Indonesia’s Employment Challenge: Can Economic Growth Create More Jobs?

We hope our country’s economic performance in recent years guarantees more job creations as we consider output growth and employment are positively correlated. However, we found other interesting facts.”

Being one of the most populous countries in the world and blessed with 138 million people in the labor force, ranking fourth largest in the world, comes with a caveat: Indonesia has to create enough jobs for its labor force, not only as a source of income but to fulfill one’s needs of achievement and dignity. Given how the economy grows, can Indonesia create new jobs?

From a sustainable development perspective, higher growth rates achieved through advancing technology, improving knowledge, and restructuring would lead to more job opportunities. As output demand and firms increase in size, new inputs are employed to match the output level. Hence, we expect our economy to absorb more workforce, leading to increased social welfare and human life quality.

Nevertheless, in some countries, economic growth is not driving more job creation. Léautier & Hanson (2013) found that in African countries, economic growth does not necessarily become a significant driver of job growth. Another lesson came from Ajakaiye et al. (2015) in their studies about the relationship between economic and employment growth in Nigeria. They asserted that recent growth had not been translated into significant social and human development, contrary to what postulates in the development literature.

How about Indonesia?

The graph below shows how economic growth correlated with employment growth in Indonesia (2010–2020 data): 1% economic growth associated with lesser employment growth, 0.78%. Inspecting the growth rates from the three sectors, we find fascinating facts.

“Employment-Growth Relationship”

The secondary (manufacturing) and tertiary (service) sectors are economic growth drivers over the last decade, with the services manifest apparent dominance. Globally, they contribute more to countries’ GDP compared to the primary (agriculture) sector. Their average share of GDP keeps on increasing over time. In connection with the relationship between growth and employment mentioned in the previous section, we can assume an increase in these two sectors’ jobs.

However, we encounter some problems regarding this principle. Firstly, economic benefits gained from restructuration and technological efficiency less encourage firms to hire more labor inputs. Secondly, the number of job losses would not be fully compensated by new jobs as automation reduces the number of workers needed. Some firms transform into capital-intensive after the technological change. Estimating the number of new jobs with economic growth alone might miss other essential variations: input choice and economies of scale.

Any better measurement?

An alternative metric to measure job creations is the employment intensity or elasticity of growth. This metric captures how sensitive employment is responding to output growth, holding other factors constant. An elasticity of 2, for example, means that employment grows 2% for every 1% increase in real output. We don’t want too low or high elasticity. That means real output growth fails to provide jobs for the labor force or productivity reduced as additional workers exceed additional output.

“Employment Intensity of Growth”

The data directly exposed us to the misery of 2020, when covid-19 shocked the economy, causing sluggish output and employment growth for all sectors, with secondary and tertiary suffering a significant shock. In the primary sector, the economic growth (the denominator in ε) is minimum, potentially escalating the overall figure and significantly increasing the elasticity coefficient. For simplicity, we can assume these scenarios are not in typical situations when describing general variability.

The primary sector has a clear fluctuating trend. The coefficient went negative in some years. It was a sign of negative employment growth, mainly due to economic transformation from agriculture to a more industrial society. Other factors such as wage expectation, education, and financial conditions will influence job migration to other sectors. People who recently enter the job markets are more interested in working in either the secondary or tertiary sectors.

The secondary sector has a distant variability of elasticity coefficient. Sometimes, this sector creates abundant job opportunities, such as in 2017 and 2018, where the employment grows by 1.76% and 1.46% respectively. Other times, they generated nearly zero jobs, as in 2013 and 2016. We can see evident fluctuation as we get over different years. It explains that firms are still transforming, seeking the most efficient input (labor and capital) combination for their productions. The fluctuation can also mean that job security is low.

The tertiary sector has a reasonably stable elasticity range around 0.5–1 (except in 2020). However, only during 2018 it reached 1 unit (where 1% increases in economic growth were associated with exactly 1% increases in employment growth). In other periods, the relevant range is around 0.5–0.8 unit (where 1% increases in economic growth lead to 0.5% — 0.8% new employment generated). The implication is a slightly lower job absorption for every 1% growth contribution this sector makes. Overall, the elasticity coefficient shows a good sign of job generation as long as the variation does not change very much.

Conclusion

During the past decade, Indonesia hasn’t created enough jobs for its labor force. On average, only a 0.78% increase in employment for each 1% of economic growth. The agricultural worker size is contracting, the manufacturing is quite volatile, and not much to say on the service sector. However, taking into account the elasticity of employment, we see that this number isn’t very bad. Although the challenge isn’t very hard, Indonesia still has to find a way to provide jobs.

In the end, we have to recognize a shortcoming. While we can estimate employment opportunities created for the labor force, we can’t pin down the qualitative measure of decent work. This is an essential factor in deciding decent work, yet left out of our analysis. There is no single measure that can accurately inform us about the quality of work. We suggest that more kinds of data are produced publicly to better understand the world we live in.

References

Ahsan, A., Pages, C. (2008). Some implications of regional differences in labour market outcomes in India. In Mazumdar, D., Sarkar, S. (eds), Globalization, labor markets and inequality in India (pp. 93–120).

Ajakaiye, Olu & Jerome, Afeikhena & Nabena, David & Alaba, Funke. (2015). Understanding the relationship between growth and employment in Nigeria. 10.35188/UNU-WIDER/2015/013–3.

BPS. (2020a). “Penduduk 15 tahun ke atas yang bekerja menurut lapangan pekerjaan utama”. Statistics Indonesia

BPS. (2020b). “PDB seri 2010, 2010–2020”. Statistics Indonesia

Flaig, G., Rottmann, H. (2001). Input demand and the short- and long-run employment thresholds: An empirical analysis for the German manufacturing sector. German Economic Review, 2(4), 367–84.

Hanson, K. T., & Leautier, F. (2013). Jobless economic growth in Africa: is there a role for agriculture?. Journal of African Development, 15(2), 1–17.

Joshi, S. (2004). Tertiary sector-driven growth in India. Economic and Political Weekly, 39(37), 4175–78.

Kapsos, S. (2005). The employment intensity of growth: Trends and macroeconomic determinants. Employment Strategy Papers, №12, International Labour Organisation, Geneva.

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