The Indonesian Crisis: A Human Development Perspective

12. The Labour Market in Indonesia during the Crisis

The Labour Market in Indonesia during the Crisis 313© 2003 Institute of Southeast Asian Studies, Singapore m n TUBAGUS FERIDHANUSETYAWAN Introduction One important aspect of the economic crisis at the macroeconomic level that would affect the quality of life of the people in Indonesia at the micro level is the adjustment in household or individual income, which depends largely on the adjustment in the labour market. A sharp economic contraction by almost 14 per cent in 1998 led to declining labour demand, massive lay-offs, and shrinking formal sector employment. Earnings in the formal sector sharply declined, and labour moved to the unprotected informal sectors. At the same time, rapid inflation of more than 77 per cent in 1998 significantly reduced the purchasing power of labour. In other words, Indonesian labourers suffered both from declining employment opportunities and skyrocketing prices, which led to rapidly declining real incomes during the worst time of the crisis in 1998.1 The effects of the economic crisis, characterized by a massive contraction in the real sector, rapid inflation, and excessive depreciation of the currency, leading to a decline in the real income of Indonesian labourers, depended on the nature of the adjustments in the labour market. In other words, the characteristics and nature of the labour market matter in determining whether the impact of the economic crisis led to massive adjustments in quantity (or employment), or prices 12 313 THE LABOUR MARKET IN INDONESIA DURING THE CRISIS Reproduced from The Indonesian Crisis: A Human Development Perspective, edited by Aris Ananta (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at . 314 Tubagus Feridhanusetyawan© 2003 Institute of Southeast Asian Studies, Singapore (or wages), or both. In most developed countries, and in a labour scarce economy in general, wages tend to be sticky and adjustments in the labour market mostly result in declining employment. In a laboursurplus developing country, such as Indonesia, where formal sector employment is twice as large as the informal sector, wages tend to be flexible, and adjustment to the shock would come from declining real wages. Workers could not afford to be unemployed in the absence of social security, safety nets, or other forms of insurance against unemployment. While declining real incomes at the aggregate level can be observed easily by looking at real gross domestic product (GDP) growth, or real GDP per capita, the decline in real incomes at the micro individual or household level would not be obvious. One question, for example, is the impact of the crisis on the changing patterns of income distribution. In other words, who have suffered the most from the crisis: the poor, the middle-income group, or the rich? Various studies2 have shown that the distribution of expenditure was, in fact, more even after the crisis. In other words, the expenditures of the rich declined more substantially than the poor during the worst time of the crisis in 1998– 99. However, this does not explain whether a similar trend is taking place with respect to income, mainly because reliable and accurate data on income are not readily available. People may receive their income from several different sources: labour wages for those who work, rent from rental properties, interest income from savings as well as profits, or dividends from certain investment. The experience during the crisis, at least from the data on income tax, shows that some people actually enjoyed the windfall of interest income from the high interest rate environment in 1998. This case shows that while wages and labour earnings may have generally declined during the crisis, the total income of individuals or households might have declined to a lesser extent, or perhaps even increased, especially for those who had large savings in the banks. For those who had no income other than their earnings, declining real wages and earnings would be directly translated to declining real income. Bearing these issues in mind, this chapter aims to present the impact of the crisis on human development in Indonesia by focusing on adjustments in the labour market. It discusses adjustments in employment and labour earnings, which are among the most crucial elements in the discussion of human development. Earnings represent the value-added, or productivity, of labour, which reflects not only the purchasing power of the people...