, rubber, palm oil (Table 3). While the negative growth rate of the particular export commodities is the result of some of difficulties of these industries to obtain import inputs, letter of credit and the lack of demand from overseas.

 

Table 3.

Value and Percentage changes of 10 export commodities

By Industrial Sector Classification

1997 and 1998

 

Group

Value (In US$ thousand)

 

Change

(%)

Share to Industrial Export

 

1997

1998

   

Textile

Wood

Gold, Silver and other metal

Electricity

Steel, machine & Automotive

Pulp and paper

Leather, leather goods & shoes

Rubber

Base Chemical

Oil Palm

10 Commodities Export

Total of Industrial Export

Percentage of 10 Commodities export to Total Export Industries

 

Percentage of 10 Commodities to Non-oil Export

Percentage of 10 Commodities to Total Export

2 136 139

1 875 451

334 298

998 615

571 498

421 083

768 593

686 978

306 090

575 010

8 673 756

10 455 393

82.96

 

70.18

52.30

2 425 759

1 549 335

1 014 383

873 305

825 180

726 937

532 457

520 464

507 043

359 148

9 334 011

11 542 304

80.87

 

69.76

57.73

13.56

-17.39

203.44

-12.55

44.39

72.64

-30.70

-24.24

65.65

-37.54

7.61

10.40

21.02

203.44

8.79

7.57

7.15

6.30

4.61

4.51

4.39

3.11

80.87

100.00

 

Source : CBS, calculated by Industrial and Trade Department, 1997 and 1998.

 

 

 

Furthermore, In terms of the growth by economic sector at constant 1993 prices, the crisis has made all sectors of the economy experienced substantial falls in activity in 1998, with the exception of agriculture and utilities. The sectors suffering the largest collapse have been construction and trade, hotels and restaurants. The growth of construction sector in 1998 declined to minus 37.5 per cent, while trade, hotels and restaurants fell to negative 20.6 per cent (Table 4).

 

Table 4

Real GDP growth by sector, 1997 and 1998

(Rp. billion at constant 1993 prices)

Description

1997

1998

Growth (%)

1. Agriculture, livestock, forestry and fisheries

64 289.5

64 532.0

0.38

2. Mining and Quarrying

38 385.9

37 101.7

-3.38

3. Manufacturing Industries

108 828.6

91 473.3

-15.95

4. Electricity, Gas and Water supply

5 498.6

5 576.8

1.42

5. Construction

35 040.6

21 902.9

-37.49

6. Trade, hotel & restaurant

73 503.6

58 330.1

-20.64

7. Transportation and communication

32 169 4

28 361.4

-11.84

8. Financial, Ownership and business

38 730.1

31 664.5

-18.24

9.Services

37 649.1

35 573.8

-5.51

Total

434 095.4

374 516.5

-13.72

Source : Calculated from National Accounting System, CBS,1998.

 

Apart from the negative effect on macro economy of the country, the crisis also hit badly the economy at the micro level. Many firms (even well-managed firms) have gone bankrupt simply because they fail to plan for an 80 per cent devaluation and a period of interest rates in excess of 100 per cent. This is because with a large collapse of the economy bankruptcies and sharp decrease in production of some firms have adverse effect on other firms which have sound management, causing them in turn to go bankrupt. Stiglitz (1998) suggests in a speech on September 19, 1998, that to minimize a loss organization capital of these firms, it is necessary to place a very high priority on maintaining production in the midst of a crisis, because decreases in production have very adverse effect on the poor through increasing unemployment.

Besides firms, many Indonesian banks also have become technically bankrupt, because of loans not being repaid, both because they were bad loans in the first place or they became bad loans because of the adverse effects the large depreciation had on their borrower, and secondly because they also borrowed in foreign currencies to relent in Rupiahs. Up to the March 1999 more than 54 commercial banks have been liquidated by the government, and it becomes more in the near future. In addition, the crisis had economic consequence on large numbers of rich and poor people. The effects on the poor operated through a contraction in the demand for labor and reduced transfer from wealthier family members, on the one hand, and through increases in commodity prices, especially for international traded goods on the other. According to Sumarto, et.al. (1999) from their study on the 4025 sub-districts (kecamatan) of Indonesia, they found that urban areas have, in general, been affected more severely than rural areas. This may reflect the fact that the crisis was initially an urban effects. Effects on rural areas, however, have been a secondary consequence of the urban effects.

Moreover, between provinces in the country both urban and rural areas in Java have been badly affected. This result presumably reflects the high degree of integration between rural and urban areas in Java, as reflected in high rates of labor mobility. In terms of island, minimal impacts were reported in large areas of Sumatra, Sulawesi and Maluku (Poppele, et.al.,1999). Other island experienced more severe effects includes East Timor, East and west Nusatenggara. But these areas were also affected by drought el nino. Another area of East Kalimantan was also negatively affected, but in this case the effect of the crisis was combined with the effects of fires (Warr, 1999).

On the basis of the above short explanations, it is clear that the economic crisis in Indonesia has almost destroyed economic fundamentals of the country which were constructed over the last 32 years under the Soeharto regime. The economic sector which seems survive from the crisis is agriculture, whereas other sectors experiencing negative growth. Therefore, to overcome the crisis the government should correct all of the economic variables that causes the crisis. These include the debt problems, financial problems, and deficiency in economic structure. With no serious concern on these problems, it is almost certain that economic crisis in Indonesia will never end.

 

 

3. THE IMPACT OF THE CRISIS ON EMPLOYMENT 3.1. Employment Situation Prior to the Crisis

As outline at the outset, the Indonesian development for over thirty-two years has been considered successful by the World Bank and others international organizations. These international organization even labeled the country as one of the miracle economic performers in 1990s. While others see it as a nascent New Industrializing Economy of Asia - on the verge of becoming a middle tier, industrialized economy in the region. They considered this country as a miracle as it has rapid economic growth for so long without triggering inflation. Normally, when economic growth continues for a certain amount of time, demand outstrips supply, and as a result raising inflation. But this normal economic cycle has not been the case for Indonesia.

The effect of the above rapid economic growth and associated policies before the economic crisis in mid 1997 have been favorable to labor, in terms of improved welfare, security and equity across the country. As can be seen at table 5, the proportion of overall open unemployment rate declined from 4.9 % in 1996 to 4.7 in 1997, white the median job search duration declined from 5.8 months in 1996 to 5.6 months in 1997. On the supply side, the growth labor force declined from 2.5% in 1996 to 1.4 percent in 1997. Similarly, the employment growth slowed down from 2.2% in 1996 to 1.6% in 1997. With GDP growth during 1990s over going 8%, average labor productivity grew at just under 6% per annum until mid 1997.

 

Table 5

Unemployment, Employment and Wages, 1992-1997

Indicator

1992

1993

1994

1996

1997

 

Open Unemployment:

% Labor Force 1)

Labor force (in Million)

 

Job search duration (months)2)

Male

Female

 

Underemployment (<35 hours/week) Employment growth

Labor force growth

Population growth (age 10+)

 

GDP growth

Productivity growth

Real wages growth

 

 

(4.6)

-

 

5.6

5.4

5.8

 

40.5

2.7

2.9

2.5

 

7.3

4.5

8.6

 

 

(4.6)

-

 

5.9

5.9

5.9

 

39.6

0.9

0.9

2.1

 

9.1

8.2

12.3

 

 

4.4

3.7

 

5.9

6.0

5.8

 

39.2

3.6

5.3

2.8

 

7.5

3.8

0.0

 

 

4.9

4.4

 

5.8

5.7

5.9

 

38.9

2.2

2.5

2.2

 

8.0

5.7

6.6

 

 

4.7

4.3

 

5.6

5.7

5.4

 

36.6

1.6

1.4

1.9

 

4.6

3.0

4.2

Notes :

  1. Open unemployment : SAKERNAS figures for 1992 and 1993 not comparable with

those for later years due to change in reference time period for

defining unemployment. Figures in bracket from National Socio-

Economic Survey, SUSENAS.

2) Job search duration : Median job search time in urban areas only (special tabulations

produced by CBS).

 

Source : Annual National Labor Force Survey, SAKERNAS (No survey carried out in

1995) cited from ILO, 1998.

Figures in bracket : National Socio-Economic Survey, SUSENAS.

In addition to these positive development, the structure of employment showed a marked improvement. Agricultural employment declined rapidly from 65.8 percent in 1971 to 44.0 percent in 1996, whereas industrial employment increased rapidly from 10.1 in 1971 to 18.4 percent in 1997. Trade and services increased from 24.1% in 1971 to 37.6 percent in 1996 (Table 6).

Table 6

Distribution and growth of employment by sector :

Indonesia, 1971-1996

 

sectors

Share of employment (%)

Growth of employment

(% p.a.)

1971

1996

Increment 71-96

         

Agriculture

65.8

44.0

23.1

1.2

M. Sector

       

Manufacturing

7.8

12.6

17.2

5.0

Construction

1.9

4.7

7.4

6.7

Mining

0.3

0.9

1.7

10.3

Public utilities

0.1

0.2

0.2

6.5

Sub total

10.1

18.4

26.3

5.5

S. Sector

       

Trade, restaurant and hotels

11.0

17.3

23.4

4.9

Govt, comm & personal service

10.4

15.1

19.7

4.3

Transport & communication

2.4

4.3

6.1

5.4

Financial services

0.3

0.9

1.4

7.9

Sub total

24.1

37.6

50.6

4.8

         

All sectors

100

100

100

2.9

N(m)

39.2

80.1

41.0

 

Note : Share of total employment growth absorbed in each sector.

Source: Center for Economic and Development Studies - LIPI, 1998.

 

A high growth rate of non-agricultural sector during 1991-1997 was partly due to labor movement from agricultural sector to non-agricultural sector (Manning, 1998). A large labor movement from agricultural sector (or traditional sector) to non-agricultural sector before the crisis was the result of better educational attainment of workers, the rise of skilled and professional workers, and limited agricultural land. Consequently, many workers from rural areas move to urban areas looking for a better wage income.

Although there was significant improvement in the structure of employment and earnings before crisis, it does not necessary mean that there are no problems with the labor markets. Manning (1998) observed that there are at least three problems, namely, a high proportion of employment in low productivity, a large traditional and mainly rural non-agricultural sector in which family and micro enterprises dominated and returns were commonly much lower than daily wages in agriculture, and a tiny modern sector, especially outside government (and military) employment, epitomized by a very small proportion of professional and other white-collar and educated workers.

Therefore, one may conclude that the strong economic performance before crisis was accompanied by significant gains in employment and labor income, and economic growth was employment friendly to a surprising extent. However, there are still problems associated with the labor market change before the crisis in mid 1997. Formal sector employment in the country still lagged in response to economic change. The agricultural sector still continued to absorb unskilled workers, informal sector work widespread and continued to grow in the cities and rural self-employed and family work still contributed a major share of total employment.

 

3.2 Employment situation in the crisis time

Employment situation in the crisis period was very much different in comparison with before the crisis. In the crisis period, there is a significant growing number of unemployment. However, the true number of unemployed workers in the crisis period is still blurred. According to ILO (1998), for instance, the number of unemployed in 1998 was about 15 million people or 20 percent of the total 93 million people labor force. The National Planning Board (Bappenas) estimated the number of unemployed about 12.4 million people, whereas the Ministry of Manpower estimates about 13.7 million people (Table 7). Johnson (1998) estimated the number of unemployed was 15.4 million or 17 percent of the total labor force. ILO (1998) stated that the discrepancy between the estimates is due to two main factors, namely their different estimates of economic contraction in 1998, and their estimates of backlog of job seekers from earlier years.

 

Table 7.

Estimate of Crisis-Induced Unemployment in 1998

 

Persons (Million)

Percentage

 

MoM1)

BAPPENAS2)

Task

Force3)

MoM

BAPPE-

NAS

Task

Force

 

Backlog 1997

 

New entrants 1998

Sub-total Job Seekers

Displaced Workers

 

Total Unemployment (U)

 

Labor Force (LF)

 

Unemployment Rate (U/LF)

 

5.80

 

2.70

8.50

5.20

 

13.70

 

92.60

 

14.8%

 

5.80

 

2.80

8.60

3.84

 

12.44

 

91.53

 

13.6%

 

2.48

 

1.40

3.88

5.41

 

9.29

 

92.60

 

10.0%

 

42

 

20

62

38

 

100

 

47

 

23

69

31

 

100

 

27

 

15

42

58

 

100

Notes :

  1. Ministry of Manpower (MoM) : Assumes 0 % economic growth in 1998 and uses reported

dismissals.

2) BAPPENAS : Assumes 10 % contraction in 1998 and uses sectoral elasticity.

3) Task Force : Assumes 30 % contraction in 1998 incorporated sectors and uses employment elasticity for wage employment only.

4) Important Remark : Task Force estimate of 5.4 million displaced workers includes 2.6 workers re-absorbed in formal/informal employment.

Therefore open unemployment is limited to 6.7 million persons or 7.2 % of labor force.

Source : ILO,1998.

 

This study using data from National Accounting System Survey 1998 calculated that the number of unemployment was about 4.5 million people (excluding the new entrants in 1998 and the backlog in 1997). This number of unemployed was the result of retrenchment of workers in 1998. Details of the number of retrenchment worker by sector are exhibited at Table 8.

 

Table 8.

Number of employment by sector, 1997 and 1998

(in thousands)

Description

1997

1998

1998 - 1997

1. Agriculture, livestock, forestry and fisheries

35 848.63

36 280.98

432.35

2. Mining and Quarrying

896.61

1 074.59

177.98

3. Manufacturing Industries

11 214.82

10 617.19

-597.63

4. Electricity, Gas and Water supply

233.24

241.30

8.06

5. Construction

4 200.20

2 807.07

-1393.13

6. Trade, hotel & restaurant

17 221.18

14 944.81

-2 276.37

7. Transportation and communication

4 137.65

3 510.50

-627.15

8. Financial, Ownership and business

656.72

558.91

-97.81

9.Services

12 640.69

12 559.20

-81.49

Total

87 049.76

82 594.55

-4 455.21

Source : Calculated from CBS National Accounting System Survey, 1998.

 

From Table 8, it can be seen that the crisis has given a great impact on trade sector, followed by construction sector and transportation sector. The agricultural and mining sectors have been able to survive. These sectors (especially agriculture) were even able to absorb the workers retrenched from other sector. This suggests that the agricultural sector has been the important sector to absorb retrench workers from other sectors. And hence, this sector should be more developed in the future economic development in the country.

The sectoral composition of the retrench workers varies between sectors. This study estimates that of nine sectors, trade and construction sectors have the largest number of their workers being laid-off. A large number of workers in these sectors being laid-off partly as the result of the negative growth of these sectors. The construction sector, for instance, with the growth rate of -37.5 percent has laid-off 1.4 million of its workers. Whereas the trade sector with negative growth of 20.1 percent has laid-off 2.3 million workers (Table 9).

 

Table 9.

Relationship Between Economic Growth and Retrenched Workers

By Sector, 1997 and 1998

Description

Growth Rate (%)*

Retrenched workers

(thousand)

Retrenched Workers (thousand per 1% Fluctuation of GDB

1. Agriculture, livestock, forestry and fisheries

+0.38

+432.35

+1138

2. Mining and Quarrying

-3.35

+177.98

***

3. Manufacturing Industries

-15.95

-597.63

-38

4. Electricity, Gas and Water supply

+1.42

+8.06

+6

5. Construction

-37.49

-1393.13

-37

6. Trade, hotel & restaurant

-20.64

-2 276.37

-110

7. Transportation and communication

-11.84

-627.15

-53

8. Financial, Ownership and business

-18.24

-97.81

-5

9.Services

-5.51

-81.49

-15

Total

-13.72

-4 455.21

-325

Source: Calculated from CBS National Accounting System survey, 1998.

 

 

Note that at Table 9, it can be estimated that for one percent of growth changes it leads to changes of 325 thousand workers. In other words, an increase (decrease) of 1 percent growth leads to a rise (decline) of 325 thousand workers. Therefore, economic growth is very essential to generate employment in the country.

 

Furthermore, the crisis also affected the employment productivity in each sector of the economy. As can be seen at Table 10, between 1997 and 1998 the average employment productivity by sector declined quiet significantly from Rp. 5 million to Rp. 4.5 million. The only exception is transportation sector. The estimation of productivity is done by dividing GDP with the number of workers in the sector. Therefore, the crisis does not only create unemployment, but also it leads to low productivity of labor in each sector, excluding transportation and communication sector.

Table 10.

Average employment Productivity by Sector

1997 and 1998 (Rp. Million)

Descriptions

1997

1998

1. Agriculture, livestock, forestry and fisheries

1793.4

1778.7

2. Mining and Quarrying

42812.3

34526.4

3. Manufacturing Industries

9704.0

8615.6

4. Electricity, Gas and Water supply

23574.9

23111.5

5. Construction

8342.6

7802.8

6. Trade, hotel & restaurant

4268.2

3903.0

7. Transportation and communication

7774.8

8079.0

8. Financial, Ownership and business

58975.1

56654.0

9.Services

2978.4

2832.5

Average

4986.8

4534.4

Source : CBS, National Accounting System Survey 1998.

In terms of employment equivalent, it was estimated that the employment equivalent has declined. In 1997 the total employment equivalent was 89.5 million employment equivalent, while in 1998 it decreased to 78.7 million employment equivalent. The decline in employment equivalent of the economy in 1998 was the result of the decrease of employment equivalent of each sector in the country, except agricultural sector (Table 11).

 

Table 11.

Number of Employment Equivalent (EQ) by Sector 1997 and 1998

(Thousand EQ)

Descriptions

1997

1998

1. Agriculture, livestock, forestry and fisheries

31078.01

31371.50

2. Mining and Quarrying

742.77

500.38

3. Manufacturing Industries

13124.10

10255.21

4. Electricity, Gas and Water supply

307.45

264.73

5. Construction

5585.98

2869.29

6. Trade, hotel & restaurant

18947.76

15296.19

7. Transportation and communication

4882.79

3732.54

8. Financial, Ownership and business

858.99

646.29

9.Services

13972.77

13823.97

Total

89500.60

78760.10

Source : Calculated from National Accounting System survey, 1997 and 1998.

 

 

Comparison between Table 8 and Table 11 can give description regarding the average of hours of employment in the economic sector. On the average, it was calculated that in 1997 the average hours of Indonesian workers for a week was 40.9 hours, while in 1998 it increased to 41.08 hours per week. This suggests that in the crisis time the workers slightly worked more harder than before crisis as they need to find more earnings to fulfill their daily needs which increased due to crisis (Table 12).

 

Table 12.

Average hours per week of Employment by Sector

1997 and 1998 (Hours)

Sectors

1997

1998

1. Agriculture, Livestock, Forestry and Fisheries

40.86

40.86

2. Mining and Quarrying

40.81

40.69

3. Manufacturing Industries

41.10

41.24

4. Electricity, Gas and Water Supply

41.17

41.27

5. Construction

41.25

41.99

6. Trade, Hotel and Restaurant

41.04

41.27

7. Transportation and Communication

41.09

41.39

8. Financial, Ownership and business

41.23

41.54

9. Services

41.07

41.11

Average

40.99

41.08

Source : Calculated from National Accounting System Survey, 1997 and 1998.

 

However, although the workers have worked more hours than before the crisis , the income earnings of workers in 1998 has been relative lower than in 1997. As can be seen at Table 13 the average income per employment equivalent decreased from Rp. 3.7 million in 1997 to Rp. 3.5 million in 1998, although the workers have increased their average hours of worked per week. This implies that wage of the workers decreased from Rp. 70.7 thousand per week in 1997 to Rp. 68 thousands per week in 1998. Hence, the crisis has made the workers' average incomes lower than before the crisis. The implication of this finding is that there will be a declining purchasing power of the workers in the crisis time.

 

Table 13.

Average Wage per Employment Equivalent per Year

By Sector, 1997 and 1998 (Rp. Thousand)

Sectors

1997

1998

  1. Agriculture, Livestock, Forestry and Fisheries

2230.55

2058.95

2. Mining and Quarrying

14304.69

18764.44

3 . Manufacturing Industries

4635.48

5607.22

4. Electricity, Gas and Water Supply

6114.07

7428.51

5. Construction

5153.93

5799.32

6. Trade, Hotel and Restaurant

3824.89

4133.66

7. Transportation and Communication

3155.38

3212.56

8. Financial, Ownership and business

24315.72

21400.19

9. Services

3478.37

2833.75

Average

3673.96

3533.72

Source : Calculated from National Accounting System Survey, 1997 and 1998.

 

 

In terms of real wages per hour, it was estimated that the average real wages per hour of workers declined significantly from Rp. 1724 to Rp 969 (Table 14). The decline of real wages per hour was due partly to inflation in 1998 with an average of 78 percent. Therefore, it can be concluded that the crisis has made a large number of workers being laid-off. It also leads to a decreasing the average income earnings, though the workers have increased their average hours per week. The only sector which had ability to survive to absorb more workers was agricultural sector.

 

Table 14.

 

Average Real Wage per Equivalent per Hours Work

By Sector, 1997 and 1998 (In Rp.)

Descriptions

1997

1998

  1. Agriculture, Livestock, Forestry and Fisheries

1050

568

2. Mining and Quarrying

6740

5193

3 . Manufacturing Industries

2169

1531

4. Electricity, Gas and Water Supply

2856

2027

5. Construction

2403

1555

6. Trade, Hotel and Restaurant

1792

1128

7. Transportation and Communication

1477

874

8. Financial, Ownership and business

11342

5801

9. Services

1629

777

Average

1724

969

Source : Calculated from National Accounting System Survey, 1997 and 1998.

 

The crisis also gives an impact on structural employment. As shown in Table 15, except agricultural sector, other sectors experienced a decline in the number of employment in the sector. Industrial sector, for instance, in 1997 employed 19 percent of the labor force, but in 1998 it decreased to 17 percent. Similarly with the trade and service sector. Furthermore, between urban and rural areas, it was calculated that the number of employment worked in rural areas increased from 66 percent to 71 percent in 1998.This suggests many displaced workers from the manufacturing sector have been forced to work in the informal sector because they cannot afford to remain unemployed for very long.

 

 

Table 15.

Structural Changes in Employment, 1986-1998

 

 

Description

 

Total Employment (Million)

 

Percentage

 

 

1986

 

1990

 

1997

 

1998

 

1986

 

1990

 

1997

 

1998

Agriculture

Industry

3. Trade

4. Services

Total

 

By Location

Urban

Rural

Total

 

By Formal/Informal

Employment

  1. Formal

2. Informal

Total

37.6

10.6

9.8

10.1

68.3

 

 

13.6

54.7

68.3

 

 

 

 

17.6

50.8

68.3

42.4

10.4

11.1

12.2

75.9

 

 

18.3

57.6

75.9

 

 

 

 

21.1

54.8

75.9

35.8

16.5

17.2

17.4

87.0

 

 

29.6

57.5

87.0

 

 

 

 

30.5

56.6

87.0

36.4

14.2

18.3

15.4

84.3

 

 

24.2

60.1

84.3

 

 

 

 

25.1

59.1

84.3

55

8

23

13

100

 

 

20

80

100

 

 

 

 

26

74

100

 

 

56

14

15

16

100

 

 

24

76

100

 

 

 

 

26

74

100

41

19

20

20

100

 

 

34

66

100

 

 

 

 

35

65

100

43

17

22

18

100

 

 

29

71

100

 

 

 

 

30

70

100

Source : Calculated from National Labor Force Survey, 1997, cited in ILO, 1998.

 

To sum up : the present economic crisis in Indonesia has created a serious problem of unemployment. Even though theoretically depreciation makes tradeable export goods of the country more competitive with the world, with this economic crisis the very high interest rate, instability in the exchange rate, wide spread between the buying and selling foreign exchange rates, letters of credit not being accepted overseas, and partial breakdown of law and order have threatened the viability of many industries in the country. Therefore, a strong effort must be made to prevent the collapse of the industries in the short run, which would have enormous costs in the long run both in terms of forgone income and much higher unemployment. Once the industries have collapsed it will be very difficult to rebuild them. In addition to the importance of the development of small and medium-sized enterprises (SMEs) and cooperatives in absorbing the unemployment, in most cases the SMEs will need to be quite large in order to be able to supply competitively the world markets with a sufficiently large variety of products and adequate quality control in large volume.

 

4. CONCLUSIONS AND POLICY RECOMMENDATIONS

It was examined that the economic crisis has given serious impact on the Indonesian economy. Of the greatest social impact of the crisis has been the increasing number of unemployment. This problem raised mainly as the result of hyper depreciation of rupiah in terms of US dollar which further lead to the collapse of many industries in the economy, especially construction sector, banking and other formal sectors. In addition, a higher interest is further contributed to the increase of unemployment as many industries cannot continue their production.

Apart from the short-term public works programs (e.g. the Social Safety Net Programs), urgent measures to strengthen and stabilize the rupiah are required . In addition, the government should implement measures to promote employment-friendly economic growth. This can be done for instance by intensifying policies and programs toward agricultural sector and the expansion of small and medium enterprises of manufacturing sector in general. For the latter, this is considered important as SMEs can be labour-intensive. However, in order to compete in the global markets, the SMEs will need to be quite large to be able to supply competitively to the world markets with a sufficiently large variety of products and adequate quality control in large volumes.

Furthermore, the government should reintroduced policies and programs to reduce interest rate. The importance of the interest rate policy is mainly to encourage the industrial sector to expand their production in achieving their economies of scale. However, the interest rate policy should be carefully designed as to mitigate the impact on the rupiah and inflation.

The role of foreign investment needs to increase in the future. Capital is complementary to labour. During the last few months tens of billion dollars have been sent out of the country causing the huge depreciation of the rupiah and domestic capital shortages of capital, partly causing the sharp rises in unemployment. Much of this domestic capital will never return. Therefore, direct foreign investment is needed to create income by employing the unemployed, facilitate the continued production of the physical capital of bankrupt enterprises, increase the utilization of capacity of manufacturing industries, produce complementary producer and consumer surpluses, facilitate the transfer needed technology and skills from overseas, expedite exports, provide financial and other required services.

The future potential of conglomerates to contribute to economic development must not be squandered. However, the bad past practice of conglomerates, such as the anti-competitive rent yielding and other special privileges granted by the Government should be abolished so that those conglomerates can become efficient, competitive and socially productive enterprises. The rate and nature of the change in the business environment must be such that the potential of the conglomerates, as well as other large enterprises and SMEs (Small and Medium Enterprises) can be realized. However, this is not saying that crimes committed by conglomerate executives and owners should be forgiven.

The success of the above policies and programs in overcoming the unemployment problem due to crisis is certainly subject to financial assistance from overseas and political stability in the country. Therefore, it is a must for the government on one hand to maintain the political stability in the country and to seek for international assistance to ensure that many Indonesian do not fall more deeply well below the poverty line. And on the other hand, the government should renew their economic activity and investment that can be sustain in the future as it was before the crisis time.

 

 

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