Beware of the Second Wave of Recession

KOMPAS/KARINA ISNA IRAWAN

Enny Sri Hartati

The economy began to show an improvement in the third quarter of 2020, but there is no guarantee that the economic recovery will continue as the Covid-19 pandemic has caused massive layoffs.

According to data from the Manpower Ministry, about 3.1 million people in the formal sector have been laid off, partly because the manufacturing sector, which is the basis of employment , declined by 1.3 percent. Almost all sectors have reduced their workers, except the agricultural sector, which still grew by 2.23 percent and the trade sector that rose by 0.46 percent.

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As a result, the number of open unemployment in August 2020 reached 9.77 million people (7.07 percent), an increase of 2.67 million people or 1.84 percent from the figure recorded in the same month, 2019. Statistically, the additional open unemployment is still relatively small and not worrying.

It is possible because the layoff victims did not immediately become totally unemployed because some of them switched to the informal sector.

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Therefore, the share of informal workers increased quite drastically, from 55.88 percent in August 2019 to 60.47 percent or about 77.68 million people in August 2020. This means that formal workers who have sufficient job security, such as laborers and employees only accounted for 39.53 percent or 50.77 million people.

KOMPAS/RONY ARIYANTO NUGROHO

Long lines of KRL commuter train passengers are seen at Bogor Station, Bogor city, West Java, Monday (8/6/2020). A number of workers and economic actors from the Greater Bogor region began to leave for Jakarta because a number of offices and economic activities began to open during the Transitional Large-Scale Social Restriction (PSBB) in Jakarta.

Thus, even though the number of the open unemployment totaled only 9.77 million people, the number of the people who work part time or underemployed are very large. The number of full-time workers, who work at least 35 hours per week, totaled only 82.02 million people, or a decrease of 9.46 million people. In percentage, the number of the full-time workers fell from 71.04 percent to 63.85 percent. Based on the criteria of the International Labor Organization (ILO), the additional unemployment is not 1.84 percent, but 7.19 percent. It is bigger because the share of underemployment increased from 6.42 percent to 10.19 percent and the portion of part-time workers increased from 22.54 percent to 25.96 percent.

According to the latest data issued by Statistics Indonesia (BPS), as of August 2020, the number of the working age population affected by Covid-19 reached 29.12 million people (14.28 percent). Of the total, 24.03 million experienced a reduction in working hours, while the number of those who could not find jobs totaled 2.56 million people, and those who lost their works because of Covid-19 reached 1.77 million people and those who were not part of the workforce totaled 0.76 million.

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Due to the domination of the informal sector and the increase in the number of part-time workers, it is increasingly difficult to restore people\'s purchasing power. Due to poor data, informal workers are unable to benefit from a number of social protection programs such as wage subsidies. As informal workers only depend on daily income, they are very vulnerable when there is an economic turmoil. Based on BPS data, the percentage of the population categorized as near poor reached 7.45 percent or around 19.91 million people, with the largest portion or about 12.15 million people (61.03 percent) coming from the informal sector.

In addition, before the pandemic, the percentage of poor people had increased from 9.22 percent in September 2019 to 9.78 percent in March 2020. The number of the poor people increased by 1.63 million people to 26.42 million people. It was quite surprising because the number of poor people in urban areas rose by 1.3 million people, while in rural areas it increased by 333,900 people. The poverty gap index-P1 increased to 1.61 points and the poverty severity index-P2 increased to 0.38 points.

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With the assumption that global economy will contract by 5.2 percent in 2020, the World Bank estimates between 88 million and 115 million people could be pushed into the brink of extreme poverty. Furthermore, in 2021 it is predicted that the number of chronic poverty, only earning less than US$1.9 (Rp.29,000) per day, will increase by 23-25 million people. About 82 percent of people experiencing extreme poverty are in middle-income countries, such as India, Nigeria and Indonesia.

KOMPAS/KARINA ISNA IRAWAN

Projections of global poverty 2020 according to the World Bank.

Solution

A deteriorating workforce structure and rising poverty rate should be anticipated and mitigated seriously as household spending remains the main contributor to the country’s economic growth. Meanwhile, people\'s purchasing power also plays an important role in investment. The close causal relationship becomes an obstacle and also a challenge, but at the same time it becomes the main key to the solution. This means that if various programs are able to focus on efforts to encourage job creation, they can also be the most effective solution.

The question is that is the implementation of Law No. 11/2020 concerning job creation able to answer the problem? The main requirement to create new jobs is to increase labor-intensive investment. Meanwhile, the direct foreign investment, which entered Indonesia in January-September 2020 were dominated by the service sector, which accounted for 55.4 percent. The share of investments in the manufacturing industry dropped dramatically to only 33 percent. The share of investment in food crops, plantations and livestock was only 5.9 percent. Moreover, the sector that most attracted foreign investments, especially those from China, is logistics, such as transportation, warehouses and communications. The total investment in the logistics sector in January-September 2020 accounted for 15.3 percent.

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It means that such trend of investment continues, the simplification of investment licensing requirements will not necessarily be a solution in job creation. It is possible because the increase in imports from China, which reached 33.73 percent in September 2020, continued. On the other hand, the industrial sector growth contraction or the process of de-industrialization was continuing.

In fact, once again, the labor-intensive sector which can massively provide employment and creates added value is part of the manufacturing sector. If the domestic industry remains remain uncompetitive. it will certainly difficult to attract investment. Moreover, data from the Manpower Ministry shows that Indonesia\'s labor productivity is only 74.4 percent. The figure is among the lowest in ASEAN countries – for an example, the Philippines (86.3 percent), Singapore (82.7), Thailand (80.1 percent), Vietnam (80 percent), Laos (76.7 percent), and Malaysia (76.2 percent).

ENNY SRI HARTATI, Senior Researcher at the Institute for Development of Economics and Finance (INDEF).