Employment generation target needs correction

Anton Doni Jakarta

The new government has set some ambitious economic targets that may well be very hard to achieve: The creation of 600,000 new jobs for every 1 percent of growth, and a growth target of 6.6 percent annually. That means for next year, with an expected growth of 4.4 percent, about 2.6 million jobs would be created with more expected in following years, reducing the current level of unemployment while at the same time keeping pace with growth in the labor force.

Unemployment is a mammoth problem affecting 9.5 million Indonesians, or 9.5 percent of the entire labor force. The unemployment rate is the peak of a consistent trend since the 1997 economic crisis, rising from 4.7 percent in 1997 to 5.5 percent in 1998. In 1999 it increased to 6.4 percent, then 6.1 percent in 2000, 8.1 percent in 2001, 9.1 percent in 2002, then 9.5 percent in 2003.

But is the government's target realistic? One of the ways to examine its reasonability is by looking at the history of employment generation in previous years.

Although the targeted number at a glance looks unrealistic for today's situation, there is evidence that supports the possibility that the targets could be reached, although its probability is not especially high.

There have been two years of economic growth where employment generation per 1 percent of GDP growth (employment elasticity) has exceeded 1 million jobs, namely 1986 and 1999. A thorough study of the factors that produce such high levels of employment elasticity can help the government to know whether it can reach its targets, or whether it needs to lower its sights.

Aside from economic growth in 1986 and 1999, there are no other years where employment elasticity gave such an impressive performance. Apart from the years just mentioned, the highest elasticity is in 1987 when 418.713 new jobs per 1 percent GDP growth were generated. Others years show levels below 400.000, among them 1988, 1990, 1992, and 1994, with employment elasticity above 300.000. The rest are much lower. (See table).

The simplest conclusion, then, is this: Although the possibility of realizing the government's plan to create 600,000 new jobs per 1 percent GDP growth cannot be ruled out, it must be kept in mind that there are limited historical references support such significant employment growth.

High job growth in 1999 is not a particularly good example. Although at that time employment growth was quite high, it was caused more by the re-opening of factories and other manufacturing businesses that were forced to stop operations as a consequence of the economic crisis of 1997.

With such limited references, and taking into account the fact that even in the times of a rapidly growing economy employment elasticity is only moderate, it can be concluded that the government should lower its ambitious employment generation targets.

The relationship between GDP growth and employment generation is not fixed. One percent of GDP growth may well produce very high levels of employment -- up to 1,000,000 jobs -- in one year, but other years it can have a very minor impact, as low as 86,757.

Learning from statistics, the most realistic choice may be to prioritize GDP growth with a more moderate expectation of employment elasticity. An expectation of 300,000 to 400,000 jobs per one percent of economic growth is much more realistic, as happened in 1994, 1992, 1990, 1988, and 1987.

It seems that good performance in terms of both employment elasticity and employment growth in those years was caused by expansion in the manufacturing sector, in helped by the trading and construction sectors.

A good combination occurred in 1994 when manufacturing sector output growth of 12 percent contributed an additional two million jobs, the trading sector about 1.5 million jobs from a growth rate of 7.6 percent, construction about 750,000 jobs from a growth rate of 14.9 percent, and transportation 445,365 jobs from a growth rate of 8.3 percent.

It also occurred when agriculture contributed negatively to employment generation. Using the term now promoted by ILO, productive employment, the years thus marked a good achievement in the promotion of productive employment.

Learning from these years it can be seen that it is important to push growth in manufacturing. The loss of competitive advantage factors such as low labor costs, and the degradation of business environment, which currently limits the growth of those sectors, means the government must work very hard to overcome negative factors.

Meanwhile the export of migrant workers is also crucial. However the government has a lot of work to do in improving the chaotic management of our migrant workers.

Despite all efforts, the government's target to create 600,0000 jobs per one percent of economic growth will be unlikely to be achieved. The government must be more realistic.

Table. GDP Growth, Employment Growth, and Employment Elasticity of Selected Years YearGDP Growth (%)Employment Growth (%)Employment ElasticityUnemployment Rate (%) 19865.99.41,000,1782.6 19874.93.0418,7132.5 19885.83.0366,0302.8 19897.51.3121,5542.8 19907.13.3339,7312.5 19916.60.886,7572.6 19926.72.7313,1832.7 19937.20.994,3532.8 19947.53.6376,3354.4 19958.2n.a.n.a.7.2 19968.0n.a. n.a.4.9 19974.71.6286,7964.7 1998-13.32.7-172,652.5.5 19990.81.31,346,3656.4 20004.91.1204,7086.1 20013.51.1285,0428.1 20023.70.9227,5749.1 20034.1-0.9-210,3059.5

*) Employment elasticity is defined as the amount of additional employment generated from 1 percent of GDP growth.

The writer is head of The Jakarta Post's Research and Development Unit.