Keeping a Close Eye on Unemployment

KOMPAS/ADITYA DIVERANTA

A number of workers on Jalan Haji Agus Salim, Central Jakarta, left the office during lunch break on Wednesday (22/7/2020). During the Covid-19 Pandemic, some of them were nervous about the emergence of a contagion cluster in the office area.

The Covid-19 epidemic has affected all aspects of economic development, including the labor market. Because the demand for labor is a "derivative" of demand for output, demand for labor is directly affected when production is disrupted.

The decline in the labor demand has been marked by layoffs (whether the workers are still paid or not) or a switch to working on rotation, and not a few workers have been affected by job termination. The Manpower Ministry recorded at least 1.7 million workers had lost their jobs as of May 2020. Meanwhile, the International Labour Organization has projected that the Covid-19 health crisis will affect 25 million workers in Indonesia, while 2.8 million workers will face job termination or layoffs.

From here, many parties have projected an "explosion"– a drastic increase – in unemployment. The Finance Ministry projects that the number of unemployed will increase by 4 to 5 million people this year. That means our unemployment rate could increase from 5.28 percent in August 2019 to 7-8 percent in 2020. Several international institutions have even projected much lower economic growth and thereby a much higher projection for unemployment.

Also read : Recession and New Civilization

Given the enormous implications for social welfare, developments in the unemployment rate during the epidemic need to be examined; not only in the case of a drastic increase, but also in the case of a "moderate" increase. Why so? On a different scale, what is happening now resembles the situation in the labor market during the 1998 crisis. Several agencies also made unemployment projections at that time.

The then-manpower department projected that the unemployment rate would increase from 4.68 percent (1997) to 14.8 percent. The projections of the National Development Planning Agency (Bappenas) and the ILO were respectively 13.6 percent and 10.0 percent. In reality, when Statistics Indonesia (BPS) published the official 1998 unemployment rate the following year (1999), the figures were far lower, "only" 5.2 percent!

Also read : Recession and Economic Sustainability

KOMPAS/HENDRA A SETYAWAN

Yanto arranges plastic bags of aquarium fish on Thursday (2/4/2020) at an ornamental fish farm near Mount Sindur in Bogor regency, West Java. The Covid-19 outbreak in Indonesia has disrupted the activities of thousands of micro, small and medium enterprises (MSMEs), including the ornamental fish trade.

What happened? Why was the unemployment rate (relatively) low when economic growth had fallen sharply (to minus 13.2 percent) as a result of the crisis? According to the formula for employment elasticity, employment absorption should fall during negative growth, shouldn’t it?

The answer to these questions is the unemployment benefit. The absence of an unemployment benefit in Indonesia (and developing countries in general) meant that only people who had money were able to live without an income (from work). The money could be in the form of severance pay, savings, proceeds from asset sales, or gifts from other people (including the government). Without money, people have no choice but to work to survive: any job, any wage.

However, this does not mean that the current crisis has not had an impact on the labor market. The impact is not a surge in the unemployment figure/rate. The writer\'s analysis based on data from the Indonesian Family Life Survey (IFLS) shows that many workers have seen a change in their employment status from formal to informal during the crisis. This is most likely because laid-off formal workers are turning to the informal sector workers in order to survive.

Also read : Recession and New Civilization

The resulting economic crisis also caused an increase in the labor force participation rate (TPAK). Quite a large number of people who were previously inactive in the labor market have become active labor, as both workers and job seekers. The impact of the crisis is also seen in reduced working hours in key jobs. The crisis has reduced the intensity of production/business activities, thereby effecting reduced intensity in the use of labor. Apart from these, the most important impact of the crisis is the decline in income among those with worker status.

In other words, many people continued to work during the 1998 crisis because they had no other choice, but their welfare declined. As a result, the relatively "ordinary" unemployment rate did not adequately describe the "economic suffering" of the people during that difficult time.

Also read : Recession and Economic Sustainability

BIRO PERS SEKRETARIAT PRESIDEN

President Joko Widodo provides working capital assistance to small and micro traders in the backyard of the Bogor Presidential Palace, Friday (24/7/2020).

Lessons

Learning from the 1998 crisis, an explosion in the unemployment rate will not necessarily occur as a result of the Covid-19 health crisis. The unemployment rate might increase, but not necessarily as per the projections made by various institutions.

It is entirely possible that the problem in the labor market cannot be seen in the high unemployment rate. In such a condition, issuing employment policies by referring only to the unemployment rate can pose a risk through programs/policies that are ineffective at managing the impacts of the health crisis on the labor market.

As mentioned earlier, the absence of an unemployment benefit means that not everyone can be counted among the unemployed. People whose jobs are terminated with severance pay, for example. For the time being, they will be able survive while being unemployed by living off their severance pay. People with savings fall into a similar scenario. Even if they lose their jobs, they can still survive by using their savings; likewise those people who have assets to sell or people with relatives who can help. They will all be able to survive even if they do not have jobs.

Also read : Printing Money During Pandemic

However, when the severance pay runs out, or those whose job terminations do not come with severance pay, laid-off workers who have been unpaid, people without savings, assets or family who can help, people have no choice but to work (at any job). The important thing is to earn money so they can survive. These people are too poor to be unemployed. They are statistically categorized as "workers", but are unable to escape the poverty trap. They are poor workers. Without overgeneralizing, their existence can be simply termed actors in the informal sector, especially micro or ultra-micro businesses.

Social assistance from the government\' will indeed help, and could theoretically reduce the desire to "do any kind of work". However, the amount is still too little to enable them to survive without work. This means that despite receiving social assistance, they still have to work. The estimated number of poor workers during the epidemic is far greater than the number of unemployed. In addition to being more numerous, they have lower welfare than unemployed people. Therefore, it would be inappropriate if the government focused only on the unemployed in the labor sector.

Also read : New Normal of the Economy

KOMPAS/TOTOK WIJAYANTO

A worker carries trays of freshly made tofu to the packaging section of a small tofu producer on Thursday (23/7/2020) in Pancoran, South Jakarta. As of July 21, the government has disbursed Rp 11.84 trillion in working capital for cooperatives and micro, small and medium enterprises (MSMEs) through national economic recovery program. The figure is 9.59 percent of the Rp 123.46 trillion fund for cooperatives and MSMEs.

Need for synergy

In general, the government’s programs for managing the impacts of Covid-19 are on the right track, including on employment. On the one hand, the government is trying to boost purchasing power through various social assistance programs. On the other hand, it is giving stimulus to business owners (directly and indirectly) so they can continue their businesses and the labor demand is maintained.

What is needed is honing the programs to address specific problems in the labor market. If it turns out later that the unemployment rate has not increased as projected, the government should not "relax" and assume that the problem has been solved. It needs deeper examination, such as whether the proportion of informal workers has increased or whether the number of poor workers has increased.

ARSIP KANTOR STAF PRESIDEN

Edy Priyono

Considering that the proportion of informal workers in Indonesia remains very large (greater than formal workers), the employment policies cannot be separated from the efforts to assist small and micro businesses, which are generally in the informal sector. In this situation, cooperation and synergy between the relevant ministries/institutions is an unavoidable necessity.

Edy Priyono, Lecturer at the School of Economics and Business, University of Indonesia; Senior Expert at the Presidential Staff Office.