00074910012331337803
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Labour Market Adjustment to Indonesia's
Economic Crisis: Context, Trends and Implications
Chris Manning
To cite this article: Chris Manning (2000) Labour Market Adjustment to Indonesia's Economic
Crisis: Context, Trends and Implications, Bulletin of Indonesian Economic Studies, 36:1,
105-136, DOI: 10.1080/00074910012331337803
To link to this article: http://dx.doi.org/10.1080/00074910012331337803
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Bulletin of Indonesian Economic Studies
Vol 36 No 1, April 2000, pp. 105–36
LABOUR MARKET ADJUSTMENT TO
INDONESIA’S ECONOMIC CRISIS:
CONTEXT, TRENDS AND IMPLICATIONS
Chris Manning*
Australian National University
This paper focuses on labour market adjustment during the economic crisis
of 1997–98. It shows how labour processes help explain better outcomes
for the poor than were initially predicted. The Indonesian experience is
viewed in a framework that contrasts two extreme models: a Keynesian
world of rigid real wages, and a neoclassical situation of flexible adjustment
to economic shocks. It was found that the Indonesian case is more
consistent with the neoclassical than the Keynesian model, despite the
tendency for greater government intervention in labour markets before
the crisis. The paper also finds that the large change in relative prices
from the exchange rate depreciation had a smaller effect than expected on
employment structure. These conclusions are discussed in the context of
major changes in labour markets prior to the economic crisis.
INTRODUCTION
Poverty and equity emerged as major issues in economic research during
the economic crisis. Although an important focus of international,
government and academic attention in the Soeharto era, few economists
had taken a serious interest in the subject. Over several decades, Thee
Kian Wie was one exception in this regard. To this author, Kian Wie’s
deep concern for the impact of economic growth on equity has been a
source of inspiration. While he frequently questioned my fundamental
conviction that rapid economic growth was pro-poor through labour
market processes—now hardly a fashionable view in the era of reformasi—
he has always taken a keen interest in the labour dimensions of economic
transformation. It is a privilege to be invited to contribute an article to
this issue of the BIES in his honour.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
106
Chris Manning
The social effects of the economic crisis have been a subject of
considerable controversy. Early predictions suggested a catastrophic
impact on the lives of ordinary Indonesians. Various estimates predicted
that perhaps as many as 10–14 million people (out of a workforce of 90
million) would find themselves without jobs in 1998, and that poverty
would spread to close to half the population (ILO 1998). Subsequent
survey results have suggested a less serious effect. According to the most
recent (July 1999) official estimates based on a subsample of the National
Socio-economic Survey (Susenas), poverty incidence was 24% nationwide
in December 1998; unemployment appeared to have risen only slightly
(Booth 2000). While this estimate of poverty still signalled a 50% increase
in the proportion of the population below the poverty line, it was far
below early estimates of the impact of the crisis on the poor.1
In part, resolution of the ongoing debate about the impact of the crisis
on poverty hinges on an understanding of how labour markets adapted
to the sharp decline in national output.2 I focus on this largely neglected
aspect of the adjustment process in this paper. The paper also deals with
the impact on employment structure of the large depreciation in the
rupiah from August 1997. Here, the focus is on the extent to which the
major change in relative prices resulted in movement of workers out of
non-tradeables and into tradeable goods activities.
It is argued that outcomes depended partly on the evolution of labour
market structures before the crisis. Thus, I devote some space in the paper
to examining the impact of Indonesia’s growing economy on wages, and
on the deployment of labour between traditional and modern sectors,
during the Soeharto era. I conclude that labour markets remained highly
flexible despite the rapid economic transformation. I suggest that this
flexibility is a key explanation for why unemployment and the incidence
of poverty did not rise more than they did during the crisis.
First, the paper provides a simple analytical framework to help
examine the effects on the labour market of the crisis. This is followed by
a look at the nature of labour market change before the crisis, focusing
on formal and informal sector interactions and the adjustment of
employment and wages to rapid economic growth. In the next section, I
look at the nature of the crisis and the impact of large changes in the
relative prices of tradeable and non-tradeable goods. This sets the stage
for an examination of trends in key labour market indicators during the
crisis period, August 1997 through 1998, based mainly on data collected
in the National Labour Force Surveys (Sakernas).
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
107
ANALYTICAL FRAMEWORK
One can represent potential labour market response to a sharp contraction
in labour demand by suggesting two extreme cases. In one, the
‘Keynesian’ model, inflexible wages and employment structures lead to
high levels of unemployment. Households whose economically active
members lose their jobs bear the brunt of the adjustment. At the other
extreme, in a neoclassical world, workers accept a sharp reduction in
real wages, assist firms to get back on their feet and are highly mobile
between sectors and regions. Some find alternative sources of work, albeit
at lower levels of income, by crowding into informal sector activities. In
the latter model, the effects of the crisis are borne by a much larger
proportion of the population, but fewer people suffer a dramatic decline
in living standards.
These effects are demonstrated in figures 1 and 2. Figure 1 illustrates
the Keynesian case of inflexible wages and an absence of alternative
employment opportunities. Real wages remain fixed at w1 despite the
sharp cut-back in labour demand from D1 to D2 in the modern sector.
Employment falls to e2 and unemployment rises to e1e2. Since there are
limited opportunities for work in informal activities, very few of the
FIGURE 1 The Keynesian Case of Adjustment to a Sharp Fall in Labour Demand
Real wages
w/p
S1
w1
D2
e2
e1
D1
Employment
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
108
Chris Manning
unemployed can be expected to find new jobs until modern sector output
and employment expand.
Figure 2 shows the process of adjustment in the neoclassical case,
under conditions of dualistic labour markets. Modern sector wages adjust
from w1m to w2m; employment contracts less than in the Keynesian case,
although it falls to e2m. But, in contrast to the Keynesian model, most of
the displaced workers are absorbed in informal sector activities, shown
by the shift out of the labour supply curve from S1 to S2. Employment
increases from e1t to e2t and wages fall from w1t to w2t in the informal
sector, and there is little increase (or, in the extreme case, no increase) in
overall unemployment.
The extent to which the Keynesian or the neoclassical response will
predominate depends on two major sets of factors: the flexibility of real
wages, and the availability of alternative employment opportunities for
those who lose their jobs or join unemployment queues. A stylised version
of ‘East Asian’ labour market adjustments to economic shocks in the early
stages of development provides an example of the neoclassical adjustment
process (Fields 1994; World Bank 1995a). Wages were closely tied to
productivity and adjusted in response to fluctuations in labour demand.
Piece-rate systems of pay, annual bonuses linked to firm performance,
and flexible employment systems (which depended partly on contract
and casual labour) supported quick adjustments of wage costs to
macroeconomic adjustment in the modern sector. Opportunities for work
in small-scale enterprises and the informal sector enabled workers to
gain alternative jobs, albeit at lower levels of remuneration, as suggested
in figure 2.
In contrast, another stylised portrayal, this time of the ‘Latin American’
case of labour market adaptation during structural adjustment, is closer
to the predictions of the Keynesian model.3 A range of factors contributed
to substantial increases in unemployment during crisis and adjustment
periods: relatively inflexible wages in the modern sector (because of
minimum wage laws, wage indexation and strong labour unions),
combined with some elements in the modern sector of the social security
and unemployment benefits characteristic of advanced countries.
It is important nevertheless to distinguish between regulation of the
labour market in principle and in practice, even in more protected labour
markets such as those in much of Latin America. Freeman (1992: 139–40)
notes that, in periods of sharp economic downturn, many labour
institutions often turn out to be ‘paper tigers’. At times of economic slump,
labour unions and government controls are typically weaker, especially
in poorer countries where their influence extends only to a limited
segment of the workforce. The main adjustment tends to be through
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
109
FIGURE 2 The Neoclassical Case of Adjustment to a Sharp Fall in Labour Demand
(Dual Labour Markets)
Modern sector
Real wages
w/p
S1
w 1m
w 2m
D2
e2m
D1
e1m
Employment
Traditional sector
Real wages
w/p
S1
S2
w 1t
w 2t
D1
e1 t
e2 t
Employment
Distribution (%)
Share of Increase (%)
Growth Rate (% p.a.)
1971a
1990a
1990b
1997b
Tradeables (1)
Agriculture
Manufacturing
Mining
65.8
7.8
0.2
50.1
11.6
1.0
56.0
10.2
0.7
41.2
12.9
1.0
30.4
16.4
2.0
–57.6
31.0
3.3
1.7
5.2
10.7
–2.4
5.4
7.6
13.0
–9.8
–23.0
Non-tradeables (2)
Public utilities
Construction
Trade
Transport
Finance
Services
0.1
1.9
11.0
2.4
0.3
10.4
0.2
4.1
15.0
3.7
1.0
13.2
0.2
2.7
14.6
3.1
0.6
12.0
0.3
4.8
19.8
4.8
0.8
14.5
0.3
6.9
20.0
5.3
1.9
16.8
0.8
18.9
54.3
16.2
1.6
31.5
6.7
7.1
4.7
5.4
10.2
4.4
7.1
10.2
6.3
8.3
4.5
4.7
–36.9
–15.9
–0.8
0.7
–5.8
–1.4
100.0
39.2
100.0
70.6
100.0
75.7
100.0
87.1
100.0
31.4
100.0
11.3
3.1
–
2.0
–
2.7
–
23.9
14.5
30.7
18.4
27.9
20.7
30.4
22.8
34.8
20.8
35.1
26.7
6.4
6.4
7.3
7.4
–4.8
5.9
26.9
34.7
24.2
26.7
20.5
30.9
19.7
27.1
22.6
21.8
18.4
19.9
4.5
3.7
5.6
4.2
–11.7
–8.3
100.0
100.0
100.0
100.0
100.0
100.0
5.1
6.1
–4.7
Total (1 + 2)
(million)
Non-agriculture
Urban
Wage
Non-wage
Rural
Wage
Non-wage
Total
a
1971–90 1990–97
Data from the 1971 and 1990 Population Censuses. bData from the 1990 and 1997 Sakernas.
Source: BPS, National Population Censuses, 1971 (Series C) and 1990; Sakernas,1990, 1997 and 1998.
1971–90
1990–97 1997–98b
Chris Manning
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Sector/Work Status
110
TABLE 1 Employment by Major Sector and Work Status, 1971–98
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Labour Market Adjustment to Indonesia’s Economic Crisis
111
declines in real wages and crowding into the urban informal sector, or
into agriculture. Thus during adjustment episodes in Latin America in
the 1980s, workers were generally unable to press for nominal wage rate
adjustments to compensate for high rates of inflation, and hence real
wages fell sharply in most countries.
Using this simple framework for analysing labour market adjustment,
we examine processes of labour market change in Indonesia during the
Soeharto era, before turning to the impact of the crisis. The discussion
suggests that Indonesian labour market structures and policies were far
more consistent with the neoclassical than the Keynesian model. However,
there were signs of greater regulation and rigidity along Keynesian lines
in the years immediately preceding the crisis.
LABOUR MARKET STRUCTURE AND CHANGE BEFORE
THE CRISIS
Labour market adjustment processes, set within an environment of highly
elastic labour supply to the modern sector, provide a context for helping
us to understand labour’s adaptation to the dramatic effects of the
recession of 1997–98. We look first at how employment and wages
changed in the years before the crisis, and especially during the decade
of deregulation from the mid 1980s.4
The discussion starts with a brief look at developments in the 20-year
period before deregulation. During this time, a combination of
government support for agriculture, infrastructure and human resource
development, and a protected manufacturing environment were the
driving forces behind growth. This was supported by the good fortune
offered by a boom in oil prices and government revenue in the 1970s.
• From the early 1970s through to 1990, agriculture absorbed the major
share (over one-quarter) of all jobs (table 1). Labour continued to
crowd into agriculture, even in densely populated Java, in part
fuelled by quite high rates of population and labour force growth.5
Thus labour productivity remained low in this sector relative to
other sectors, even though agricultural growth was not
unimpressive by international standards.
• Labour absorption in manufacturing was relatively slow during the
first 20 years of the New Order regime, even though output in
this sector grew at rates comparable with those of the world’s
fastest growing industrial sectors—in the newly industrialising
economies (NIEs) of Korea, Taiwan, Singapore and Hong Kong.
As a result, non-tradeable goods industries—construction, trade,
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
112
Chris Manning
transport and services—absorbed the bulk of new labour force
entrants and workers from the large agricultural sector. This
experience contrasts with that of, for example, Korea and Taiwan,
where close to half of all jobs were created in labour-intensive
manufacturing in the early stages of accelerated economic growth
(Fields 1994).
• Although rural poverty declined substantially, real wages increased
only slowly in traditional sectors, owing to a continuing elastic supply
of unskilled labour. While real wages and labour incomes rose in
non-agricultural sectors (especially during the oil boom period),
poverty declined mainly as a consequence of industry shifts to
higher-wage sectors, and more diversified sources of household
income away from agriculture. Again the contrast with the NIEs
is marked. In these countries, sustained rises in real wage rates
among unskilled workers were a major factor contributing to rapid
per capita income growth (Fields 1994).
• Labour markets were in general highly flexible in response to
fluctuations in output. Aside from the ubiquitous informal sector,
this has been attributed to a weak trade union movement, military
intervention in labour disputes on the side of employers, and little
government commitment to implementation of quite extensive
labour protection legislation, even in the modern sector (Nayyar
1995; Hadiz 1997; Manning 1998). In addition, high levels of labour
mobility, underpinned by improvements in communications,
supported the labour supply response to changes in labour
demand.6
Labour markets changed during the decade of deregulation (1986–
96) in several important ways.
• The agricultural sector was no longer providing a net increase in jobs
(table 2). Indeed, the total number of those employed in agriculture
began to decline quite sharply, especially in Java–Bali. By 1996,
agricultural workers were being absorbed into non-agricultural
sectors at a much faster rate than had been the case a decade earlier.
• Urban employment grew strongly, in both wage and non-wage sectors.
Manufacturing and construction employment grew very quickly
from the beginning of the deregulation period, particularly in
towns and cities (figures 3–5). Females, who had always played
an important role in economic activities, were increasingly
involved in low-wage manufacturing employment. However,
compared with the experience of the NIEs, labour absorption
remained relatively slow overall in manufacturing, even during
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
113
TABLE 2 Distribution of Employment by Major Sector,
Selected East Asian Countries, 1985–97a
(%)
Agriculture
1985
1990
1997
Korea
Malaysia
Thailand
Philippines Indonesia
24.9
17.9
11.0
30.5
26.0
17.3
63.5
64.0
50.3
49.6
45.2
40.4
54.7
56.0
41.2
Industry
1985
1990
1997
Manufacturing
1985
1990
1997
30.5
35.0
30.9
23.9
27.5
33.7
13.0
14.0
19.7
13.8
15.0
16.7
13.4
13.8
19.0
23.4
27.2
21.3
15.1
19.9
23.4
9.4
10.2
12.9
9.5
9.7
9.9
9.3
10.2
12.9
Services
1985
1990
1997
44.5
47.1
58.1
45.6
46.5
49.0
23.5
22.0
29.9
36.5
39.7
42.9
31.8
30.3
39.8
a
Data refer to population aged 15 and over in Korea and the Philippines; 15–64
years in Malaysia; 13 years and over in 1990 and 1997, 11 years and over in 1985 in
Thailand; and 10 years and over in Indonesia. The data are based on annual or
quarterly labour force surveys (August round in Thailand, October/4th round in
the Philippines). Data for 1985 for Indonesia are taken from the National Intercensal
Survey.
Sources: Adapted from Manning (1999), table 2. Most of the data are taken from
ILO (1999), Yearbook of Labour Statistics 1998, table 2B.
the export-oriented boom of the late 1980s and early 1990s.
Incentives were increased for exporters, mainly through marketoriented reforms, but many parts of the economy remained highly
regulated, and the process of economic reform slowed from
around 1993.
• Real wages rose moderately, including among casual labourers in
the large rice sector, which had experienced stagnant income
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Chris Manning
114
FIGURE 3 Index of Employment by Major Sector, 1986–97
250
200
150
100
50
0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Agriculture
Construction
Manufacturing
Other
Source: BPS, Sakernas, 1986–97.
growth during the previous decade (Manning 1999a). Real wages
rose rapidly in all non-agricultural sectors, by approximately
5–6% p.a. in agricultural manufacturing and services over the
period 1990–97.7 On the eve of the crisis, labour markets had begun
to tighten. Indonesia no longer had the luxury of an elastic supply
of unskilled labour to support a highly labour-intensive pattern
of export-oriented growth.
• Labour regulation spread in the modern sector in the 1990s. Minimum
wages and social security for workers became an important plank
of government policy. Labour protection was extended, at least
in the modern sector. This was partly in response to labour unrest,
and to middle-class and international criticism of labour controls
and low wages in the new export-oriented industries (Manning
1998: ch. 8). Minimum wages rose by close to 100% in real terms
over a five-year period, and social security was extended through
the Law on Worker Social Security passed in 1992.8 Minimum
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
115
FIGURE 4 Index of Employment Growth in Urban Areas by Sector, 1986–97
300
250
200
150
100
50
0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Manufacturing
Other
Construction
Total
Source: BPS, Sakernas, 1986–97.
wage policy had introduced an element of rigidity into
adjustments of output in the modern sector. Nevertheless, many
small and medium enterprises remained largely unprotected, and
casual employment contracts predominated in agriculture and
construction.
In sum, the defining characteristic of labour market change before
the economic crisis was the acceleration of employment away from lowproductivity, largely agricultural, rural jobs. In this and other respects,
Indonesia shared many of the labour force characteristics of middle and
lower-income countries such as Thailand and the Philippines.
However, Indonesia’s employment structure differed in three
important ways from those of more industrialised and higher-income
countries in the region such as Taiwan, Korea or Malaysia (table 2). First,
the share of employment in agriculture was 2–3 times higher than in the
more industrialised East Asian countries. Second, the manufacturing
sector, which accounted for around 13% of all jobs in 1997 (but one-third
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Chris Manning
116
FIGURE 5 Index of Wage and Non-wage Employment by Sector, 1986–97
250
200
150
100
50
0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Total wage
Total non-wage
Urban wage
Urban non-wage
Source: BPS, Sakernas, 1986–97.
of GDP), still had a quite small share of total employment. Finally, wage
employment accounted for only around 30% of all jobs, and half of all
jobs outside agriculture, compared with closer to two-thirds of all
employment in the NIEs (Manning 1999b).
Thus, although there had been major changes in the structure of
employment, there had been no ‘miracle’ transformation of labour
markets comparable to that which had occurred in the NIEs. In three
decades, these countries had changed from largely agrarian (or lowincome) societies to modern industrial—and, increasingly, modern
service-sector dominated—economies. In contrast, even though
manufacturing exports played a critical role in income growth during
the deregulation period in Indonesia, they had been promoted for little
more than a decade and were not sufficiently broad-based to contribute
to a sustained labour market transition.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
117
IMPACT OF THE CRISIS
The context of economic crisis in Indonesia was the extraordinary, and
largely unexpected, turnaround in economic performance starting in the
last quarter of 1997, and extending through most of 1998 to produce a
year-on-year fall in GDP of 14%.9 The well-documented sequence of major
shocks to output and incomes included the following.10
• A contraction in imports in response to the huge devaluation beginning
with the float of the rupiah in August 1997. The shock was so large
that it also negatively affected export-oriented manufacturing
(much of it dependent on imported raw materials and associated
credit arrangements), despite favourable movements in the
exchange rate.
• The ‘credit crunch’ of late 1997 and a blow-out in the debt situation
across the modern sector, bringing production to a halt in much of
the modern sector.
• The subsequent period of loose monetary policy in 1998, fuelling much
higher rates of inflation than Indonesia had experienced for nearly
30 years.
• The political and social chaos of May 1998, which brought imports
and most modern-sector economic activity to a virtual halt, and
severely disrupted domestic trade and transport for a period of
several months. The economy did not begin to recover until the
last quarter of 1998.
In Indonesia (and several other East Asian countries), relative prices
changed dramatically between tradeable (exportable and importable) and
non-tradeable activities, owing to the huge depreciation of the exchange
rate. However, the Indonesian crisis differed in several important respects
from similar crises in other countries: for example, the ‘tequila’ crisis in
Mexico in 1994–95 and the earlier debt crisis in Latin America in the early
1980s. The ‘appropriate’ response to macroeconomic crisis in the typical
Latin American case was a large devaluation accompanied by sharp cutbacks in government spending and money supply, resulting in a
contraction of domestic economic activity (Williamson 1990). The key
goal of structural adjustment was to shift resources into tradeable goods
sectors, often a necessary correction to long periods of exchange rate
overvaluation.
In contrast, the Indonesian crisis occurred after a sustained period of
economic growth; it was not associated with major problems of
macroeconomic or current account imbalance in the pre-crisis period (and
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Chris Manning
118
hence there was not a simple ‘IMF package’ remedy). The initial contagion
exposed structural weaknesses, and financial markets (increasingly
dominated by short-term capital flows) reacted swiftly and devastatingly.
The shock was exacerbated by policy uncertainty, as the ageing president
attempted to balance national economic interests with those of his family
and to manage (for the first time quite unsuccessfully) an increasingly
volatile political situation (Mietzner 1998).
Thus, although the crisis brought about a huge change in the relative
prices of tradeable and non-tradeable goods, it had a rather different
impact on production—and, as we shall see, on employment and wages—
than in the more familiar case of structural adjustment in Latin America.
Although the dimension of these changes is now well known, I will
summarise the main effects that are relevant to the labour market story.
Tradeable Activities
In tradeable goods industries, three different effects were apparent.
• Many export-oriented manufacturing activities, especially those
dependent on imports, did not benefit from the huge shift in
relative prices. They were badly hit by the financial crisis and lack
of international confidence in the rupiah, and by the political
turmoil, as manifested in initial falls in output and subsequent
slow growth through to mid 1999 (Pardede 1999).
• Import substitution producers that were not heavily indebted or
import-dependent received a substantial boost. Many were
typically small-scale traditional enterprises.
• Some agricultural producers with elastic short-run supply
schedules responded positively to the crisis. This was most marked
in the export-oriented cash crop sector. However, a positive
response was also evident in the food crop sector, despite
disruption to trade and transport during the worst months of the
crisis in 1998.
Within the tradeable goods sector, manufacturing output fell by close
to 13% after slowing considerably in 1997. Agricultural growth was
positive but well below the trend in previous years (of just under 3% real
growth in the first half of the 1990s). The volume of agricultural exports
increased significantly but was supported by only a small rise in the
volume of total non-agricultural exports.11 At the same time, the high
rupiah price of imports disrupted import-intensive activities, especially
those oriented towards the domestic market. Prices of everyday consumer
goods—such as cooking oil, chicken, soy bean products (tempe, tofu, soy
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Labour Market Adjustment to Indonesia’s Economic Crisis
119
sauce), powdered milk, most medicines and basic plastic products—
soared.
Finally, it is important to recognise that Indonesia faced two other
sets of problems that affected output of tradeable goods, apart from
private debt and the banking crisis. The first was structural. China in
particular had made major inroads into the export markets of developing
countries following the devaluation of its currency in 1994. This
contributed to a fall in export growth in Indonesia in the mid 1990s,
although not to the same extent as in Thailand and Korea (World Bank
1998). Second, agricultural production was adversely affected in 1997 by
the El Niño drought, exacerbating the rise in food prices.
Non-tradeable Activities
In non-tradeable sectors, two main patterns were important.
• Specific non-tradeable service industries, primarily construction
and real estate, were seriously disrupted in major cities by the
dual impact of the debt crisis and credit crunch in the modern
private sector.
• Owing to across-the-board disruption of production and
investment during much of 1998, there was not the shift in
resources out of non-tradeables and into tradeable goods
industries (especially into manufacturing exports) that would
normally be expected to accompany a large depreciation.
The construction sector contracted most severely—by an astonishing
37% in 1998—bringing activity in the building and real estate sectors to a
virtual halt in all major cities, and especially Jakarta. The value of output
from the banking and finance, trade and transport sectors also declined
steeply. Fortunately, growth rates in other services (including the public
sector) fell only slightly and this helped cushion the effect of the
substantial fall in output of other sectors.
THE CRISIS AND LABOUR MARKET ADJUSTMENT
This discussion of labour market adjustment highlights the shift in
employment to tradeable sectors, the crowding into agriculture and the
informal sector, and falls in real wages. I look first at labour force
participation, employment and unemployment, then at deployment by
industry and work status—including the behaviour of displaced workers.
The section closes with a brief examination of trends in real wages. The
Rural
Male
Female
Total
1997
1998
1997
1998
1997
1998
1997
1998
1997
1998
Total (million)
Population aged 15+
Labour force
Employed
Unemployed
53.3
31.9
29.4
2.6
56.1
33.4
30.3
3.1
81.7
57.7
56.1
1.6
82.5
59.3
57.4
2.0
66.3
55.3
53.0
2.3
68.2
56.8
53.9
2.9
68.8
34.2
32.4
1.9
70.3
36.0
33.8
2.2
135.1
89.5
85.4
4.2
138.5
92.8
86.7
5.1
Rate (%)
Labour force participation
Employmentb
Unemployment
59.8
55.2
8.0
59.6
54.0
9.3
70.6
68.7
2.8
71.9
69.6
3.3
83.4
79.9
4.1
83.2
79.0
5.0
49.9
47.1
5.6
51.2
48.1
6.1
66.3
63.2
4.7
66.9
62.6
5.5
Growth (%)
Population aged 15+
Labour force
Employment
5.1
4.7
3.3
0.9
2.9
2.3
2.9
2.7
1.7
2.2
4.8
4.2
2.6
3.5
2.7
Share of increase (%)
Population aged 15+
Labour force
Employment
Unemployment
78.6
47.5
41.9
62.0
21.4
52.5
58.1
38.0
55.6
47.8
39.4
69.7
44.4
52.2
60.6
30.3
100
100
100
100
a
Refers to population aged 15 and over. bDefined as total employed as a percentage of the working age population.
Sources: BPS, Sakernas, 1997 and 1998.
Chris Manning
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Urban
120
TABLE 3 Key Indicators of Aggregate Labour Force and Employment Growth, August 1997 and August 1998a
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
121
analysis of employment change focuses on the findings of the Sakernas
of August 1997, on the eve of the crisis, and that of August 1998.12
Labour Force Participation, Employment and Unemployment
Adjustments in labour supply were one important aspect of the response
to the crisis. Total labour force participation increased slightly in 1998,
suggesting that there was no net withdrawal from the workforce related
to the contraction in demand for labour (table 3). Indeed, one response to
the crisis was greater female involvement in the workforce, to supplement
(or supply) the family income. Table 3 indicates a quite sharp rise in female
participation rates in 1998, which occurred especially in rural areas. The
increases were most apparent among older women living in rural areas.13
As we shall see below, many more women reported working in agriculture
than in the previous year.
More surprisingly, employment growth rates appear to have risen,
despite the displacement of large numbers of workers beginning in the
last quarter of 1997 (see last column of table 4). Employment growth did
fall sharply in urban areas, to 3.3% in 1997–98, compared with rates of
close to 7% in 1990–96. But this was counterbalanced by an increase in
participation and employment rates among women, especially in rural
areas. A slowdown of growth in urban employment was to be expected,
given the intensity of the impact of the crisis in Indonesia’s major cities.
Nevertheless, urban employment continued to grow. There is no
indication of the massive de-urbanisation and movement to the
countryside that some commentators had predicted.14
As table 3 indicates, unemployment rose only slightly in 1997–98—to
5.5% in August 1998 from just under 5% a year earlier. As noted, earlier
studies had predicted quite dramatic increases in unemployment based
on employment elasticity calculations with respect to GDP growth by
sector (ILO 1998). That this did not occur attests to the remarkable
flexibility of Indonesian labour markets and the capacity of people to
find new jobs after being retrenched from wage employment.15
Indonesian unemployment trends contrast markedly with those in
several other crisis-affected countries in East Asia. For example, by the
last quarter of 1998, unemployment in South Korea had more than tripled
from 2.2% in 1997 to close to 8%; in Hong Kong, Malaysia and Thailand
it more than doubled, from 2–2.5% in 1997 to 5–6% in 1998 (Manning
1999b).
The increases in unemployment in Indonesia were greatest among
young people, especially females aged 15–24 and younger rural males.
By August 1998, around 10% of all urban dwellers reported being
Agriculture Manufacturing Construction
Location
Total
Trade
Services
Othera
Urban
Rural
1990–96
Java–Bali
Outer Islands
Indonesia
–3.5
–0.3
–1.9
5.1
7.4
5.6
9.2
12.9
10.2
5.0
9.6
6.2
3.8
5.3
4.3
7.4
7.3
7.4
6.0
9.3
6.9
–0.6
1.1
0.1
1.6
2.7
2.0
1996–97
Java–Bali
Outer Islands
Indonesia
-5.8
–4.4
–5.1
2.8
7.9
4.0
9.8
10.9
10.1
4.7
11.2
6.7
3.7
14.4
7.5
2.4
14.5
6.0
6.2
8.0
6.7
–2.7
1.2
–1.0
0.7
2.8
1.6
1997–98
Java–Bali
Outer Islands
Indonesia
15.6
9.4
12.5
–9.5
–12.4
–10.2
–19.4
–12.5
–17.4
–0.3
–2.6
–1.0
1.1
–5.9
–1.4
–11.4
7.1
–5.2
2.2
5.9
3.3
2.5
2.1
2.3
2.4
3.1
2.7
a
Includes banking and finance, transport and communications, electricity, gas and water, and mining.
Source: BPS, Sakernas, 1990, 1996–98.
Chris Manning
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Industry
122
TABLE 4 Change in Employment by Major Sector and Location, Java–Bali and the Outer Islands, 1990–98
(%)
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
123
unemployed. As table 3 shows, male workers accounted for 70% of the
increase in unemployment over the 12-month period.
At the same time, the unemployment pool now consisted of a much
larger proportion of workers with previous job experience. In 1998,
approximately 40% of all unemployed had worked previously, compared
with only 20% in 1997. (The balance were first job-seekers.) The rise in
the share of those who had worked before was particularly marked among
younger males, in both urban and rural areas.
Employment Changes by Industry and Work Status
It was suggested earlier that crisis in Indonesia differed from the pattern
commonly observed in other countries, where there has tended to be a
large shift of resources into tradeable activities. This conclusion is
supported by the data on employment. Although employment grew
overall in tradeable goods industries in 1997–98, there was no clear-cut
shift in jobs in favour of tradeables, as might have been expected following
such a large exchange rate depreciation. Paradoxically in light of precrisis trends, the largest changes involved a reallocation of rural jobs into
agriculture, from both other tradeable and non-tradeable industries.
The main trends are summarised in table 1 (above) and in tables 4–5.
Tradeable Activities. The most important development among
tradeables was a dramatic increase in work in the agricultural sector. But
while agriculture made significant gains, manufacturing employment
contracted sharply among tradeable goods sectors, in both urban and
rural areas (see table 1, last column, and table 5). The increases in
agricultural work were large, and reversed the substantial fall in jobs
experienced in this sector in 1990–96, especially in Java–Bali (table 4).
The growth rate was high for both male and female workers, most of
them self-employed and working in family businesses. Bearing in mind
that agricultural production grew only slightly in 1998, output per worker
probably fell by around 10% overall.
Although disaggregated data on employment are not available by
agricultural subsector, it seems likely that many people crowded back
into this sector, sharing work on small farms. Many who returned
probably failed to find much work.16 Perhaps, too, many went back to
cultivating dry land agriculture or their house-gardens (pekarangan),
which had tended to be neglected during the period of rapid exportoriented growth. Crowding was likely to have been more intense in landscarce Java, and to have marked a greater fall in output and income per
worker.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Chris Manning
124
TABLE 5 Change in Employment by Sector, Location and Sex, 1997–98a
Urban
Rural
Change in employment (‘000)
Agriculture
4,762
Non-agriculture
–71
–2,339
Manufacturing
–298
–790
Construction
–182
–489
Trade and transport
285
–427
Services
185
–402
Other
–61
–231
Male
Female
Total
2,737
–1,759
–636
–657
–45
–213
–208
2,025
–651
–452
–14
–97
–4
–84
4,762
–2,410
–1,088
–671
–142
–217
–292
1,359
978
1,374
2,352
Total
993
% change, 1997–98
Agriculture
Non-agriculture
Manufacturing
Construction
Trade and transport
Services
Other
0
–6
–10
3
2
–14
–10
–13
–20
–4
–8
–33
12
–6
–10
–16
0
–3
–23
15
–3
–9
–9
–1
0
–41
13
–5
–10
–16
–1
–2
–26
Total
3.4
2.4
1.8
4.2
2.7
13
a
Data refer to population aged 10 and over.
Sources: BPS, Sakernas, 1997 and 1998.
But not all agricultural producers suffered from the crisis. There was
a significant rise in agricultural employment outside Java, in response to
improved domestic prices for cash crop exports in certain provinces, such
as South and North Sulawesi and Lampung (Potter 2000). Farmers who
produced a marketable surplus—not just of rice, but also of corn in the
poorer, rain-fed areas of Java and the Outer Islands, and of fish in the
case of fishing families dotted along the north coast of Java—benefited
from the sharp increases in food prices in 1998 (Maurer 1998). The
‘traditional’ free-range chicken industry and vegetable producers
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
125
cultivating house-gardens also received a boost from the high prices of
imported substitutes and inputs.17
According to the Sakernas data, agricultural employment rose quite
steeply in urban areas as well, possibly as a result of renewed cultivation
of previously unused land (lahan kosong) controlled before the crisis by
real estate companies and speculators (Tubagus 1999). This trend was
particularly pronounced in the Outer Islands, where land was more
abundant on the outskirts of urban areas than in Java–Bali.
In contrast to agriculture, manufacturing employment fell by a large
margin in both Java–Bali and the Outer Islands (table 4).18 Within Java,
the declines were particularly marked in the major industrial centres of
Jakarta, West Java and East Java, where the Sakernas data suggest
manufacturing employment fell by close to 15%.
These aggregate changes undoubtedly hide important changes in the
composition of manufacturing.19 The large changes in relative prices
opened up new opportunities in this sector. While the impact of the
depreciation was felt most by cash producers outside Java, several clusters
of small and medium industries in Java also benefited. They included
producers of sarongs in Majalaya, West Java, and furniture producers in
Jepara in Central Java. In other cases, imports were substituted with
domestic production that was largely free of imported inputs. Anecdotal
evidence suggests that many products that had once been part of the
traditional Javanese economy began to be produced by rural people at a
fraction of the cost of imported goods. These included bamboo mats and
bags (replacing plastic) and processed food relying entirely on local food
products.
Finally, there were important changes in employment by sex in the
tradeable goods sectors. Employment of both males and females rose in
agriculture, but the percentage increase was greater among females (table
5). In addition, many more males lost wage jobs in manufacturing. In
general males, who tended to be more concentrated in modern sector
jobs, were harder hit than females by the crisis, although women also
lost a significant number of jobs in manufacturing.
Non-tradeable Activities. As would be expected, employment declined
substantially in non-tradeables, in contrast to the overall expansion of
employment in tradeables. However, as with tradeables, there was
considerable variation within non-tradeable activities and a marked shift
from wage to non-wage employment. The data point to an increasing
informalisation of employment in non-tradeable activities.
All non-tradeable goods sectors experienced an overall decline in
employment, except transport and communications, the latter perhaps
reflecting crowding into labour-intensive segments such as becak
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
126
Chris Manning
(trishaws) and ojeg (private motor cycle transport services). By far the
greatest decline—aside from the small utilities sector (electricity, gas and
water)—was in construction in both urban and rural areas.20
There was, however, a marked contrast in employment trends
between urban and rural areas in other non-tradeable goods and service
industries. Whereas mainly informal, non-wage jobs rose in trade,
transport and services in the towns and cities, employment in similar
activities fell in rural areas (table 5). Some activities, such as petty trade,
repair work and food stalls, absorbed more workers in towns and cities,
but probably at lower levels of income. In these sectors, similar patterns
were observed in Java–Bali and the Outer Islands.
Although some new activities have been important for the poor, their
impact can be overstated given the substantial disruption caused to local
trade and transport and the negative impact of inflation on living
standards (see below). There is little doubt that Jellinek and Rustanto
(1999: 2) overstate the impact of consumption switching and substitution
in production on the incomes of the poor when they suggest that ‘we are
witnessing an unprecedented economic boom in the small-scale sector’.
The employment and wage data suggest that, in so far as employment
grew in non-tradeable industries, this was mainly the result of crowding
into the informal sector.
Displaced Workers
The data presented above do not help us to identify the impact of job
losses during the crisis, since they refer to changes in the employment
structure at two points in time. We can obtain a better glimpse of the
direct impact of labour displacement from a 1998 Sakernas questionnaire
on the current activities of people who left their jobs between August
1997 and August 1998. Although not all those who left jobs did so because
of the crisis, a large percentage appear to have done so.21 We refer to this
group as ‘displaced workers’ for convenience.
The data support the general findings presented above on changes in
the distribution of work by industry and work status. Table 6 presents
data on the sector of employment in August 1998 of people who had left
their jobs during the previous year. Two findings stand out.
First, a high proportion of displaced workers found work in
agriculture. The considerable absorptive capacity of agriculture is further
suggested by data from the Sakernas on the industry in which new
agricultural workers had previously been employed. For example, a high
percentage (30–40%) of those who had left work in manufacturing and
construction shifted to agriculture.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
127
TABLE 6 Main Activity in August 1998 of People Who Left Jobs
during the Previous Year
(%)
Main Activity
Male
Female
Total
Not working
Unemployed
Outside the labour force
Subtotal
25.6
13.0
38.6
24.8
43.7
68.5
25.4
23.5
48.9
Working
61.4
31.5
51.1
100.0
2,808
100.0
1,471
100.0
4,279
38.9
10.7
11.7
17.3
9.0
12.5
40.7
17.5
1.5
26.1
12.1
2.2
39.3
12.1
9.5
19.2
9.6
10.3
100.0
1,724
100.0
464
100.0
2,188
36.6
63.4
30.0
70.0
35.2
64.8
3.2
1.4
2.5
53,969
33,077
87,046
Total who left their jobs
(‘000)
Main sector of work of those
finding new jobs
Agriculture
Manufacturing
Construction
Trade
Services
Other
Total finding new jobs
(‘000)
Of which:
Wage
Non-wage
Those finding new jobs as
% of total employed
Total employed (‘000)
Source: BPS, Sakernas, 1998.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
128
Chris Manning
Second, trade—typically the largest informal sector in urban areas—
was the second most important sector of employment for displaced
workers. Not surprisingly, the majority were self-employed, seemingly
in activities such as small stalls and hawking. Around 20% of people
who had previously worked in manufacturing and services found new
jobs in trade.
We can infer that much of the labour displacement was from modern
sector work by looking at the educational status of people who left jobs
in the year to August 1998. While many less-educated persons lost their
jobs, a disproportionate number of displaced workers—nearly onethird—were educated to at least upper secondary level, compared with
only around 20% of all employed persons in 1997.22
As might be expected, not all those who left their jobs were able to
find employment. One-quarter remained unemployed in 1998, and a high
proportion of females (44%) were outside the workforce (table 6). Most
of the women (some 300,000) who left the labour force had formerly been
wage workers, although a significant proportion had previously managed
their own enterprises or worked in family businesses.23 Thus there
appears to have been a significant number of ‘discouraged’ workers who
left the labour force as a result of the crisis (although, as noted above, the
number of women entering the labour force in 1998 far exceeded those
who left, the net increase being just under two million).
Trends in Wages
As noted, average real wages grew strongly across all major sectors from
1990 through to the onset of the economic crisis. Wage growth was rapid
across all sectors, both tradeable and non-tradeable, suggesting a general
tightening of labour markets (table 7). However, real wage rates in rice
agriculture—still the single most important employer of unskilled, casual
labour—grew less quickly than average wages, and were uneven across
regions (Manning 1999a).24 Given the substantial rise in average wages
noted earlier, it is likely that much of the increase could be accounted for
by the rising proportion of skilled workers in the workforce, and their
deployment into higher-productivity jobs, especially in manufacturing
and services.
The general pattern of real wage increases reversed sharply in 1998
as adjustments in nominal wages failed to keep up with rates of inflation.25
The decline in real wages was dramatic in both tradeable and nontradeable goods sectors. They fell by close to 35% overall, and nearly
4
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Labour Market Adjustment to Indonesia's
Economic Crisis: Context, Trends and Implications
Chris Manning
To cite this article: Chris Manning (2000) Labour Market Adjustment to Indonesia's Economic
Crisis: Context, Trends and Implications, Bulletin of Indonesian Economic Studies, 36:1,
105-136, DOI: 10.1080/00074910012331337803
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Bulletin of Indonesian Economic Studies
Vol 36 No 1, April 2000, pp. 105–36
LABOUR MARKET ADJUSTMENT TO
INDONESIA’S ECONOMIC CRISIS:
CONTEXT, TRENDS AND IMPLICATIONS
Chris Manning*
Australian National University
This paper focuses on labour market adjustment during the economic crisis
of 1997–98. It shows how labour processes help explain better outcomes
for the poor than were initially predicted. The Indonesian experience is
viewed in a framework that contrasts two extreme models: a Keynesian
world of rigid real wages, and a neoclassical situation of flexible adjustment
to economic shocks. It was found that the Indonesian case is more
consistent with the neoclassical than the Keynesian model, despite the
tendency for greater government intervention in labour markets before
the crisis. The paper also finds that the large change in relative prices
from the exchange rate depreciation had a smaller effect than expected on
employment structure. These conclusions are discussed in the context of
major changes in labour markets prior to the economic crisis.
INTRODUCTION
Poverty and equity emerged as major issues in economic research during
the economic crisis. Although an important focus of international,
government and academic attention in the Soeharto era, few economists
had taken a serious interest in the subject. Over several decades, Thee
Kian Wie was one exception in this regard. To this author, Kian Wie’s
deep concern for the impact of economic growth on equity has been a
source of inspiration. While he frequently questioned my fundamental
conviction that rapid economic growth was pro-poor through labour
market processes—now hardly a fashionable view in the era of reformasi—
he has always taken a keen interest in the labour dimensions of economic
transformation. It is a privilege to be invited to contribute an article to
this issue of the BIES in his honour.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
106
Chris Manning
The social effects of the economic crisis have been a subject of
considerable controversy. Early predictions suggested a catastrophic
impact on the lives of ordinary Indonesians. Various estimates predicted
that perhaps as many as 10–14 million people (out of a workforce of 90
million) would find themselves without jobs in 1998, and that poverty
would spread to close to half the population (ILO 1998). Subsequent
survey results have suggested a less serious effect. According to the most
recent (July 1999) official estimates based on a subsample of the National
Socio-economic Survey (Susenas), poverty incidence was 24% nationwide
in December 1998; unemployment appeared to have risen only slightly
(Booth 2000). While this estimate of poverty still signalled a 50% increase
in the proportion of the population below the poverty line, it was far
below early estimates of the impact of the crisis on the poor.1
In part, resolution of the ongoing debate about the impact of the crisis
on poverty hinges on an understanding of how labour markets adapted
to the sharp decline in national output.2 I focus on this largely neglected
aspect of the adjustment process in this paper. The paper also deals with
the impact on employment structure of the large depreciation in the
rupiah from August 1997. Here, the focus is on the extent to which the
major change in relative prices resulted in movement of workers out of
non-tradeables and into tradeable goods activities.
It is argued that outcomes depended partly on the evolution of labour
market structures before the crisis. Thus, I devote some space in the paper
to examining the impact of Indonesia’s growing economy on wages, and
on the deployment of labour between traditional and modern sectors,
during the Soeharto era. I conclude that labour markets remained highly
flexible despite the rapid economic transformation. I suggest that this
flexibility is a key explanation for why unemployment and the incidence
of poverty did not rise more than they did during the crisis.
First, the paper provides a simple analytical framework to help
examine the effects on the labour market of the crisis. This is followed by
a look at the nature of labour market change before the crisis, focusing
on formal and informal sector interactions and the adjustment of
employment and wages to rapid economic growth. In the next section, I
look at the nature of the crisis and the impact of large changes in the
relative prices of tradeable and non-tradeable goods. This sets the stage
for an examination of trends in key labour market indicators during the
crisis period, August 1997 through 1998, based mainly on data collected
in the National Labour Force Surveys (Sakernas).
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
107
ANALYTICAL FRAMEWORK
One can represent potential labour market response to a sharp contraction
in labour demand by suggesting two extreme cases. In one, the
‘Keynesian’ model, inflexible wages and employment structures lead to
high levels of unemployment. Households whose economically active
members lose their jobs bear the brunt of the adjustment. At the other
extreme, in a neoclassical world, workers accept a sharp reduction in
real wages, assist firms to get back on their feet and are highly mobile
between sectors and regions. Some find alternative sources of work, albeit
at lower levels of income, by crowding into informal sector activities. In
the latter model, the effects of the crisis are borne by a much larger
proportion of the population, but fewer people suffer a dramatic decline
in living standards.
These effects are demonstrated in figures 1 and 2. Figure 1 illustrates
the Keynesian case of inflexible wages and an absence of alternative
employment opportunities. Real wages remain fixed at w1 despite the
sharp cut-back in labour demand from D1 to D2 in the modern sector.
Employment falls to e2 and unemployment rises to e1e2. Since there are
limited opportunities for work in informal activities, very few of the
FIGURE 1 The Keynesian Case of Adjustment to a Sharp Fall in Labour Demand
Real wages
w/p
S1
w1
D2
e2
e1
D1
Employment
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
108
Chris Manning
unemployed can be expected to find new jobs until modern sector output
and employment expand.
Figure 2 shows the process of adjustment in the neoclassical case,
under conditions of dualistic labour markets. Modern sector wages adjust
from w1m to w2m; employment contracts less than in the Keynesian case,
although it falls to e2m. But, in contrast to the Keynesian model, most of
the displaced workers are absorbed in informal sector activities, shown
by the shift out of the labour supply curve from S1 to S2. Employment
increases from e1t to e2t and wages fall from w1t to w2t in the informal
sector, and there is little increase (or, in the extreme case, no increase) in
overall unemployment.
The extent to which the Keynesian or the neoclassical response will
predominate depends on two major sets of factors: the flexibility of real
wages, and the availability of alternative employment opportunities for
those who lose their jobs or join unemployment queues. A stylised version
of ‘East Asian’ labour market adjustments to economic shocks in the early
stages of development provides an example of the neoclassical adjustment
process (Fields 1994; World Bank 1995a). Wages were closely tied to
productivity and adjusted in response to fluctuations in labour demand.
Piece-rate systems of pay, annual bonuses linked to firm performance,
and flexible employment systems (which depended partly on contract
and casual labour) supported quick adjustments of wage costs to
macroeconomic adjustment in the modern sector. Opportunities for work
in small-scale enterprises and the informal sector enabled workers to
gain alternative jobs, albeit at lower levels of remuneration, as suggested
in figure 2.
In contrast, another stylised portrayal, this time of the ‘Latin American’
case of labour market adaptation during structural adjustment, is closer
to the predictions of the Keynesian model.3 A range of factors contributed
to substantial increases in unemployment during crisis and adjustment
periods: relatively inflexible wages in the modern sector (because of
minimum wage laws, wage indexation and strong labour unions),
combined with some elements in the modern sector of the social security
and unemployment benefits characteristic of advanced countries.
It is important nevertheless to distinguish between regulation of the
labour market in principle and in practice, even in more protected labour
markets such as those in much of Latin America. Freeman (1992: 139–40)
notes that, in periods of sharp economic downturn, many labour
institutions often turn out to be ‘paper tigers’. At times of economic slump,
labour unions and government controls are typically weaker, especially
in poorer countries where their influence extends only to a limited
segment of the workforce. The main adjustment tends to be through
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
109
FIGURE 2 The Neoclassical Case of Adjustment to a Sharp Fall in Labour Demand
(Dual Labour Markets)
Modern sector
Real wages
w/p
S1
w 1m
w 2m
D2
e2m
D1
e1m
Employment
Traditional sector
Real wages
w/p
S1
S2
w 1t
w 2t
D1
e1 t
e2 t
Employment
Distribution (%)
Share of Increase (%)
Growth Rate (% p.a.)
1971a
1990a
1990b
1997b
Tradeables (1)
Agriculture
Manufacturing
Mining
65.8
7.8
0.2
50.1
11.6
1.0
56.0
10.2
0.7
41.2
12.9
1.0
30.4
16.4
2.0
–57.6
31.0
3.3
1.7
5.2
10.7
–2.4
5.4
7.6
13.0
–9.8
–23.0
Non-tradeables (2)
Public utilities
Construction
Trade
Transport
Finance
Services
0.1
1.9
11.0
2.4
0.3
10.4
0.2
4.1
15.0
3.7
1.0
13.2
0.2
2.7
14.6
3.1
0.6
12.0
0.3
4.8
19.8
4.8
0.8
14.5
0.3
6.9
20.0
5.3
1.9
16.8
0.8
18.9
54.3
16.2
1.6
31.5
6.7
7.1
4.7
5.4
10.2
4.4
7.1
10.2
6.3
8.3
4.5
4.7
–36.9
–15.9
–0.8
0.7
–5.8
–1.4
100.0
39.2
100.0
70.6
100.0
75.7
100.0
87.1
100.0
31.4
100.0
11.3
3.1
–
2.0
–
2.7
–
23.9
14.5
30.7
18.4
27.9
20.7
30.4
22.8
34.8
20.8
35.1
26.7
6.4
6.4
7.3
7.4
–4.8
5.9
26.9
34.7
24.2
26.7
20.5
30.9
19.7
27.1
22.6
21.8
18.4
19.9
4.5
3.7
5.6
4.2
–11.7
–8.3
100.0
100.0
100.0
100.0
100.0
100.0
5.1
6.1
–4.7
Total (1 + 2)
(million)
Non-agriculture
Urban
Wage
Non-wage
Rural
Wage
Non-wage
Total
a
1971–90 1990–97
Data from the 1971 and 1990 Population Censuses. bData from the 1990 and 1997 Sakernas.
Source: BPS, National Population Censuses, 1971 (Series C) and 1990; Sakernas,1990, 1997 and 1998.
1971–90
1990–97 1997–98b
Chris Manning
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Sector/Work Status
110
TABLE 1 Employment by Major Sector and Work Status, 1971–98
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
111
declines in real wages and crowding into the urban informal sector, or
into agriculture. Thus during adjustment episodes in Latin America in
the 1980s, workers were generally unable to press for nominal wage rate
adjustments to compensate for high rates of inflation, and hence real
wages fell sharply in most countries.
Using this simple framework for analysing labour market adjustment,
we examine processes of labour market change in Indonesia during the
Soeharto era, before turning to the impact of the crisis. The discussion
suggests that Indonesian labour market structures and policies were far
more consistent with the neoclassical than the Keynesian model. However,
there were signs of greater regulation and rigidity along Keynesian lines
in the years immediately preceding the crisis.
LABOUR MARKET STRUCTURE AND CHANGE BEFORE
THE CRISIS
Labour market adjustment processes, set within an environment of highly
elastic labour supply to the modern sector, provide a context for helping
us to understand labour’s adaptation to the dramatic effects of the
recession of 1997–98. We look first at how employment and wages
changed in the years before the crisis, and especially during the decade
of deregulation from the mid 1980s.4
The discussion starts with a brief look at developments in the 20-year
period before deregulation. During this time, a combination of
government support for agriculture, infrastructure and human resource
development, and a protected manufacturing environment were the
driving forces behind growth. This was supported by the good fortune
offered by a boom in oil prices and government revenue in the 1970s.
• From the early 1970s through to 1990, agriculture absorbed the major
share (over one-quarter) of all jobs (table 1). Labour continued to
crowd into agriculture, even in densely populated Java, in part
fuelled by quite high rates of population and labour force growth.5
Thus labour productivity remained low in this sector relative to
other sectors, even though agricultural growth was not
unimpressive by international standards.
• Labour absorption in manufacturing was relatively slow during the
first 20 years of the New Order regime, even though output in
this sector grew at rates comparable with those of the world’s
fastest growing industrial sectors—in the newly industrialising
economies (NIEs) of Korea, Taiwan, Singapore and Hong Kong.
As a result, non-tradeable goods industries—construction, trade,
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
112
Chris Manning
transport and services—absorbed the bulk of new labour force
entrants and workers from the large agricultural sector. This
experience contrasts with that of, for example, Korea and Taiwan,
where close to half of all jobs were created in labour-intensive
manufacturing in the early stages of accelerated economic growth
(Fields 1994).
• Although rural poverty declined substantially, real wages increased
only slowly in traditional sectors, owing to a continuing elastic supply
of unskilled labour. While real wages and labour incomes rose in
non-agricultural sectors (especially during the oil boom period),
poverty declined mainly as a consequence of industry shifts to
higher-wage sectors, and more diversified sources of household
income away from agriculture. Again the contrast with the NIEs
is marked. In these countries, sustained rises in real wage rates
among unskilled workers were a major factor contributing to rapid
per capita income growth (Fields 1994).
• Labour markets were in general highly flexible in response to
fluctuations in output. Aside from the ubiquitous informal sector,
this has been attributed to a weak trade union movement, military
intervention in labour disputes on the side of employers, and little
government commitment to implementation of quite extensive
labour protection legislation, even in the modern sector (Nayyar
1995; Hadiz 1997; Manning 1998). In addition, high levels of labour
mobility, underpinned by improvements in communications,
supported the labour supply response to changes in labour
demand.6
Labour markets changed during the decade of deregulation (1986–
96) in several important ways.
• The agricultural sector was no longer providing a net increase in jobs
(table 2). Indeed, the total number of those employed in agriculture
began to decline quite sharply, especially in Java–Bali. By 1996,
agricultural workers were being absorbed into non-agricultural
sectors at a much faster rate than had been the case a decade earlier.
• Urban employment grew strongly, in both wage and non-wage sectors.
Manufacturing and construction employment grew very quickly
from the beginning of the deregulation period, particularly in
towns and cities (figures 3–5). Females, who had always played
an important role in economic activities, were increasingly
involved in low-wage manufacturing employment. However,
compared with the experience of the NIEs, labour absorption
remained relatively slow overall in manufacturing, even during
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
113
TABLE 2 Distribution of Employment by Major Sector,
Selected East Asian Countries, 1985–97a
(%)
Agriculture
1985
1990
1997
Korea
Malaysia
Thailand
Philippines Indonesia
24.9
17.9
11.0
30.5
26.0
17.3
63.5
64.0
50.3
49.6
45.2
40.4
54.7
56.0
41.2
Industry
1985
1990
1997
Manufacturing
1985
1990
1997
30.5
35.0
30.9
23.9
27.5
33.7
13.0
14.0
19.7
13.8
15.0
16.7
13.4
13.8
19.0
23.4
27.2
21.3
15.1
19.9
23.4
9.4
10.2
12.9
9.5
9.7
9.9
9.3
10.2
12.9
Services
1985
1990
1997
44.5
47.1
58.1
45.6
46.5
49.0
23.5
22.0
29.9
36.5
39.7
42.9
31.8
30.3
39.8
a
Data refer to population aged 15 and over in Korea and the Philippines; 15–64
years in Malaysia; 13 years and over in 1990 and 1997, 11 years and over in 1985 in
Thailand; and 10 years and over in Indonesia. The data are based on annual or
quarterly labour force surveys (August round in Thailand, October/4th round in
the Philippines). Data for 1985 for Indonesia are taken from the National Intercensal
Survey.
Sources: Adapted from Manning (1999), table 2. Most of the data are taken from
ILO (1999), Yearbook of Labour Statistics 1998, table 2B.
the export-oriented boom of the late 1980s and early 1990s.
Incentives were increased for exporters, mainly through marketoriented reforms, but many parts of the economy remained highly
regulated, and the process of economic reform slowed from
around 1993.
• Real wages rose moderately, including among casual labourers in
the large rice sector, which had experienced stagnant income
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Chris Manning
114
FIGURE 3 Index of Employment by Major Sector, 1986–97
250
200
150
100
50
0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Agriculture
Construction
Manufacturing
Other
Source: BPS, Sakernas, 1986–97.
growth during the previous decade (Manning 1999a). Real wages
rose rapidly in all non-agricultural sectors, by approximately
5–6% p.a. in agricultural manufacturing and services over the
period 1990–97.7 On the eve of the crisis, labour markets had begun
to tighten. Indonesia no longer had the luxury of an elastic supply
of unskilled labour to support a highly labour-intensive pattern
of export-oriented growth.
• Labour regulation spread in the modern sector in the 1990s. Minimum
wages and social security for workers became an important plank
of government policy. Labour protection was extended, at least
in the modern sector. This was partly in response to labour unrest,
and to middle-class and international criticism of labour controls
and low wages in the new export-oriented industries (Manning
1998: ch. 8). Minimum wages rose by close to 100% in real terms
over a five-year period, and social security was extended through
the Law on Worker Social Security passed in 1992.8 Minimum
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
115
FIGURE 4 Index of Employment Growth in Urban Areas by Sector, 1986–97
300
250
200
150
100
50
0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Manufacturing
Other
Construction
Total
Source: BPS, Sakernas, 1986–97.
wage policy had introduced an element of rigidity into
adjustments of output in the modern sector. Nevertheless, many
small and medium enterprises remained largely unprotected, and
casual employment contracts predominated in agriculture and
construction.
In sum, the defining characteristic of labour market change before
the economic crisis was the acceleration of employment away from lowproductivity, largely agricultural, rural jobs. In this and other respects,
Indonesia shared many of the labour force characteristics of middle and
lower-income countries such as Thailand and the Philippines.
However, Indonesia’s employment structure differed in three
important ways from those of more industrialised and higher-income
countries in the region such as Taiwan, Korea or Malaysia (table 2). First,
the share of employment in agriculture was 2–3 times higher than in the
more industrialised East Asian countries. Second, the manufacturing
sector, which accounted for around 13% of all jobs in 1997 (but one-third
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Chris Manning
116
FIGURE 5 Index of Wage and Non-wage Employment by Sector, 1986–97
250
200
150
100
50
0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Total wage
Total non-wage
Urban wage
Urban non-wage
Source: BPS, Sakernas, 1986–97.
of GDP), still had a quite small share of total employment. Finally, wage
employment accounted for only around 30% of all jobs, and half of all
jobs outside agriculture, compared with closer to two-thirds of all
employment in the NIEs (Manning 1999b).
Thus, although there had been major changes in the structure of
employment, there had been no ‘miracle’ transformation of labour
markets comparable to that which had occurred in the NIEs. In three
decades, these countries had changed from largely agrarian (or lowincome) societies to modern industrial—and, increasingly, modern
service-sector dominated—economies. In contrast, even though
manufacturing exports played a critical role in income growth during
the deregulation period in Indonesia, they had been promoted for little
more than a decade and were not sufficiently broad-based to contribute
to a sustained labour market transition.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
117
IMPACT OF THE CRISIS
The context of economic crisis in Indonesia was the extraordinary, and
largely unexpected, turnaround in economic performance starting in the
last quarter of 1997, and extending through most of 1998 to produce a
year-on-year fall in GDP of 14%.9 The well-documented sequence of major
shocks to output and incomes included the following.10
• A contraction in imports in response to the huge devaluation beginning
with the float of the rupiah in August 1997. The shock was so large
that it also negatively affected export-oriented manufacturing
(much of it dependent on imported raw materials and associated
credit arrangements), despite favourable movements in the
exchange rate.
• The ‘credit crunch’ of late 1997 and a blow-out in the debt situation
across the modern sector, bringing production to a halt in much of
the modern sector.
• The subsequent period of loose monetary policy in 1998, fuelling much
higher rates of inflation than Indonesia had experienced for nearly
30 years.
• The political and social chaos of May 1998, which brought imports
and most modern-sector economic activity to a virtual halt, and
severely disrupted domestic trade and transport for a period of
several months. The economy did not begin to recover until the
last quarter of 1998.
In Indonesia (and several other East Asian countries), relative prices
changed dramatically between tradeable (exportable and importable) and
non-tradeable activities, owing to the huge depreciation of the exchange
rate. However, the Indonesian crisis differed in several important respects
from similar crises in other countries: for example, the ‘tequila’ crisis in
Mexico in 1994–95 and the earlier debt crisis in Latin America in the early
1980s. The ‘appropriate’ response to macroeconomic crisis in the typical
Latin American case was a large devaluation accompanied by sharp cutbacks in government spending and money supply, resulting in a
contraction of domestic economic activity (Williamson 1990). The key
goal of structural adjustment was to shift resources into tradeable goods
sectors, often a necessary correction to long periods of exchange rate
overvaluation.
In contrast, the Indonesian crisis occurred after a sustained period of
economic growth; it was not associated with major problems of
macroeconomic or current account imbalance in the pre-crisis period (and
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Chris Manning
118
hence there was not a simple ‘IMF package’ remedy). The initial contagion
exposed structural weaknesses, and financial markets (increasingly
dominated by short-term capital flows) reacted swiftly and devastatingly.
The shock was exacerbated by policy uncertainty, as the ageing president
attempted to balance national economic interests with those of his family
and to manage (for the first time quite unsuccessfully) an increasingly
volatile political situation (Mietzner 1998).
Thus, although the crisis brought about a huge change in the relative
prices of tradeable and non-tradeable goods, it had a rather different
impact on production—and, as we shall see, on employment and wages—
than in the more familiar case of structural adjustment in Latin America.
Although the dimension of these changes is now well known, I will
summarise the main effects that are relevant to the labour market story.
Tradeable Activities
In tradeable goods industries, three different effects were apparent.
• Many export-oriented manufacturing activities, especially those
dependent on imports, did not benefit from the huge shift in
relative prices. They were badly hit by the financial crisis and lack
of international confidence in the rupiah, and by the political
turmoil, as manifested in initial falls in output and subsequent
slow growth through to mid 1999 (Pardede 1999).
• Import substitution producers that were not heavily indebted or
import-dependent received a substantial boost. Many were
typically small-scale traditional enterprises.
• Some agricultural producers with elastic short-run supply
schedules responded positively to the crisis. This was most marked
in the export-oriented cash crop sector. However, a positive
response was also evident in the food crop sector, despite
disruption to trade and transport during the worst months of the
crisis in 1998.
Within the tradeable goods sector, manufacturing output fell by close
to 13% after slowing considerably in 1997. Agricultural growth was
positive but well below the trend in previous years (of just under 3% real
growth in the first half of the 1990s). The volume of agricultural exports
increased significantly but was supported by only a small rise in the
volume of total non-agricultural exports.11 At the same time, the high
rupiah price of imports disrupted import-intensive activities, especially
those oriented towards the domestic market. Prices of everyday consumer
goods—such as cooking oil, chicken, soy bean products (tempe, tofu, soy
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
119
sauce), powdered milk, most medicines and basic plastic products—
soared.
Finally, it is important to recognise that Indonesia faced two other
sets of problems that affected output of tradeable goods, apart from
private debt and the banking crisis. The first was structural. China in
particular had made major inroads into the export markets of developing
countries following the devaluation of its currency in 1994. This
contributed to a fall in export growth in Indonesia in the mid 1990s,
although not to the same extent as in Thailand and Korea (World Bank
1998). Second, agricultural production was adversely affected in 1997 by
the El Niño drought, exacerbating the rise in food prices.
Non-tradeable Activities
In non-tradeable sectors, two main patterns were important.
• Specific non-tradeable service industries, primarily construction
and real estate, were seriously disrupted in major cities by the
dual impact of the debt crisis and credit crunch in the modern
private sector.
• Owing to across-the-board disruption of production and
investment during much of 1998, there was not the shift in
resources out of non-tradeables and into tradeable goods
industries (especially into manufacturing exports) that would
normally be expected to accompany a large depreciation.
The construction sector contracted most severely—by an astonishing
37% in 1998—bringing activity in the building and real estate sectors to a
virtual halt in all major cities, and especially Jakarta. The value of output
from the banking and finance, trade and transport sectors also declined
steeply. Fortunately, growth rates in other services (including the public
sector) fell only slightly and this helped cushion the effect of the
substantial fall in output of other sectors.
THE CRISIS AND LABOUR MARKET ADJUSTMENT
This discussion of labour market adjustment highlights the shift in
employment to tradeable sectors, the crowding into agriculture and the
informal sector, and falls in real wages. I look first at labour force
participation, employment and unemployment, then at deployment by
industry and work status—including the behaviour of displaced workers.
The section closes with a brief examination of trends in real wages. The
Rural
Male
Female
Total
1997
1998
1997
1998
1997
1998
1997
1998
1997
1998
Total (million)
Population aged 15+
Labour force
Employed
Unemployed
53.3
31.9
29.4
2.6
56.1
33.4
30.3
3.1
81.7
57.7
56.1
1.6
82.5
59.3
57.4
2.0
66.3
55.3
53.0
2.3
68.2
56.8
53.9
2.9
68.8
34.2
32.4
1.9
70.3
36.0
33.8
2.2
135.1
89.5
85.4
4.2
138.5
92.8
86.7
5.1
Rate (%)
Labour force participation
Employmentb
Unemployment
59.8
55.2
8.0
59.6
54.0
9.3
70.6
68.7
2.8
71.9
69.6
3.3
83.4
79.9
4.1
83.2
79.0
5.0
49.9
47.1
5.6
51.2
48.1
6.1
66.3
63.2
4.7
66.9
62.6
5.5
Growth (%)
Population aged 15+
Labour force
Employment
5.1
4.7
3.3
0.9
2.9
2.3
2.9
2.7
1.7
2.2
4.8
4.2
2.6
3.5
2.7
Share of increase (%)
Population aged 15+
Labour force
Employment
Unemployment
78.6
47.5
41.9
62.0
21.4
52.5
58.1
38.0
55.6
47.8
39.4
69.7
44.4
52.2
60.6
30.3
100
100
100
100
a
Refers to population aged 15 and over. bDefined as total employed as a percentage of the working age population.
Sources: BPS, Sakernas, 1997 and 1998.
Chris Manning
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Urban
120
TABLE 3 Key Indicators of Aggregate Labour Force and Employment Growth, August 1997 and August 1998a
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
121
analysis of employment change focuses on the findings of the Sakernas
of August 1997, on the eve of the crisis, and that of August 1998.12
Labour Force Participation, Employment and Unemployment
Adjustments in labour supply were one important aspect of the response
to the crisis. Total labour force participation increased slightly in 1998,
suggesting that there was no net withdrawal from the workforce related
to the contraction in demand for labour (table 3). Indeed, one response to
the crisis was greater female involvement in the workforce, to supplement
(or supply) the family income. Table 3 indicates a quite sharp rise in female
participation rates in 1998, which occurred especially in rural areas. The
increases were most apparent among older women living in rural areas.13
As we shall see below, many more women reported working in agriculture
than in the previous year.
More surprisingly, employment growth rates appear to have risen,
despite the displacement of large numbers of workers beginning in the
last quarter of 1997 (see last column of table 4). Employment growth did
fall sharply in urban areas, to 3.3% in 1997–98, compared with rates of
close to 7% in 1990–96. But this was counterbalanced by an increase in
participation and employment rates among women, especially in rural
areas. A slowdown of growth in urban employment was to be expected,
given the intensity of the impact of the crisis in Indonesia’s major cities.
Nevertheless, urban employment continued to grow. There is no
indication of the massive de-urbanisation and movement to the
countryside that some commentators had predicted.14
As table 3 indicates, unemployment rose only slightly in 1997–98—to
5.5% in August 1998 from just under 5% a year earlier. As noted, earlier
studies had predicted quite dramatic increases in unemployment based
on employment elasticity calculations with respect to GDP growth by
sector (ILO 1998). That this did not occur attests to the remarkable
flexibility of Indonesian labour markets and the capacity of people to
find new jobs after being retrenched from wage employment.15
Indonesian unemployment trends contrast markedly with those in
several other crisis-affected countries in East Asia. For example, by the
last quarter of 1998, unemployment in South Korea had more than tripled
from 2.2% in 1997 to close to 8%; in Hong Kong, Malaysia and Thailand
it more than doubled, from 2–2.5% in 1997 to 5–6% in 1998 (Manning
1999b).
The increases in unemployment in Indonesia were greatest among
young people, especially females aged 15–24 and younger rural males.
By August 1998, around 10% of all urban dwellers reported being
Agriculture Manufacturing Construction
Location
Total
Trade
Services
Othera
Urban
Rural
1990–96
Java–Bali
Outer Islands
Indonesia
–3.5
–0.3
–1.9
5.1
7.4
5.6
9.2
12.9
10.2
5.0
9.6
6.2
3.8
5.3
4.3
7.4
7.3
7.4
6.0
9.3
6.9
–0.6
1.1
0.1
1.6
2.7
2.0
1996–97
Java–Bali
Outer Islands
Indonesia
-5.8
–4.4
–5.1
2.8
7.9
4.0
9.8
10.9
10.1
4.7
11.2
6.7
3.7
14.4
7.5
2.4
14.5
6.0
6.2
8.0
6.7
–2.7
1.2
–1.0
0.7
2.8
1.6
1997–98
Java–Bali
Outer Islands
Indonesia
15.6
9.4
12.5
–9.5
–12.4
–10.2
–19.4
–12.5
–17.4
–0.3
–2.6
–1.0
1.1
–5.9
–1.4
–11.4
7.1
–5.2
2.2
5.9
3.3
2.5
2.1
2.3
2.4
3.1
2.7
a
Includes banking and finance, transport and communications, electricity, gas and water, and mining.
Source: BPS, Sakernas, 1990, 1996–98.
Chris Manning
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Industry
122
TABLE 4 Change in Employment by Major Sector and Location, Java–Bali and the Outer Islands, 1990–98
(%)
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
123
unemployed. As table 3 shows, male workers accounted for 70% of the
increase in unemployment over the 12-month period.
At the same time, the unemployment pool now consisted of a much
larger proportion of workers with previous job experience. In 1998,
approximately 40% of all unemployed had worked previously, compared
with only 20% in 1997. (The balance were first job-seekers.) The rise in
the share of those who had worked before was particularly marked among
younger males, in both urban and rural areas.
Employment Changes by Industry and Work Status
It was suggested earlier that crisis in Indonesia differed from the pattern
commonly observed in other countries, where there has tended to be a
large shift of resources into tradeable activities. This conclusion is
supported by the data on employment. Although employment grew
overall in tradeable goods industries in 1997–98, there was no clear-cut
shift in jobs in favour of tradeables, as might have been expected following
such a large exchange rate depreciation. Paradoxically in light of precrisis trends, the largest changes involved a reallocation of rural jobs into
agriculture, from both other tradeable and non-tradeable industries.
The main trends are summarised in table 1 (above) and in tables 4–5.
Tradeable Activities. The most important development among
tradeables was a dramatic increase in work in the agricultural sector. But
while agriculture made significant gains, manufacturing employment
contracted sharply among tradeable goods sectors, in both urban and
rural areas (see table 1, last column, and table 5). The increases in
agricultural work were large, and reversed the substantial fall in jobs
experienced in this sector in 1990–96, especially in Java–Bali (table 4).
The growth rate was high for both male and female workers, most of
them self-employed and working in family businesses. Bearing in mind
that agricultural production grew only slightly in 1998, output per worker
probably fell by around 10% overall.
Although disaggregated data on employment are not available by
agricultural subsector, it seems likely that many people crowded back
into this sector, sharing work on small farms. Many who returned
probably failed to find much work.16 Perhaps, too, many went back to
cultivating dry land agriculture or their house-gardens (pekarangan),
which had tended to be neglected during the period of rapid exportoriented growth. Crowding was likely to have been more intense in landscarce Java, and to have marked a greater fall in output and income per
worker.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Chris Manning
124
TABLE 5 Change in Employment by Sector, Location and Sex, 1997–98a
Urban
Rural
Change in employment (‘000)
Agriculture
4,762
Non-agriculture
–71
–2,339
Manufacturing
–298
–790
Construction
–182
–489
Trade and transport
285
–427
Services
185
–402
Other
–61
–231
Male
Female
Total
2,737
–1,759
–636
–657
–45
–213
–208
2,025
–651
–452
–14
–97
–4
–84
4,762
–2,410
–1,088
–671
–142
–217
–292
1,359
978
1,374
2,352
Total
993
% change, 1997–98
Agriculture
Non-agriculture
Manufacturing
Construction
Trade and transport
Services
Other
0
–6
–10
3
2
–14
–10
–13
–20
–4
–8
–33
12
–6
–10
–16
0
–3
–23
15
–3
–9
–9
–1
0
–41
13
–5
–10
–16
–1
–2
–26
Total
3.4
2.4
1.8
4.2
2.7
13
a
Data refer to population aged 10 and over.
Sources: BPS, Sakernas, 1997 and 1998.
But not all agricultural producers suffered from the crisis. There was
a significant rise in agricultural employment outside Java, in response to
improved domestic prices for cash crop exports in certain provinces, such
as South and North Sulawesi and Lampung (Potter 2000). Farmers who
produced a marketable surplus—not just of rice, but also of corn in the
poorer, rain-fed areas of Java and the Outer Islands, and of fish in the
case of fishing families dotted along the north coast of Java—benefited
from the sharp increases in food prices in 1998 (Maurer 1998). The
‘traditional’ free-range chicken industry and vegetable producers
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
125
cultivating house-gardens also received a boost from the high prices of
imported substitutes and inputs.17
According to the Sakernas data, agricultural employment rose quite
steeply in urban areas as well, possibly as a result of renewed cultivation
of previously unused land (lahan kosong) controlled before the crisis by
real estate companies and speculators (Tubagus 1999). This trend was
particularly pronounced in the Outer Islands, where land was more
abundant on the outskirts of urban areas than in Java–Bali.
In contrast to agriculture, manufacturing employment fell by a large
margin in both Java–Bali and the Outer Islands (table 4).18 Within Java,
the declines were particularly marked in the major industrial centres of
Jakarta, West Java and East Java, where the Sakernas data suggest
manufacturing employment fell by close to 15%.
These aggregate changes undoubtedly hide important changes in the
composition of manufacturing.19 The large changes in relative prices
opened up new opportunities in this sector. While the impact of the
depreciation was felt most by cash producers outside Java, several clusters
of small and medium industries in Java also benefited. They included
producers of sarongs in Majalaya, West Java, and furniture producers in
Jepara in Central Java. In other cases, imports were substituted with
domestic production that was largely free of imported inputs. Anecdotal
evidence suggests that many products that had once been part of the
traditional Javanese economy began to be produced by rural people at a
fraction of the cost of imported goods. These included bamboo mats and
bags (replacing plastic) and processed food relying entirely on local food
products.
Finally, there were important changes in employment by sex in the
tradeable goods sectors. Employment of both males and females rose in
agriculture, but the percentage increase was greater among females (table
5). In addition, many more males lost wage jobs in manufacturing. In
general males, who tended to be more concentrated in modern sector
jobs, were harder hit than females by the crisis, although women also
lost a significant number of jobs in manufacturing.
Non-tradeable Activities. As would be expected, employment declined
substantially in non-tradeables, in contrast to the overall expansion of
employment in tradeables. However, as with tradeables, there was
considerable variation within non-tradeable activities and a marked shift
from wage to non-wage employment. The data point to an increasing
informalisation of employment in non-tradeable activities.
All non-tradeable goods sectors experienced an overall decline in
employment, except transport and communications, the latter perhaps
reflecting crowding into labour-intensive segments such as becak
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
126
Chris Manning
(trishaws) and ojeg (private motor cycle transport services). By far the
greatest decline—aside from the small utilities sector (electricity, gas and
water)—was in construction in both urban and rural areas.20
There was, however, a marked contrast in employment trends
between urban and rural areas in other non-tradeable goods and service
industries. Whereas mainly informal, non-wage jobs rose in trade,
transport and services in the towns and cities, employment in similar
activities fell in rural areas (table 5). Some activities, such as petty trade,
repair work and food stalls, absorbed more workers in towns and cities,
but probably at lower levels of income. In these sectors, similar patterns
were observed in Java–Bali and the Outer Islands.
Although some new activities have been important for the poor, their
impact can be overstated given the substantial disruption caused to local
trade and transport and the negative impact of inflation on living
standards (see below). There is little doubt that Jellinek and Rustanto
(1999: 2) overstate the impact of consumption switching and substitution
in production on the incomes of the poor when they suggest that ‘we are
witnessing an unprecedented economic boom in the small-scale sector’.
The employment and wage data suggest that, in so far as employment
grew in non-tradeable industries, this was mainly the result of crowding
into the informal sector.
Displaced Workers
The data presented above do not help us to identify the impact of job
losses during the crisis, since they refer to changes in the employment
structure at two points in time. We can obtain a better glimpse of the
direct impact of labour displacement from a 1998 Sakernas questionnaire
on the current activities of people who left their jobs between August
1997 and August 1998. Although not all those who left jobs did so because
of the crisis, a large percentage appear to have done so.21 We refer to this
group as ‘displaced workers’ for convenience.
The data support the general findings presented above on changes in
the distribution of work by industry and work status. Table 6 presents
data on the sector of employment in August 1998 of people who had left
their jobs during the previous year. Two findings stand out.
First, a high proportion of displaced workers found work in
agriculture. The considerable absorptive capacity of agriculture is further
suggested by data from the Sakernas on the industry in which new
agricultural workers had previously been employed. For example, a high
percentage (30–40%) of those who had left work in manufacturing and
construction shifted to agriculture.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Labour Market Adjustment to Indonesia’s Economic Crisis
127
TABLE 6 Main Activity in August 1998 of People Who Left Jobs
during the Previous Year
(%)
Main Activity
Male
Female
Total
Not working
Unemployed
Outside the labour force
Subtotal
25.6
13.0
38.6
24.8
43.7
68.5
25.4
23.5
48.9
Working
61.4
31.5
51.1
100.0
2,808
100.0
1,471
100.0
4,279
38.9
10.7
11.7
17.3
9.0
12.5
40.7
17.5
1.5
26.1
12.1
2.2
39.3
12.1
9.5
19.2
9.6
10.3
100.0
1,724
100.0
464
100.0
2,188
36.6
63.4
30.0
70.0
35.2
64.8
3.2
1.4
2.5
53,969
33,077
87,046
Total who left their jobs
(‘000)
Main sector of work of those
finding new jobs
Agriculture
Manufacturing
Construction
Trade
Services
Other
Total finding new jobs
(‘000)
Of which:
Wage
Non-wage
Those finding new jobs as
% of total employed
Total employed (‘000)
Source: BPS, Sakernas, 1998.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
128
Chris Manning
Second, trade—typically the largest informal sector in urban areas—
was the second most important sector of employment for displaced
workers. Not surprisingly, the majority were self-employed, seemingly
in activities such as small stalls and hawking. Around 20% of people
who had previously worked in manufacturing and services found new
jobs in trade.
We can infer that much of the labour displacement was from modern
sector work by looking at the educational status of people who left jobs
in the year to August 1998. While many less-educated persons lost their
jobs, a disproportionate number of displaced workers—nearly onethird—were educated to at least upper secondary level, compared with
only around 20% of all employed persons in 1997.22
As might be expected, not all those who left their jobs were able to
find employment. One-quarter remained unemployed in 1998, and a high
proportion of females (44%) were outside the workforce (table 6). Most
of the women (some 300,000) who left the labour force had formerly been
wage workers, although a significant proportion had previously managed
their own enterprises or worked in family businesses.23 Thus there
appears to have been a significant number of ‘discouraged’ workers who
left the labour force as a result of the crisis (although, as noted above, the
number of women entering the labour force in 1998 far exceeded those
who left, the net increase being just under two million).
Trends in Wages
As noted, average real wages grew strongly across all major sectors from
1990 through to the onset of the economic crisis. Wage growth was rapid
across all sectors, both tradeable and non-tradeable, suggesting a general
tightening of labour markets (table 7). However, real wage rates in rice
agriculture—still the single most important employer of unskilled, casual
labour—grew less quickly than average wages, and were uneven across
regions (Manning 1999a).24 Given the substantial rise in average wages
noted earlier, it is likely that much of the increase could be accounted for
by the rising proportion of skilled workers in the workforce, and their
deployment into higher-productivity jobs, especially in manufacturing
and services.
The general pattern of real wage increases reversed sharply in 1998
as adjustments in nominal wages failed to keep up with rates of inflation.25
The decline in real wages was dramatic in both tradeable and nontradeable goods sectors. They fell by close to 35% overall, and nearly
4