JP/6/MISHRA

JP/6/MISHRA

The unemployment question:
Squaring the circle

Satish Mishra
Head, United Nations
Support Facility for
Indonesian Recovery (UNSFIR)
satish.mishra@undp.org
Jakarta

Psychologists have a favorite game. This consists of asking
their clients to react to pictures and symbols with the first
word which comes to their mind. The answers are expected to
reveal deeply hidden fears. Bringing our innermost feelings out
into the open this way helps us to come to terms with ourselves.
In the process, we look things in the eye. We are no longer
trapped in denial. Reality stares us in the face.

Strange as it might seem, the Indonesian condition bears a
curious parallel to such a word game. Think about krismon
(monetary crisis). What are the first words that come to your
mind? The rupiah, stock prices, debt, KKN, crime, IBRA, IMF, the
budget, inflation rate, fuel subsidy, foreign investors,
Singapore, Tommy Suharto, regional autonomy, the poorest of the
poor. There are no right or wrong answers in this game; just a
revelation of concerns, prejudices and preferences. Surprising
nevertheless that jobs and wages are rarely on the first-reaction
scorecard.

Four presidents and five and half years into krismon, people
are trying to make sense of it all. 2004 looms. There will be
direct elections. What are the issues closest to the public mind?
What is their vision of the good life? You might get different
answers from different people. But one thing is certain. A steady
job is sure to be on almost everyone's list.

That employment merits so little attention amidst a mountain
of papers on the Indonesian economy since 1997, is not altogether
a surprise. First, there is the problem of definition. When is a
person really employed? We could think in terms of the numbers of
hours worked per week. Forty is a good number. But so is 30 or
50.

What about the gifted artist who might paint one picture in
two months and makes enough to live on for several years? Is she
employed for two months or two years? What about those who stay
at home, work 10 hours everyday and receive no cash? What about
agricultural laborers and construction workers, who work in a
frenzy of seasonal activity? What about those who are just lazy
and live on family support or grandma's inheritance?

Second, there are pitfalls of measurement. Not everyone is in
formal employment. They do not clock in and out. Their working
hours and wages are not recorded by their employers. They might
work 60 hours one week and just 10 the next. They might be
migrant workers who move from one job to the next. They may not
remember how many days they worked and where.

What about those who work in family concerns. How would they
distinguish between the hours worked by one family member from
that by another? They would find it even harder to differentiate
between the incomes of several members of the same family. Such
collective work and pay poses both a conceptual and a measurement
problem. Labeling it as "informal sector" work does not bring
much analytical light to the question.

Measurement problems do not just end with tracking jobs in the
informal sector. Not everyone in formal employment is a truthful
respondent to workforce questionnaires. Take the case of your
average civil servant or teacher or electrician or plumber.
Salaries are low. Moonlighting is commonplace. There is little
incentive to tell the truth. There is equally little incentive to
report it. The result is poor classification of both jobs
undertaken and hours worked.

There is a third and much more complex problem -- one which
concerns policy makers. They are little enamored with labor force
statistics. But they are into the business of thinking about how
to create new jobs. They promise to purge the curse of
unemployment. The promise is repeated with great urgency during
run up to the elections. The trouble is no one really knows how
to do that or what it would cost.

In the old days, the solution lay in the building of bridges
and highways and electricity pylons. The government could run a
hefty deficit. In times of recession it could even print money.
Unemployment signaled unused capacity. By pumping money in the
hands of the consumer it could generate a virtuous cycle of
investment and growth. Even Henry Ford, no champion of the
working classes, saw that if you raised workers' wages you might
sell more cars. They would certainly be happier. They might even
be more productive.

Such "populism" is a thing of the past. Today's governments,
under scrutiny from international financial institutions and
global currency markets have limited room for maneuver. That is
rather ironical for those countries emerging from
authoritarianism to democracy.

They must establish rule by the people. But they must avoid
any hint of populism. The state must live within its means. It
must not be in the business of providing jobs directly.

So what lies next? The answer, as in the psychologist word
game is instinctive. Go for growth. The arithmetic is blindingly
simple. Count the number of new entrants into the job market in
any one year.

Estimate the investment required to absorb this potential
increase in the labor force. Relate investment to growth using
the equivalent of the economists' version of the theory of
relativity. The relevant words are: Capital output ratio.

That will give you just what you want. It will tell you the
rate of growth of growth domestic product needed to absorb all
the new entrants into the job market. And there you have it.
Indonesia's GDP needs to grow by around 5 percent to 6 percent
each year to keep pace with some 2 million job seekers each year.

That looks good. We have a number. There is a policy target.
But the skeptic is hard to convince. Granted that investment
generates growth and growth brings jobs, what determines
investment? Public investment might be driven by votes. What
about private investment? What drives the captains of industry,
directors of banks and managers of trading empires? The favorite
answer, popular since the mid 1930s, is "sentiment". The
uncharitable Keynes called it "animal spirits". These days it is
called investor confidence.

That brings us full circle. In the end, jobs are created by
investor confidence. This is threatened by direct creation of
jobs by the state. That would be populism. So how does a
government keep its promise of creating new jobs? It keeps
investors happy while keeping out of the job creation business.

As in all suspense stories, there is sudden shift in the plot.
Not all economic downturns are alike. The factors which promote
investor confidence in one context might undermine it in another.
Indonesia is a good case in point.

In times of systemic transition, investor confidence might
well be influenced by "public" confidence. What is more, a little
dose of populism might not be a bad thing.

The opinions expressed in this article are strictly personal.