The Social Impact of Economic Crisis On Employment in Indonesia

4/14/2016
THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA
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).
http://www.ismea.org/asialist/Firdausy.html
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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
Real GDP (% of growth rate)
9.0
8.9
7.2
7.3
7.5
8.1
7.8
Agriculture
2.3
2.9
6.3
1.7
0.6
4.2
1.9
Industry
13.2
11.8
8.2
9.8
11.1
10.2
10.4
Services
7.6
9.3
6.8
7.5
7.2
7.9
7.6
Consumption
63.3
64.1
61.6
64.7
65.5
65.9
66.0
Private
54.4
55.0
52.3
55.7
57.4
57.8
58.3
Government
9.0
9.1
9.5
9.0
8.1
8.1
7.7
National Saving
27.5
26.9
26.9
27.0
26.4
28.0
26.5
Private
19.1
19.8
20.5
20.4
22.0
22.4
22.8
Public
8.4
7.1
6.4
6.6
6.4
5.6
5.7
Investment
30.1
29.9
29.0
28.3
30.3
31.3
32.1
Private
23.5
21.7
20.9
24.0
24.0
25.8
26.9
Public
6.6
7.7
7.8
7.4
6.3
5.5
5.3
Inflation (CPI)
9.5
9.5
4.9
9.8
9.2
8.6
6.5
Fiscal Balance
0.4
0.4
-0.4
-0.6
0.1
0.8
0.2
Current Account Balance
-2.8
-3.7
-2.2
-1.6
-1.7
-3.7
-4.0
Net Capital Inflows
4.9
5.0
3.8
1.9
2.4
4.6
5.0
Net Portfolio Investment
-0.1
0.0
-0.1
1.1
2.2
2.0
n.a.
Net Direct Investment
1.0
1.3
1.4
1.3
1.2
2.2
n.a.
Other Capital
3.3
3.6
3.5
1.4
-0.9
1.3
n.a.
Net Error and Omissions
0.7
0.1
-1.0
-1.9
-0.1
-0.9
n.a.
Internal Stability
Gross Domestic Product
External Stability
Of which
Reserves (in months of import)

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Ratio M2 to Reserves (%)

Total External Debt (in percent
of Exports of Goods and
Services)
Short term Debt (in percent of
Total External Debt)
4.7
4.8
5.0
5.2
5.0
4.4
5.1
514.0
505.7
497.4
557.1
602.9
657.4
633.3
222.0
236.9
221.8
211.9
195.8
205.0
194.0
15.9
17.9
20.5
20.1
17.7
20.9
24.8
11.1
14.3
18.1
18.0
17.1
24.3
29.3
30.9
32.0
31.6
33.8
30.0
33.7
33.0
26.6
27.4
29.4
25.9
26.0
26.0
26.2
15.9
13.5
16.6
8.4
8.8
13.4
9.7
28.64
20.06
18.71
14.14
16.11
18.02
22.78
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
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,
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Export and Import, 1997 and 1998 (at constant 1993 prices)
Percentage change
Description
1. Consumption
2. Government spending
3. Investment
4. Export
5. Import
Total
1997
1998
(Rp. Billion)
(Rp. Billion)
173 917.4
260 368.3
-4.95
31 700.8
26 839.9
-15.33
139 724.8
80 525.9
-42.37
121 157.9
137 487.1
13.48
139 796.1
129 056.1
-7.68
434 095.5
374 516.6
-13.72
1997 -1998
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
Value (In US$ thousand)
Change
Group
Share to
Industrial
Export
(%)
1997
1998
Textile
2 136 139
2 425 759
Wood
1 875 451
1 549 335
Gold, Silver and other metal
334 298
1 014 383
203.44
8.79
Electricity
998 615
873 305
-12.55
7.57
Steel, machine & Automotive
571 498
825 180
44.39
7.15
Pulp and paper
421 083
726 937
72.64
6.30
13.56
-17.39
21.02
203.44
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Leather, leather goods & shoes
768 593
532 457
-30.70
4.61
Rubber
686 978
520 464
-24.24
4.51
Base Chemical
306 090
507 043
65.65
4.39
Oil Palm
575 010
359 148
-37.54
3.11
10 Commodities Export
8 673 756
9 334 011
7.61
80.87
Total of Industrial Export
10 455 393
11 542 304
10.40
100.00
Percentage of 10 Commodities export to Total

Export Industries
Percentage of 10 Commodities to Non-oil

Export
82.96
80.87
70.18
69.76
52.30
57.73
Percentage of 10 Commodities to Total Export
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
1. Agriculture, livestock, forestry and fisheries
1997
1998
Growth (%)
64 289.5
64 532.0
0.38
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
38 730.1
31 664.5
-18.24
2. Mining and Quarrying
8. Financial, Ownership and business

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9.Services
Total
37 649.1
35 573.8
-5.51
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
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Unemployment, Employment and Wages, 1992-1997

Indicator
1992
1993
1994
1996
1997
Open Unemployment:
(4.6)
(4.6)
4.4
4.9
4.7
3.7
4.4
4.3
5.6
5.9
5.9
5.8
5.6
5.4
5.9
6.0
5.7
5.7
5.8
5.9
5.8
5.9
5.4
40.5
39.6
39.2
38.9
36.6
2.7
0.9
3.6
2.2
1.6
Labor force growth
2.9
0.9
5.3
2.5
1.4
Population growth (age 10+)
2.5
2.1
2.8
2.2
1.9
GDP growth
7.3
9.1
7.5
8.0
4.6
Productivity growth
4.5
8.2
3.8
5.7
3.0
Real wages growth
8.6
12.3
0.0
6.6
4.2
% Labor Force 1)
Labor force (in Million)
Job search duration (months)2)

Male
Female
Underemployment (<35 hours/week)

Employment growth
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 SocioEconomic 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 :
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Indonesia, 1971-1996
Share of employment (% )
sectors
Agriculture
1971
1996
Growth of employment
Increment 71-96
(% p.a.)
65.8
44.0
23.1
1.2
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
10.1
18.4
26.3
5.5
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
M. Sector
Sub total
S. Sector
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.
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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)
MoM 1 )
BAPPENAS2 )
Percentage
Task
MoM
Force3 )
BAPPE-
Task
NAS
Force
Backlog 1997
5.80
5.80
2.48
42
47
27
New entrants 1998
2.70
2.80
1.40
20
23
15
Sub-total Job Seekers
8.50
8.60
3.88
62
69
42
Displaced Workers
5.20
3.84
5.41
38
31
58
Total Unemployment (U)
13.70
12.44
9.29
100
100
100
Labor Force (LF)
92.60
91.53
92.60
14.8%
13.6%
10.0%
Unemployment Rate (U/LF)

Notes :
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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
35 848.63
36 280.98
432.35
896.61
1 074.59
177.98
11 214.82
10 617.19
-597.63
233.24
241.30
8.06
4 200.20
2 807.07
-1393.13
17 221.18
14 944.81
-2 276.37
4 137.65
3 510.50
-627.15
656.72
558.91
-97.81
12 640.69
12 559.20
-81.49
87 049.76
82 594.55
-4 455.21
5. Construction
9.Services
Total
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
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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
Retrenched Workers
(thousand per 1%
Fluctuation of GDB
(thousand)
1. Agriculture, livestock, forestry and
fisheries
+0.38
+432.35
+1138
-3.35
+177.98
***
-15.95
-597.63
-38
+1.42
+8.06
+6
5. Construction
-37.49
-1393.13
-37
-20.64
-2 276.37
-110
-11.84
-627.15
-53
-18.24
-97.81
-5
-5.51
-81.49
-15
-13.72
-4 455.21
-325
9.Services
Total
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
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each sector, excluding transportation and communication sector.

Table 10.
Average employment Productivity by Sector
1997 and 1998 (Rp. Million)
Descriptions
1997
1998
1793.4
1778.7
42812.3
34526.4
9704.0
8615.6
23574.9
23111.5
5. Construction
8342.6
7802.8
4268.2
3903.0
7774.8
8079.0
58975.1
56654.0
2978.4
2832.5
4986.8
4534.4
9.Services
Average
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
31078.01
31371.50
742.77
500.38
13124.10
10255.21
307.45
264.73
5585.98
2869.29
5. Construction
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18947.76
15296.19
4882.79
3732.54
858.99
646.29
13972.77
13823.97
89500.60
78760.10
9.Services
Total
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
1. Agriculture, Livestock, Forestry and Fisheries
1997
1998
40.86
40.86
40.81
40.69
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
41.23
41.54
41.07
41.11
40.99
41.08
9. Services
Average
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
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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
2230.55
2058.95
14304.69
18764.44
3 . Manufacturing Industries
4635.48
5607.22
6114.07
7428.51
5. Construction
5153.93
5799.32
3824.89
4133.66
3155.38
3212.56
24315.72
21400.19
3478.37
2833.75
3673.96
3533.72
9. Services
Average
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
1050
568
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6740
5193
3 . Manufacturing Industries
2169
1531
2856
2027
5. Construction
2403
1555
1792
1128
1477
874
11342
5801
1629
777
1724
969
9. Services
Average
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
Total Employment (Million)
Percentage
Description
1986
1990
1997
1998
1986
1990
1997
1998
Agriculture
37.6
42.4
35.8
36.4
55
56
41
43
Industry
10.6
10.4
16.5
14.2
14
19
17
3. Trade
9.8
11.1
17.2
18.3
23
15
20
22
4. Services
10.1
12.2
17.4
15.4
13
16
20
18
Total
68.3
75.9
87.0
84.3
100
100
100
100
By Location
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Urban
13.6
18.3
29.6
24.2
20
24
34
29
Rural
54.7
57.6
57.5
60.1
80
76
66
71
68.3
75.9
87.0
84.3
100
100
100
100
2. Informal
17.6
21.1
30.5
25.1
26
26
35
30
Total
50.8
54.8
56.6
59.1
74
74
65
70
68.3
75.9
87.0
84.3
100
100
100
100
Total
By Formal/Informal
Employment
1. Formal
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
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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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THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA

THE SOCIAL IMPACT OF ECONOMIC CRISIS

THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA

Real GDP (% of growth rate)

Current Account Balance

Net Capital Inflows

Net Portfolio Investment

Net Direct Investment

Net Error and Omissions

Reserves (in months of import)

Ratio M2 to Reserves (%)

THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA

Short Term Debt (in US$

Source: IMF, International Financial Statistics, various issues.

2. IMPACTS OF THE CRISIS ON THE MACROECONOMY

THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA

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

Gold, Silver and other metal

Steel, machine & Automotive

Pulp and paper

THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA

Leather, leather goods & shoes

Total of Industrial Export

Percentage of 10 Commodities export to Total

Percentage of 10 Commodities to Non-oil

Percentage of 10 Commodities to Total Export

4. Electricity, Gas and Water supply

6. Trade, hotel & restaurant

7. Transportation and communication

2. Mining and Quarrying

8. Financial, Ownership and business

THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA

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

THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA

Unemployment, Employment and Wages, 1992-1997

Labor force growth

Population growth (age 10+)

Real wages growth

Job search duration (months)2)

Underemployment (<35 hours/week)

THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA

Trade, restaurant and hotels

Govt, comm & personal

Transport & communication

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

THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA

3.2 Employment situation in the crisis time

New entrants 1998

Sub-total Job Seekers

Total Unemployment (U)

Labor Force (LF)

Unemployment Rate (U/LF)

THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA

4. Electricity, Gas and Water supply

2. Mining and Quarrying

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

THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA

Growth Rate (%)*

4. Electricity, Gas and Water supply

6. Trade, hotel & restaurant

7. Transportation and communication

2. Mining and Quarrying