On unemployment: 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.