On unemployment: Squaring the circle II

On unemployment: Squaring the circle II

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

Unemployment, as we saw, is not an easy subject. It is hard to
define. It is difficult to measure. Governments do not find it
easy to formulate and implement unemployment reducing policies.
How do we begin to get a handle on the unemployment question in
the current Indonesian situation?

Labour force statistics, even incomplete ones, provide a good
starting point. They tell us that to understand the severity of
the unemployment problem in Indonesia we should focus not on open
but on "hidden", "disguised" or "under" employment". Open
unemployment, defined as consisting of those who work less than
35 hours a week and are actively seeking a job, is in fact rather
small.

What is worrying for Indonesia is that open unemployment has
risen from a mere 2.8 percent in 1993 to around 4.7 percent at
the outset of Krismon in 1997 to around 8.1 percent in 2001. It
is often noted that the 2001 figure is not much higher than in
several developed industrial countries. This is not much of a
consolation to a country long used to very low levels of open
unemployment.

The relative numbers of open and disguised unemployment
illustrate the dimensions of the problem. Indonesia has a total
workforce of some 98.8 million people. Out of this around 60
million are considered fully employed. An estimated 8 million are
openly unemployed. The remaining 27.7 million persons are classed
as underemployed". Note that the number of the disguised
unemployed is four and a half times the number of openly
unemployed.

The employment problem can therefore be divided into two
constituent elements. The first is to stem the increase of open
unemployment begun from the mid 1990s. The second is to reduce
the incidence and volume of disguised unemployment. This means
providing work such that each underemployed person becomes fully
employed

That serves to put the unemployment problem in perspective.
But we need more detail with respect to location and occupational
patterns. The data at hand does give us some good starting
indicators. Thus out of the 27.7 million underemployed, around 21
million or 76 percent live in the rural areas. The rest 6.5
million, 23.7 percent, are urban residents. This rural-urban
spread is also reflected in the occupational patterns.
Agriculture and forestry thus account for around 19 million
underemployed. This is as much as 68 percent of the total number
of disguised unemployed.

In addition, there are the regional variations in employment
and unemployment. Thus Jakarta leads the country with some 65.5
percent of its workers in formal employment. Aceh has only 19
percent. Seen from another angle, informal sector jobs account
for around 62 percent of all workers in Bengkulu and only 42
percent in Yogyakarta.

This structure of unemployment has some critical messages for
policy. First, "going for growth", relying on a fixing of the
banks and the large organized sector, will not be enough to solve
the problem. This might make a dent on open unemployment if
future growth is job absorptive rather than job shedding. But it
is likely to be an expensive strategy. It costs much more to
create a new job in the formal, urban sector than in others.

Second, with over 40 percent of the population already living
in cities, labour absorption through the continuous migration
from the villages is not sustainable. The urban areas already
contain a significant pool of unemployed and underemployed,
around 14.6 million of them. Migration of the old form is not a
serious policy option.

Third, the disguised unemployed are not always free to
undertake secondary jobs if these are far away or at peak
activity times. Transport costs, family obligations and the
pattern of seasonal farming activity limits the number of people
who can travel far to supplement the number of hours worked. Thus
aggregate unemployment provision strategies will provide only
partial solutions.

This is where populism enters the story. Regional government
will, of necessity, be a lead actor in the employment story. The
old formula of roads, bridges and pylons might well have to be
part of the game plan. But so would business incubation centers,
cooperative processing and marketing of agricultural commodities.
Then there are schools and clinics and safe water supply
programs. These are all parts of the populist promise. But they
also make sense in creating local employment opportunities. At
current cost estimates they are still much cheaper than
persuading banks to lend to all but the richest and the safest of
borrowers.

The lesson is simple. The market cannot do it all. The state
will have to play the lead role as thinker, organizer and
initially at least the financier of last resort. But to be
effective, the state will have to be both legitimate and
accountable. Issues of regional balance and social justice will
need to play a key part in public investment decisions.
Accountability is more than good accounting. It requires not only
checks and balances of a functioning democracy. It also needs the
corrective of public information and public complaint.

I hear the groan of the sceptic. This is all utopian, he says.
The state is corrupt. What is worse, it is also bankrupt.
Politicians are driven by their own interests. They care nothing
for the greatest good of the greatest number. This is a strange
comment. How easy is it to forget that today's Indonesian
economic reform is little more than a wholesale bail out of
organized private business by the public purse?

Luckily, one does not have to choose between the state and the
citizen. The question is setting appropriate boundaries for both.
Other countries have experimented with different incentive
systems. Management contracts, out-sourcing, civil society
partnerships, watchdogs and management audits all constitute the
armory of the modern democratic state.

But to move towards the appropriate institutional choices for
Indonesia, we must first remove the blinkers. We must be able to
weigh up all the alternatives. There is nothing sacrosanct about
budget deficit or debt targets, nor about interest rates or
inflation targets. Taxes are not fixed in stone. They can be
changed, and are all the time, at times of crises and
emergencies. Established democracies all over the world have done
just that.

Fortunately, investors are cautious people. Stung by past
crises, they tend to look beyond macroeconomic indicators to
political and social variables. They have often used local
knowledge and sentiment as barometers to guide their own. Reduced
unemployment within a convincing local framework will appeal to
them both as a signal for economic activity and political
stability. We might do well to start working on that message.

The views expressed in this article are strictly personal.