Employment trends in Indonesia over 1996-2009: Casualization of the labour market during an era of crises, reforms and recovery

Employment Working Paper No. 99

The East Asian financial crisis of 1997-1998 hit Indonesia hard, resulting in a winding back of the substantial economic and social gains made during the previous two decades. However, that crisis did not result in a large fall in employment and a commensurate rise in unemployment; rather, the economic contraction of over 13 per cent was accompanied by considerable transitions within employment, namely, from formal sector to informal and agricultural employment, particularly among women. The years following were characterized by slow growth and weak formal job creation, which has often been attributed to such factors as rigid labour regulations, especially the enactment of the Manpower Law in 2003. The economic and labour market situation in Indonesia only began to consistently improve over the last five years, notably during the boom years leading up to the global financial crisis. During this period, unemployment fell from its 2005 peak and employment increased. When the global financial crisis spread in late 2008 to emerging economies like Indonesia, it was expected that these countries would be severely affected. However, in contrast to the East Asian financial crisis, Indonesia proved to be rather resilient despite the fact that exports collapsed by almost 18 per cent from 2008 to 2009. This paper presents estimates that confirm the milder labour market impact of the most recent crisis. At the same time, the move towards more flexible and less protected forms of employment, as reflected by the increase in casualization, notably among the less-skilled, appear to be part of longer term trends. In this respect, labour market regulations, notably the Manpower Law of 2003, may have contributed to this trend, but the Law alone is not the main problem for employers in Indonesia. Overall, despite the apparent resilience to the global financial crisis, Indonesia continues to face a number of substantial challenges at both the macroeconomic and labour market level.