Indonesian labour markets: Adjusting to crisis and slow recovery

The paper focusses on labour market adjustment during the economic crisis and beginnings of recovery in Indonesia during 1997-99. Two major issues are examined in the paper: the flexibility of labour markets and labour adjustments to changes in relative prices in favour of tradable goods. It is found that there was considerable flexibility in both employment and wages although this was only partly in response to relative price shifts. The major quantity adjustments occurred through changes in employments across sectors and activities rather than through increased unemployment. Real wages fell substantially, and falling non-agricultural employment was counterbalanced by new rural and agricultural jobs. Recovery was also quite swift as the economy stabilised in 1999. Many people returned to non-agricultural jobs and real wages recovered somewhat. The paper also looks briefly at the extent to which labour market change can help explain welfare effects of the crisis. It concludes that inter-sectoral job shifts and wage adjustment help explain why many more Indonesians escaped falling into poverty, even though poverty incidence almost doubled.